After many years of rumoured deliberation, the board of Standard Bank Group has finally pulled the trigger on buying out Liberty minorities. It already controls Liberty (with a 54% holding) and has done so since 1999. The group says the implied value of the shares to be acquired is R10.5 billion.
In a presentation to shareholders, Standard Bank is selling the idea of ‘bancassurance’ – the selling of insurance products by banking institutions – hard as the strategic rationale.
The two have had a cooperation agreement stretching back to 1991 and operate an asset management joint venture, Stanlib.
Standard Bank says while “historically beneficial for both parties” the bancassurance agreement between the two is “inefficient going forward as [it is] not aligned with [the group’s] strategy to provide an integrated client platform”.
Standard Bank says the “full integration of Liberty products and services will promote efficiency and facilitate the delivery of the group’s strategic priorities”. The transaction is the “next logical step” in the group’s ongoing simplification of its structure since 2011.
Biggest in Africa
A combination of the two will create the “largest financial services platform in Africa” says Standard Bank, active in 20 countries with “active bancassurance partnerships” in 14.
Liberty, though, is only active in 12 (with a direct overlap with the bank in all of these). The customer base will be the bank’s 14.8 million active clients plus 4.3 million policies. There is likely significant overlap between these, but the bank has not disclosed this.
It says full integration will “drive agility and quicker decision-making, provide a more integrated customer offering, [and] enable open architecture and partnerships to provide customers with enhanced choice”.
Kokkie Kooyman, executive director and portfolio manager at Denker Capital, says that while the bank is pushing the integration of offerings as a major reason for doing the transaction, “the execution risk in this type of exercise is high”.
“It is likely to lead to staff and client fall-out,” says Kooyman.
The banking group has long faced a conundrum: it either needed to dispose of the stake (through a sale or unbundling to shareholders), or it needed to commit to the insurance business fully. The cooperation agreement worked well on paper, but Liberty has consistently underperformed.
Standard Bank argues that the relationship has been “highly successful” and that the bancassurance partnership has generated “in excess of R13 billion in earnings in the last ten years”.
Presumably, even with the 100% share of profits, the bank sees the potential to increase this contribution substantially.
The fundamental problem for Standard Bank (as shareholder) is that Liberty has long lagged its rivals, particularly Sanlam and Old Mutual. More recently, it has seen pressure from the likes of Discovery, Momentum, Hollard, and direct insurers (as well as other banks that have entered the space).
This has meant that tensions have been simmering between Liberty and the banking group for years.
In 2017, a disagreement between Standard Bank Group and Liberty CEO Thabo Dloti led to his resignation.
Standard Bank seconded seasoned executive David Munro to the insurer, and while there were some early signs of turnaround progress, the impact of Covid-19 has been a major setback.
Consecutive turnaround execution frameworks – stuffed with jargon that would typically be found in presentations from management consultants – have not yielded results.
Critics of Munro’s appointment pointed to the fact that he had no experience in the retail market or the insurance sector.
Problems in broker channel
In 2019, Liberty contributed R1.8 billion to Standard Bank’s R28 billion in earnings. Last year, it booked a loss of R651 million. In its update for the first three months of 2021, Liberty said its SA Retail business reflected “an improvement in new business inflows due to strong growth in embedded banking product sales”.
In other words, more and more sales are being done by Standard Bank.
“In contrast,” says Liberty, “in the intermediated distribution channels, new business volumes and margin remain a challenge, with a key focus maintained on managing the expense base in a disciplined manner, including continued investment into the Group’s strategic initiatives”. Translated: its broker channel is struggling.
Kooyman says that “despite all its efforts, Standard Bank could not succeed in turning around Liberty”.
“It is losing market share, its premium and embedded value growth has been poor, and its African operations have not really been profitable.”
He says this is why the banking group is now taking it out of public eye through its delisting.
There is an obvious opportunity to take a sizeable amount of costs out of the Liberty business. Standard Bank says integration will cost R650 million over two years, but after that, it sees “synergies” of R600 million per annum.
Critical is that the banking group will also be able to “capture and grow capital-light revenue streams to enhance returns”.
Kooyman says that, simplistically, the transaction is “good for Liberty shareholders and bad for Standard Bank shareholders”.
It has offered minorities 0.5 Standard Bank shares, R14.40 in cash as well as a distribution by Liberty of R11.10 per share (totalling R3 billion) for ordinary shares.
This equates to a 40% premium to Liberty’s volume weighted average price until Wednesday.
It also intends to pay R1.50 per preference share, a 36% premium.
Scheme meetings to vote on the transaction will be held in October, and Standard Bank already has the support of 35.4% of Liberty shareholders. Allan Gray is the largest of these, with 12.69% held on behalf of clients. Laurium Capital and Visio Fund Management each hold around 8% on behalf of clients.
Because Standard Bank can’t vote its shares, the support equates to 77% in favour.
Liberty is expected to be delisted by the first quarter of next year.
Listen: Kokkie Kooyman of Denker Capital on whether Standard Bank can breathe new life into Liberty