Old Mutual: here and there

Superficially, Old Mutual's first-quarter trading update on Thursday shows the London-listed financial services group to be doing fine. Gross sales, most of them from its UK-based wealth manager, were almost a fifth higher at £7.3bn. Yet Old Mutual - for all its guerrilla-like attack and retreat, expanding into and retracting out of businesses in the UK, the US and elsewhere - still earns two-thirds of its operating profit in its South African homeland.

Not surprisingly, given that Old Mutual trades at a discount to its UK peers, it routinely faces calls to head home. Investors in South Africa point out that rival Sanlam, which mostly stuck to the South African market, has returned almost 2000 per cent in rand terms since Old Mutual listed in London, to the latter's near 550 per cent. Sanlam's outperformance is even more pronounced in sterling terms.

Giving up the UK domicile and listing would not be easy, though. And, depending on the success of outgoing chief executive Julian Roberts' strategy, it could make sense to stay. Since he became chief in 2008, Mr Roberts has done much of the work needed to solve the stay-or-leave conundrum. He has sold assets acquired in Old Mutual's foreign forays, including much of Skandia (bar its UK wealth manager) and a US life assurer. He has listed a US asset manager and cut debt. He has also been on the attack, bolting UK investment manager Quilter Cheviot on to Old Mutual Wealth, and expanding in Africa. Mr Roberts will pass the helm to Bruce Hemphill before the result of his strategy is known. He will, however, leave his successor a potential solution to the conundrum.

Assume for a moment that the combined OMW and Quilter Cheviot achieves operating profit of £400m in two years' time. Apply, say, a Rathbone Brothers multiple to the prospective after-tax earnings of OWM and it could be worth £5bn (Old Mutual's current market capitalisation is £11bn). If that prompts a re-rating of Old Mutual, pressure to split might subside. If not, it will be a signal that investors do not like either Old Mutual's emerging market bias or its conglomerate status.

Only then can Mr Hemphill decide whether to keep Old Mutual as a London listed outpost housing a UK wealth manager and an emerging markets business, or demerge OMW and lead Old Mutual home.

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