the G spot by Giulietta Talevi
RMI: cash flush and fancy free
@GTalevi talevig@fm.co.za
I won’t commit to a special dividend now, but similarly, we are not in the business of building a war chest 56
financialmail.co.za
T
he surprise sale of Rand Merchant Investment Holdings’s (RMI’s) 30% stake in UK insurer Hastings to its co-investor, Sampo, means that RMI — which owns Outsurance and is also in the process of unbundling Momentum and Discovery — is suddenly awash with cash. What now for shareholders? The FM spoke to RMI CEO Herman Bosman. Were you not wanting to build up an insurance conglomerate? Or did you simply get a price too good to refuse? HB: As a strategic investor you need to exhibit to the market and remind it that you have financial discipline. In this case financial discipline met strategy and actually trumped it, and the reason for that is the context. Hastings is a great business, it’s probably the only property & casualty insurer in the UK that has been profitable through many cycles. However, it’s a hugely competitive market, with over 120 underwriters, and because of the prevalence of price comparison websites you have a completely transparent market. So in most cases you are a price taker. The second piece of context is that Sampo has been a magnificent partner to us. But one has to see where it is in its existence: it finds Hastings very attractive, it has a market cap of almost €30bn — of which most businesses are unlisted — and it owns 100% of those businesses. So it was probably inevitable that it would buy us out. Then you look at the context of RMI: can this not be a classic example of being great shareholders? Maybe it’s shorter than any other timeframe, but here’s a great return, here’s a great price and we’ve created value. Also, part of our unbundling was that we had to raise R6.5bn of capital. So I avoid that and am not diluting shareholders. The last bit of context is that we feel we’ve fulfilled our role as a partner to management: the business is in better shape and we’re leaving it in great hands.
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December 16 - December 22, 2021
What will you do with the proceeds? HB: We’re paying off the debt in the holding company, which is called Main Street, and then half of the proceeds go to Outsurance, our partner in Hastings. It has identified the next geography where it wants to build a business, so it is now capitalised for that. We also want to buy some of the minority shareholders out in Youi in Australia. Then, Outsurance is distributing a dividend of about R3bn to its shareholders — we are 90%, with management and ex-management. at 10%. We will be left with about R3bn in cash. Does that imply a special dividend? HB: The R3bn is earmarked for two purposes: should Discovery do a capital raise for any investments before the unbundling we will support it, so there’s a soft bracket around R500m of that. We want to keep a bit of a cash buffer for operational costs, probably R500m. Then the remaining R2bn — I won’t commit to a special dividend now, but similarly, we are not in the business of building a war chest for future investments, so it’s possible that in the next cycle we would declare a special dividend. But what is RMI’s raison d’être now? Simply the conduit into Outsurance? HB: No. The sale of Hastings has positioned us at an important fork in the road. The one direction is to say we want to build a network of noncompeting collaborative local champions, and obviously we’ve taken a step back by selling one of them. However, if you follow the strategy, you’ll probably then say we need to give the team time to go deeper into the seven markets we find attractive, see whether there’s another [unlisted] local champion where we can partner with management, and then add that next to Outsurance. If, after a reasonable period of, say, two years, we’ve not found a suitable asset, we probably would turn to the other direction of the fork in the road, where we basically change the name of RMI to Outsurance, which is effectively an Outsurance listing.
That’s not an unattractive option. The way we did it, by not listing Outsurance itself, is financially quite important. If we took Outsurance while RMI and its affiliates were in existence and made an IPO of it, we would have incurred at least two additional costs: we would have had to empower Outsurance (if you want to do 10% or 15% typically it would cost the company 3%-5% in terms of dilution), and we would have had to take 25% of Outsurance as a free float. And if you’re bringing that to the market, you’d have to apply the so-called IPO discount to get the asset managers interested. But by leaving Outsurance behind in a listed vehicle which is empowered and has a fantastic spread of shareholders, you avoid both those costs. What’s it like having slowpoke Remgro as a shareholder? HB: I grew up in the RMB stable and as a CEO I think maybe the biggest thing you want is consistency. If you have shareholders who are clear, articulate and consistent, it’s a huge benefit to have a controlling bloc and you’re not subject to the whims of an ever-changing institutional base. x
Herman Bosman
