EDITORIAL: Spinning off FirstRand to build more?
Unbundling of stakes may mark a bigger role in unlisted companies for Johann Rupert and Remgro
History happens quickly in investment markets, and big events tend to be dispensed with rapidly as investors focus on implications for the future. And so it was with last week’s “end of an era” announcement that Remgro and Rand Merchant Bank Holdings are preparing to unbundle their stakes in FirstRand, the country’s largest financial institution by market capitalisation.
After quickly digesting the news, which wasn’t entirely unexpected — though the timing seemed to cause a bit of a shock — the market quickly moved into speculation mode.
Was this the beginning of a larger unbundling at Remgro? Would the Johann Rupert-controlled investment company stop at the unbundling of as much as 34% of its net asset value? Or could Mediclinic, which accounts for 18% of that value, be next on the distribution list? Like FirstRand, Mediclinic is in good hands, having recovered from a grim few years of poorly executed foreign ventures.
Some analysts suggested that instead of offloading its attractive operations, Remgro should focus on shedding its underperforming listed assets such as RCL and Distell, forcing management to toughen up in a less protected environment.
The suggestion highlights the uncertainty around the motivation for the FirstRand move. The official explanation is that with the three founding directors — Laurie Dippenaar, GT Ferreira and Paul Harris, who along with Rupert set up RMB 40 years ago — no longer on the board, the time has come to unwind the structure. Without any control or influence, “it just no longer made sense for us”, explained Rupert.
It may also be that Remgro was responding to shareholders’ long-expressed concern about the discount at which the Remgro share price has traded to its underlying net asset value. The discount has historically been at about 18% but shortly before the unbundling announcement it touched a 10-year high of 27%. Remgro CEO Jannie Durand recently told analysts they were considering doing something about it.
It’s ironic that Remgro’s effective controlling stake in FirstRand should be mentioned in the context of a holding company discount. The 40-year relationship has been key to the creation of the country’s most enterprising and profitable bank.
Over that period it has left its competitors in the shade, generating returns substantially ahead of all of them bar comparatively recent arrival Capitec, which is not a full-service bank. Without Remgro it’s impossible to imagine that RMB would have been in a position to become the dominant shareholder in one of the country’s big five banks.
The deal between Rupert and Anglo American essentially involved the swap of Remgro’s mining assets for Anglo’s financial assets, chief of which was First National Bank, which had been purchased by Anglo from a disinvesting Barclays in 1986.
Certainly the three founding executives were instrumental in driving the bank’s stellar growth, but it’s likely the Remgro environment helped them avoid some of the value-destroying pitfalls other banks seemed regularly to fall into. The most egregious was Nedbank’s audacious and somewhat desperate bid for underperforming Standard Bank at the end of the 1990s and Absa’s constant restructuring in a bid to secure itself a place on some sort of growth path before it was grabbed in an ill-considered and value-destroying African expansion bid by Barclays.
Being part of the Remgro stable meant the FirstRand founding executives could get on with the business of growing a profitable bank; they did this and more. Despite the discount, Remgro reminds us of the important role for holding companies. Sadly, it also reminds us of the potential flaws in the model, chief of which is providing shelter for underperforming executives.
The unbundling announcement has sparked grim speculation that this might be the beginning of a winding down of Rupert’s role in SA. If so, that would be deeply regrettable. For decades the Ruperts have played an unmatched role in the development of the country’s economy and society. More upbeat is the contrary speculation that the move actually marks the beginning of a more robust involvement by Rupert and Remgro in the unlisted space.