Good day, ladies and gentlemen, and welcome to the Old Mutual Limited investor call on the proposed Bula Tsela broad-based black economic empowerment transaction. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star then zero. Please note that this call is being recorded. I would now like to hand the call over to Sizwe Ndlovu. Please go ahead, sir.
I'm Sizwe Ndlovu, head of investor relations, and good afternoon to everybody. Welcome to all those who are joining the call. This afternoon, we'll be hearing from our Chief Executive, Iain Williamson, and CFO, Casper Troskie, on both the rationale for the proposed transaction, as well as some indicative financial impacts following the SENS that we released on the 20th April, 2022. Please note that the presentation has been emailed to all participants who had registered as at the close of business yesterday, and will be available on the homepage of our investor relations website as well. If you haven't seen it, I would encourage you to access it, and also for those who have received it, please follow using that during this presentation. Once Iain and Casper have concluded, we will be happy to field any questions you may have for the remainder of the call.
When it is time to ask a question, please state your name and the firm you're associated with, and then proceed to ask your question. Over to you, Iain.
Thanks, Sizwe, and good afternoon, everyone. We're also joined on this call by Taskeen Ismail, who is our new Head of Corporate Finance, as well as by Ronan McCracken, who is our General Manager of Group Reporting. For those of you who are following on the slides, I'm gonna start on slide three. We mentioned at the announcement of our year-end results on the fifteenth of March, that achieving the empowerment targets we had set for ourselves at listing in 2018, which was to be best in class, is something that we have taken and continue to take seriously and have been working on achieving.
As at 2018, best in class amounted to 30% Black ownership of our business, and we're pleased to be bringing an impactful transaction to the market that has a wide set of participants with employees, communities, and the general public included. The proposed Bula Tsela B-BBEE transaction will allow us to reach just over 33% Black ownership, subject to all necessary approvals, assuming of course that our current B-BBEE ownership percentage of between 28% and 29% remains at that level. Bula Tsela is a Sesotho phrase that means paving a way, and we are indeed paving a way for the transformation of the financial futures of those who participate in the scheme. We're also the first insurer to facilitate a share offer to the Black South African public.
Based on the share price at the end of March, we expect the transaction to be valued at ZAR 2.8 billion. Moving on to the next slide four, for those of you who are following. The proposed transaction gives life to the commitment that we made in 2018 and goes beyond that. We believe that it will give us an enhanced competitive advantage, particularly in the key corporate and investment segments. The development of South Africa is at the core of what we do. The more equal and inclusive our society becomes, the more opportunity there is for us to achieve sustained growth and unlock value for shareholders. The transaction aligns with both our responsible business and shared value approach, and it is deliberately, truly broad-based. The benefits, we believe, far outweigh and will outlive the costs of the implementation. On slide five.
The rationale for the transaction is that we firmly believe it makes business sense to drive real empowerment. The more equal and inclusive our society becomes, as I said before, the more opportunity there is to achieve sustained growth and unlock value. The way that we constructed the deal is deliberate to achieve genuinely broad-based transformation. There are three groups of participants, our employees, the Black South African public, and our communities. On employees, we want all of our employees to share in the success of the Old Mutual Group, and this will, in this case, include non-Black South African and our employees in the rest of Africa. However, we will materially tilt towards Black South African employees in entry-level positions in our company.
Within the communities, we aim to support community development and specifically the development of black people and black-owned entities through financial and other educational and digital skill development programs. We will aim to help create jobs in the SME sector and develop the skills to fill those jobs. In including the black public, we are broadening our shareholder base and specifically including black South Africans at lower income levels, which has not been done before. The deal will be good for Old Mutual. It should improve our B-BBEE ownership credentials, enhancing our ability to compete successfully in our chosen market segments. We did a substantial amount of work on analyzing business at risk from our current lack of empowerment.
This deal, together with the sale of 21% of Futuregrowth to AIH that we announced earlier this year, will help move both Futuregrowth and the Old Mutual Investment Group towards becoming majority Black-owned businesses, which will help those businesses to remain preferred service providers for institutional investment mandates. It also helps the Old Mutual corporate business to be more competitive in its offering to institutional counterparties. On slide six, the salient terms of the deal. As you would have seen in our terms announcement, we are proposing to issue just over 205 million new Old Mutual shares to be allocated to the employee scheme, the retail scheme, and the community trust. Detailed funding plans for this will be outlined in the shareholder circular that will be released in due course.
