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Old Mutual over a barrel

First there was Brexit, now there’s Buxit.


Fund star Richard Buxton is said to be in talks to buy out a big chunk of Old Mutual Plc’s money management arm — a £35.6 billion ($46 billion) business he knows inside out, given he runs it. According to Sky News, Buxton has been sounded out by potential private equity backers.

Buxton’s Bet
The star fund manager reportedly wants to buy out the 25.5 billion-pound single-strategy unit.

Old Mutual would keep a smaller, more wealth-management oriented business that invests in multi-asset strategies. This latter unit is closely integrated with its distribution platform and network of financial advisers. While not explicitly confirming the talks, Old Mutual said on Monday it now sees an “opportunity” to split its asset-management unit.

Buxton has his employer over a barrel, and you can see why he might feel this is a good time to strike. Old Mutual shares are trading at a discount to peers, bogged down by the company’s complexity across multiple businesses and geographies. UBS analysts put this conglomerate discount at about 10%.

Rocky Break-Up Road
Old Mutual’s share price has been hit by currency volatility and uncertainty over spin-off costs.

Old Mutual is part-way through trying to break itself up. With the asset-management business posting good results so far this year and the industry under pressure to bulk up and cut costs, there could be value to unlock in a buyout.

Old Mutual’s Wealth Division Underperforms
Return on equity has improved, but still lags.

But it leaves some headaches for Old Mutual: A deal would bring an extra hurdle for CEO Bruce Hemphill to reach his desired break-up, which had been geared towards the spin-off of Old Mutual Wealth — the combined asset management, distribution and financial advice business — in its entirety in 2018.

It’s not clear exactly how much the single-strategy funds contribute in terms of earnings, but breaking off £25 billion of assets could bring a cut in valuation. Old Mutual Wealth is said to be worth between £2 billion to £5 billion; there’s pressure on Hemphill to get close to the latter.

One optimistic scenario is that simplifying the business makes things clearer for potential buyers, investors and regulators. Hiving off proprietary fund managers could help narrow Old Mutual’s valuation discount against wealth manager St. James’s Place Plc, which has no proprietary investment managers, yet trades at 5.9 times book value compared with Old Mutual’s premium of 1.3.

It might also alleviate concerns over the potential conflicts of interest inherent in vertically integrated business models like Old Mutual Wealth. The Financial Conduct Authority said in June that it wouldn’t rule out more measures to tackle conflicts of interest in the industry.

But ultimately, Buxton appears to have backed his employers into a corner — and that may show up in the final price. Old Mutual has little choice but to engage, given the alternative might be losing not just a star fund manager but other key employees as well. Performance fees might suffer.

With a deadline even shorter than Brexit, Old Mutual is going to have to negotiate Buxit. The risk for shareholder is that an expensive divorce settlement complicates what was an already protracted breakup.

© 2017 Bloomberg

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