Rand Merchant Investment Holdings (RMI) will unbundle its large stakes in both Discovery and Momentum Metropolitan in a move it believes “will unlock material shareholder value”. This will leave it with two core assets: its 89% of OUTsurance and 30% of the UK’s Hastings.
The problem facing RMI – like most investment holding companies – is the stark discount between what the market values the business at and its underlying intrinsic value.
Prior to Monday’s announcement, RMI’s market capitalisation was R47.2 billion. The group’s valuation of its majority holding in OUTsurance is R35.4 billion and its valuation of its stake in the UK’s Hastings is R9.3 billion (while the valuation of the RMI Investment Managers and Alphacode businesses at R1.6 billion).
That means the market currently ascribes less than R1 billion in value to the 24.8% holding in Discovery (market value of R20.8 billion) and the 26.8% holding in Momentum Metropolitan (market value of R7.8 billion). One can see the problem.
The RMI share price jumped 14% on Monday morning following the announcement. But that only served to narrow the nearly R28 billion gap in valuation to just over R21 billion.
The group will unbundle those holdings in Discovery and Momentum Metropolitan to existing RMI shareholders during 2022. Both of these are historic shareholdings which date back to RMH in the early 1990s. In 1992 it acquired a controlling interest in Momentum (which later merged with Metropolitan) and in 1993 it provided Adrian Gore and Barry Swartzberg with seed funding for Discovery. RMH separately listed its insurance-focused portfolio as RMI in 2011.
Post the “restructure”, RMI will be an investment group focused on property and casualty insurance, in other words, short-term insurers. It will have “exposure to, and influence over, unlisted insurers in South Africa, Australia, and the UK” via OUTsurance (and its Aussie unit Youi) and Hastings.
Collectively, the three have over 5 million customers, with gross written premiums of more than $2 billion. In South Africa, OUTsurance has 1 million policies (which gives it 18% market share in personal lines), in Australia it has 1.1 million policies (with around 4% market share) and in the UK, Hastings has 3.1 million policies (approximately 8.3% market share). RMI says the “underlying businesses’ core financial metrics are robust and competitive relative to a global peer set”.
RMI says it will undertake a rights issue to raise up to R6.5 billion in order to settle a portion of its debt. The rights issue will be implemented before the unbundling.
RMI’s 30% holding in Hastings is via both RMI and OUTsurance. Both parties have an option to increase their ownership to 40% by May 2022 at the original delisting offer price. The group says its post restructure balance sheet will allow it to fund its portion of the option, but that no decision in this regard has yet been made. It is surely planning to exercise this option.
RMI says its focus post unbundling “will exhibit a preference for unlisted businesses that are not otherwise accessible to investors which, over time, should result in a market capitalisation more reflective of the underlying intrinsic value of the portfolio as its management partners are able to flexibly drive long-term strategic opportunities outside of public market constraints and investment horizons”.
The unbundling has the support of 65% of RMI’s shareholders, including Remgro (30.6%), Royal Bafokeng Holdings (14.5%), the RMB founders as well as Coronation, Allan Gray and Abax Investment (on behalf of their clients).
Remgro has not yet indicated its plans for the holdings in Discovery and Momentum Metropolitan that it will receive from the unbundling.