At a high level, we anticipate that individual group companies will contribute to fund the employee scheme, with the remainder to be funded by Old Mutual Limited through notional vendor funding. For the retail scheme, Black members of the public, including Black-owned entities, will be invited to apply for shares and will contribute some equity to do so, with the remainder to be funded through preference share funding from Old Mutual. For the community scheme, notional vendor funding will be provided by Old Mutual. Other key points worth noting are that the allocation of value in this deal is largely tilted towards the Black population and towards Black women in particular. There is no strategic equity partner to ensure that the deal remains broad-based. Non-executive directors of Old Mutual will not be participating in the transaction.
The scheme will be in place for 10 years, with the community scheme to continue operating beyond the 10-year period. We will not be providing any specific business updates, and we will communicate these in the normal course of our investor calendar and via SENS. I'll now hand over to Casper for a brief overview of the indicative financial impacts of the transaction, and we'll then take any questions at the end. Casper, over to you.
Thanks, Iain. I hope you can all hear me well. I'm referring now to slide eight, if investors want to follow. In terms of the announcement, we showed the indicative pro forma impacts of the transaction, and we referred to total costs of ZAR 970 million, which is made up as follows. In terms of the scheme costs for the employee scheme, the accounting treatment is similar to our existing employee schemes, with the only difference being the vesting periods, which for this transaction is four, six, and eight years. The IFRS 2 costs of approximately ZAR 377 million will be incurred over the duration of the scheme.
In terms of the community scheme, the expenses represent the use of trickle dividends in the community trust to be paid out to various qualifying initiatives on a discretionary basis. We assumed that we'll be paying out the full trickle dividend for purposes of the financial impacts. In terms of the retail scheme, this represents the upfront IFRS 2 charge of ZAR 174 million, calculated as the equity settled costs of the scheme, less the contribution from retail participants. This amounts to ZAR 305 million as the equity settled cost, less the contribution of ZAR 131 million, which gets you to the ZAR 174 million. The one-off implementation costs consist mainly of consulting and implementation fees, and further detail will be provided in the forthcoming circular.
Should the retail scheme be listed in year five, we have estimated an additional once-off listing cost of ZAR 10 million. The annual administration cost represents the ongoing costs that we will be incurred to manage the administration of the schemes. The costs contained in the terms of the announcement are based on assumptions at 31 December 2021, and final costs incurred will be impacted by changes both to market and the market assumptions. We have used the Black-Scholes model to set specific assumptions for the deal over a 10-year period. We have made fairly conservative assumptions of value in our model for share price volatility, dividend yield, and risk-free rates, among others. These assumptions give us additional confidence that value indeed can be created through the proposed transaction.
We will provide further detail on these assumptions in a circular which will be distributed to our shareholders in coming months. We are firming up with our auditors the exact dilution impacts and, in particular, around the retail scheme, as well as the impact to net assets, and we'll provide further detail in the circular once we have alignment with our auditors on these items. I think the most critical point that we've been very clear on as a management team is that the benefits to Old Mutual Limited of this deal far outweighs the cost of its implementation. We've used fairly conservative assumptions, you know, in terms of what the deal would cost. We then have quantified internally what we expect the cumulative benefits to be of the scheme. We thought about this in three ways.
We've looked at current funds at risk that we are managing funds where those are at risk because we are not above the, you know, 50% ownership in our, you know, asset managers. That's the listed equity franchise, Futuregrowth, as well as Old Mutual corporate, all of the entities that are affected. We've looked at the ability to source additional funds from existing clients, and we've looked at the ability to increase our win rates in new proposals, both for the asset management businesses as well as Old Mutual corporate. In that case, we've looked at our pipeline to try and quantify what the impact would be.
Taking that into account, we, the actual annual benefits are material that we've calculated and are expected to fairly quickly exceed the cost of the transaction. Back to you, Iain.
Yeah. Thanks, Casper. Just in terms of process and next steps, we will issue a circular that will provide additional information regarding the transaction in due course, and we expect that'll be in the next couple of months. Following the release of the circular, we will schedule a shareholders meeting, and we will be seeking approval of the proposed Bula Tsela B-BBEE transaction and its terms, and we'll issue a prospectus for the retail scheme. We anticipate that, you know, we would want to schedule all of that such that we can conclude this transaction subject to regulatory approvals by the end of the year. I'll hand back to Sizwe to just take any questions that you may have on the line. Sizwe, over to you.
Thanks, Iain. I see we already have some people lining up. I'll hand over just to Irene from Chorus Call. We have Michael, Craig, and Larissa, apparently. There's, Irene, over to you.
Thank you. Ladies and gentlemen, if anyone would like to ask a question, you're welcome to press star and then one on your touchtone phone or on the keypad on your screen. If you ever wish to withdraw the question, you may press star and then two to remove yourself from the question queue. Our first question is from Michael Christelis of UBS. Please go ahead.
