History suggests Old Mutual overpaid for Sweden’s Skandia

Old Mutual's CEO Jim Sutcliffe hunted Skandia for years. Overpaying for the purchase would eventually cost him his job.

December 19, 2005

Old Mutual’s dogged pursuit of Sweden’s Skandia has ended almost a year after talks started last December. The 800 000 South Africans who own Old Mutual shares will be hoping it’s worth the R850m in advisory fees being paid to London-based lawyers, bankers and financiers.

Skandia shareholders voted on Friday. Although counting will only be concluded on Tuesday night, insiders reckon between 55% and 65% cast their ballots for the deal to go ahead.

That means once formalities are finally concluded, Old Mutual will have a third major separately listed subsidiary to join Nedbank (owned 50,4%) and Mutual & Federal (77%).

At the deal’s valuation of R38bn, Skandia is worth R4bn more than the current market capitalization of Sanlam, Old Mutual’s biggest competitor in South Africa.

Since the formal offer was released on September 2 (2004), there has been spirited opposition from Skandia’s directorate. Apart from an aggressive media campaign, it has involved replacing former chairman Bernt Magnusson and financial advisors Morgan Stanley, both regarded as being too close to the predator.

Now that the fish has been landed, attention will shift from whether to what. Old Mutual shareholders now need to hope the obviously sick Swede (Skandia hasn’t made a profit for years) is truly on the way to recovering from afflictions many believed would be terminal.

Did Old Mutual overpay? History certainly suggests so. That Skandia was vulnerable in the first place was the result of a series of scandals that rocked the once venerable firm during the past three years.

First came a legal dispute because of an “alleged prohibited profit distribution” (ie illegally raiding the cookie jar) after the 2002 sale of its asset management business. That’s still in arbitration.

Then New York attorney general Eliot Spitzer attacked Skandia’s US mutual funds because of illegal practices that cost investors tens of millions. An initial $95m was settled with the authorities. Meeting claims from an ongoing Class Action suit could be higher. Old Mutual knows all about that kind of problem because of similar experiences with its own US asset management subsidiary Pilgrim Baxter.

Another potential liability comes from the poorly managed American Skandia’s “improper administration” of its annuities business. Although that operation has been sold, Skandia signed a $1bn indemnity deal to buyer Prudential Financial. So even though it no longer owns the business, the Swedish firm has to settle the claims.

But perhaps the most serious of all is reputational damage flowing from the scandal in its Swedish home base. A media frenzy followed disclosure that since-fired Skandia executives illegally granted themselves huge cash bonuses.

Just how badly this scandal hit Skandia is reflected in a domestic market share which plunged from 2003’s 26% to last year’s 18%.

In May 2002, before any of the problems were known of, Skandia’s London Stock Exchange-listed shares traded at £3,60. Six months later they were worth less than £1. During the following two years they recovered thanks to a stronger market, to edge up to a touch above £2.

Based on ratios announced in the deal, Old Mutual is now valuing Skandia shares at £3,50 – virtually equal to the highest price investors were ever prepared to pay for an apparently “squeaky clean” company.

Old Mutual’s brains trust is clearly taking a view that Skandia’s long-term brand value will shrug off any reputational damage from the scandals. It’s a bold decision. In financial services, much of the value of a company is dependent on its reputation and the trust associated with a brand.

Old Mutual CEO Jim Sutcliffe and his right hand Julian Roberts are to be congratulated for not paying the absolute top dollar which Skandia’s directorate tried to extract.

But even so, it will be years before anyone can say for sure whether Old Mutual has done a good deal. No matter what supposed strategic advantages come from relying less on its South African base.

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