Good afternoon, guys. Thanks very much for the time and thanks a lot for the detail, I guess, around the costs of the scheme and how you expect this to come through. Two questions if I can. Just one related to those costs. I mean, presumably these costs will be shown in your central cost line. Is that right? Just for my modeling. That 2022 costs are presumably all getting incurred in H2, if you're hoping to do this by year-end. If you can just clarify that for me. Then secondly, maybe just on a sort of higher level, just around new business over the last say, you know, two or three years.
Have you actually lost business purely on the basis of your B-BBEE ownership, or do you think this is more a defensive move and therefore, you know? Is it something that you can actually quantify how much business you've lost in the last couple of years and it's material or not?
Should I answer?
Michael, I'll let Casper answer the first question around the accounting treatment. Regarding the second one, you know, we can point to specific transactions and mandate losses in the asset management space that have been attributed by the clients that have moved the business specifically to the issue of majority Black ownership and asset managers. The answer to that is yes.
Michael, on your first question. The once-off costs will be treated as a transaction cost which we exclude from our adjusted headline earnings. We've agreed that treatment with our audit committee. The once-off cost that you see in year one, so that, you know, the ZAR 165 million for the transaction plus the retail scheme, that once-off costs will go outside of adjusted headline earnings. We'll sit in the center. The rest of the costs relating to the employee scheme will allocate to the business unit. Obviously the community scheme will sit in the center. I hope that gives you. You can see that's not really material.
Hopefully that gives you a sense of, yeah, we shouldn't see the employee scheme solely sitting in the center. So that's, some of that will be allocated out to the business units.
That's very clear. Thanks. Thanks very much.
Our next question is from Larissa van Deventer of Barclays. Please go ahead.
Thank you. Good afternoon, gentlemen. three questions, please. The first one about on the lock-in, you have a slide, Andy, to specify that it's 10 years. Does that mean that after 10 years all of the shares are fully free to trade. The second question is on the funding. Can you just please help me understand the extent to which the funding is just effectively a loan that will be repaid, or is there a free element to it? I'm not clear on that. And also, is the attractive funding cost included as a cost, or does that come in in addition, the differential between them and market rates? And then the last one is, Casper, you mentioned the benefits and you mentioned where they would come from, but I'm not clear as to how.
Are you expecting to get all the benefits from additional business, or how did you quantify those benefits, please?
Okay, thanks. Thanks, Larissa. Let me start with your last question. We've looked at, as I said, we've looked at transit risk in our existing client base where there's an empowerment mandate. Okay. That's one part of the answer. That's these are the fees we can lose if we don't do this. We've also looked at our existing clients, where we have current allocations to us, where we think by having a higher empowerment, so being above 50% HDI clients of ours, will give us the ability to attract additional funds from those clients. We've quantified what we think that number is. We also then looked at proposals we currently excluded from because we're not majority black-owned.
We've looked at potential additional pipeline that we can source because we would be black-owned in our estimate. We've put a number to that sort of opportunity, and we've calculated what that could mean from an assets under management, a revenue, and a profit perspective. I hope that helps, Larissa. In terms of the notional funding, there is obviously interest charged on the funding, and depending on which scheme it is. It will be as a percentage of prime.
How the notional funding works, whatever the cost of that build-up of the funding is, including the interest, taking off the dividends, you know, excluding the trickle dividends, whatever that ends up at the end of the day, you then cancel enough shares to pay for the outstanding funding and the interest roll-up on that at the end of the scheme, so that you get to the amount of shares that actually vest for each of the participants. For the community scheme, it's effectively a, it remains, you know, post the 10-year period. And those will be treated as treasury shares on an ongoing basis, and you'll see the trickle dividends come through as a cost. I hope that helps, Larissa.
Okay. I'm not sure that I'm entirely clear, but let me think about that one. Thank you. The lock-in for everything is 10, and then it's completely free flow. Is that right?
For the employee scheme, there's a four, six, and eight year lock-in. For the other schemes, there's a five year period for the retail scheme. We then intend listing the retail scheme shares on the B-BBEE exchange, which then preserves that, you know, that B-BBEE nature of those shares for longer than the 10-year period because they are listed on that exchange.
Okay. Thank you.
Our next question is from Craig Gradidge of Gradidge-Mahura Investments. Please go ahead.
All right. Thank you. Good afternoon, gentlemen. Yeah, I think my first question was partly answered. It was around the retail scheme. I see it's a 10-year funding term, but is the intention for it to be an evergreen scheme, by staying listed on an exchange? I think you've answered that. I'll go to my second question, is whether the staff shares will also be listed on the same exchange so that, if members of the public wanted to get a bigger exposure to Bula Tsela, they could. Or to at least improve the liquidity.
It's not. We're intending to treat the staff shares, except for the vesting, you know, the difference in the vesting period in exactly the same way as we're dealing with our current employee share allocations. Those will not be listed on the B-BBEE Exchange. That's the current thinking.
Okay. Last question. The selection criteria, it looks like you'll be favoring smaller investors. Do you have some of the peer selection criteria that you can disclose now, or do we just wait for the prospectus for that?
I think we'll be detailing all that detail in our circular. There will be a substantial skew, both in the staff scheme. When we say substantial, we mean substantial. There will be a substantial skew towards you know our lower paid employees, so at lower levels of management. Equally, there will be a skew in the actual retail scheme. Taskeen, if you wanna just give a bit more detail on that.
Thanks, Casper. Yeah, that is accurate. On the retail scheme selection criteria, it really does depend on the level of applications that we get, but the intention is to try and build that book with as broad an allocation base as possible.
Thank you.
Our next question is from Andrew Sinclair of Bank of America. Please go ahead.
Thanks, everyone. Two from me, if that's all right. Firstly, we just really do you expect this to be essentially a one-off such transaction or do you think there'll be any further such transactions in the future, because best in class is clearly a moving target? And second question was just on the benefits. Really, on what timeline should we start to see the benefits that you've been talking about? Thanks.
Andy, I think on your first question, you know, our view is that at this stage, this is a one-off in the sense that we made a particular commitment as part of Managed Separation, which we're honoring. I think any decisions around future transactions would be driven by, you know, essentially a business case for that transaction in terms of understanding what we believe the cost-benefit equation looks like. I think at this stage, you know, we don't necessarily plan anything else. It would, you know, it's an evolving story at the time, depending on the business case at that point in time.
Timeline for the benefits.
Casper, do you wanna elaborate at all?
Sorry, B, you know, I got cut off. They dropped me out.
Oh, Andy was asking the business benefits that we thought about in terms of business at risk, etcetera, timelines for those.
Yeah. I think based on, you know, my understanding of the work that we've done, actually, a lot of. We've been able to keep some clients at bay because of the fact that we are going ahead with, you know, the inbound transaction at Futuregrowth level and the intention to get mutual investments to 51%. You know, there's almost immediate benefits starting to accrue, but I expect the timeline for the benefits to accrue and for us to be in a, you know, on the front foot on the benefit side versus the cost to be within the ten-year period timeframe.
Thank you, everyone.
Our next question is from Cornice Anzel of Absa Asset Management. Please go ahead.
Good afternoon, guys. Casper, sorry, my Black-Scholes and IFRS 2 knowledge is a bit rusty. Just in terms of the cost assumptions that you put out here and the current share price, because obviously, you know, we've seen quite a significant correction in your share price along with the rest of the market. What type of impact would it have on these costs and numbers on your cost estimates if we see material either upside or downside movements on the share price?
Obviously, the scheme is pretty dependent on how the share price performs over the period. You know, the starting share price, different inputs. And then obviously, what happens to the return over the 10-year period. If there's a higher return, more shares will vest, and the impacts. We've based our financial impacts at this stage on a set of assumptions, which we'll be disclosing as part of the circular. Obviously if any, you know, if interest rates are higher, if there's a change in volatility, you know, if the dividend yield that we've assumed in the model is higher or lower, it will impact on the ultimate number of shares that are vesting.
The IFRS 2 cost is fixed because equity settled fixed on day one. You know, that will move around until we actually do the deal. It depends on what happens to the market. You know, you'll calculate that on the day of implementation of the transaction using the various inputs at that point in time. Then you'll calculate the IFRS 2 cost, and that will, you know, then be your cost that you use for accounting purposes. The actual number of shares that then vest at the end of the day, if there's no growth in the share price, well, we know shares vested. The share price actually has to perform for participants to obviously get value out of this transaction.
I hope, I hope I've understood your question correctly, and I hope you're happy with the answer.
Yeah. Will you be publishing a sensitivity analysis to your costs once you have all of the details?
Yeah. Taskeen, I'm not sure if we're doing it as part of the circular. I think we will be doing, you know, some scenario analysis. We certainly have two scenarios I know of. We can certainly provide you with. Once we've made the announcement, we can certainly provide you with sort of sensitivities, as part of the updates to investors when the circular's gone out around some of the key assumptions, like share price growth and so forth. You can have a better understanding of what the sensitivities are.
Thank you.
Ladies and gentlemen, just a reminder, if anyone else would like to ask a question, you're welcome to press star and then one. We have a question from Sarine Barnard of Ninety One. Please go ahead.
Hi, everyone. I just want to find out how do we think about the impact on the embedded value? Because, Casper, as you said, initially, I mean, the notional loan will have to be paid off with the appreciation, the share price of the shares. Will it initially be zero? As the share price appreciates, the sort of ones that seem to vest will be taken into account, or how do we think about that?
The impacts on the balance sheet are, well, actually quite small, because, you know, if it's effectively a charge through the income statement, but it's, you know, the credit's taken to reserves. We'll be providing you with the detailed impact on the net asset value. You know, the EV will be much the same if you.
Okay.
Sorry, Sarine.
What happens to the shares in issue for the EV?
The shares in issue, because they're treated as treasury shares until such time as they vest. You won't have any impact in the near term. When those shares then vest, you know, we'll be providing you with detailed disclosure on the dilution impact of, you know, the shares. What the accounting rules require us to do is to show the negative side only. We need to take the costs into account and the additional shares that we think might be issued, but we don't take the benefits into account. Obviously, for this to be a complete picture, one actually has to understand what benefits you've derived from this transaction, which I've spoken through before.
Just to be 100% clear, shares are treated as treasury shares, and there's no impact over the term until you get to a vesting date. Then depending on how many shares get issued, there will be a dilution impact. We feel confident as management that the benefits that should accrue should more than make up for the dilution impact in the shares. But if you know the way we have to account or report this from an accounting IFRS perspective requires us, as I said, to only take the costs into account and the additional shares that we will issue. There'll be detailed disclosure, Sarine, on the expected dilution impact. Once again, that could change quite materially depending on whether the share price performs, you know, underperforms or overperforms.
You'll have a much smaller dilutive impact if the share price underperforms and vice versa if it overperforms. All those details we'll have in the circular.
Okay, great. In the circular. The EV isn't going to anticipate the expected dilutive impact. Make assumptions on the share price accretion over the 10-year period and then take the dilution into account immediately.
No.
You know, putting a value on it.
Yeah. Because the value is effectively calculated on day one, the value of what you're giving the shareholder. Because that's what your IFRS 2 charge represents, is the cost to the shareholder of this transaction.
Yes. Not the dilution. Basically, if everything goes according to plan and say you issue 50% of the shares of the, I can't remember, 250 million shares at the end of the scheme, then in year nine, you will have everything still treated as treasury shares, and in year 10, all of those shares will come into issue and you'll see the dilution in the EV only in that year.
Yeah, shouldn't be built up the reserves through the IFRS charge to effectively pay for those shares. I think what we'll do is we'll try and provide a little more detail on that, Sarine, as part of the.
Okay. That'll be great. That will be very helpful. I just wanted to ask on the share scheme. Iain was saying that the funding will be provided by the different business units. I wasn't clear. The ESOP scheme also have a notional funding attached to that. Will that notional funding be the liability of the business unit or the liability of the participant?
No, it will be the liability of the participant, so for repaying the funding. The funding to the participant is provided by. It's not so much the business unit, it's more the legal entity.
Okay.
That provides the funding. Yeah.
The hurdle for the ESOP scheme is substantially higher because the notional funding is based on the net fair value, 80% net fair value instead of the VWAP, which obviously you still have to disclose to us, but I assume the notional fair value will be quite a bit higher than the VWAP.
I didn't quite follow that, Sarine.
My understanding for the ESOP scheme is that the notional funding, they talk about the subscription price will be 20% VWAP and 80% fair value. Is my understanding there incorrect?
No, no.
That's what needs to be paid back from, by sort of selling shares at the end of the period.
Casper, can I add
Yeah. No, no. Sorry. Go on.
Sorry. Yeah. Sarine, we just use the word fair price, fair price because it's not the VWAP. We'll use the share price we use in the option pricing model for the fair value calculation. I think for your intents and purposes, just think of it as the share price.
Okay, great. Thanks. I couldn't understand. Yeah, it looked to me as if there it was.
It's more, you know, it's more an accounting tax technical issue.
Okay, great.
that we have to refer to it that way.
Okay, great. Thanks so much. Thanks for that, guys.
Ladies and gentlemen, just a final reminder. If anyone else would like to ask a question, you're welcome to press star and then one. We will pause a moment to see if we have any further questions. It seems we have no further questions on the line, so I would like to hand back to Cesar for any closing remarks.
Thank you, Irene. Thanks to everybody for participating in today's engagement. We do still invite you to contact the investor relations team should you have any specific matters you wish to discuss with the company. Finally, we'll be making a transcript available on our website of this call very shortly. Thank you and goodbye.
Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your line.