Owner of OUTsurance RMI to unlink Discovery, Momentum and raise R6.5 billion through rights issue
RMI has announced that it will unbundle its stakes in life insurers Discovery and Momentum as the investment holding company seeks to streamline operations to focus on the property and casualty insurance business. The unbundling will reduce the haircut between its share price and the underlying value of its assets, with RMI shares soaring about 15% in trading on Monday. RMI’s restructured portfolio will consist of OUTsurance, in which it owns 89%, and UK property and casualty insurer Hastings, in which it has a 30% stake. The restructured RMI means that the companies in its portfolio will primarily benefit from South Africa, the UK and Australia. The company will also seek to raise R6.5 billion via a rights issue, as it seeks to optimize its capital structure to maximize shareholder value. – Justin Rowe-Roberts
SENS statement from Rand Merchant Investment Holdings (RMI):
RMI strategic restructuring proposal
1. Introduction Historically, RMI’s strategy has focused on being an active and influential shareholder invested in a portfolio of primarily life and property and casualty insurance businesses that have an entrepreneurial and ambitious culture. More recently, RMI has deliberately focused on changing its geographic distribution and earnings to become a global P&C insurance investor. In accordance with the continued execution of this strategy, and in accordance with RMI’s goal of continuing to maximize shareholder value through optimal corporate structures, shareholders are advised that the RMI Board of Directors has decided to restructure the RMI portfolio (the Restructuring).
The Restructuring comprises the following indivisible elements:
– the distribution of all the shares held by RMI in its two listed life insurance-focused assets, Discovery Limited (Discovery) and Momentum Metropolitan Holdings Limited (Momentum Metropolitan), to the shareholders of RMI (the Unbundling); and
– a capital increase up to R6.5 billion through a pro rata capital increase by RMI (Rights Issue), in order to optimize the capital structure of RMI.
The RMI Board of Directors believes that the Restructuring:
– provides structural alignment to the evolved strategy by creating a specialized P&C investment group with exposure and influence to unlisted insurers in South Africa, Australia and UK through OUTsurance Group Limited (OUTsurance), Youi Group Holdings (Youi) and Hastings Holdings (Hastings);
– create an efficient and agile corporate structure with regulatory robustness that optimizes the capital structure and improves dividend yield; and
– Unlock significant shareholder value through a reduction in the discount at which RMI is currently trading relative to its underlying intrinsic value.
RMI has received support in principle for the Restructuring from shareholders, together representing approximately 65% of the issued shares in RMI. These shareholders include:
– the main shareholders of RMI, Remgro Limited (Remgro) and Royal Bafokeng Holdings Limited (RBH);
– the founders of the RMB group of companies, MM. Laurie Dippenaar, Paul Harris, GT Ferreira and Pat Goss; and
– The large institutional shareholders of RMI, Coronation Asset Management, Allan Gray and Abax Investments (all on behalf of various clients).
The indicative salient terms, potential mechanism and conditions of the Restructuring are set forth herein. Further details (which may, if circumstances so require, differ from these indicative terms) will be provided to shareholders in subsequent announcements which will be published on the Stock Exchange News Service (SENS) of JSE Limited (JSE) in due course. desired. The restructuring is expected to be completed by the end of the second quarter of 2022.
RMI is currently the largest shareholder of Discovery and Momentum Metropolitan and is classified as a significant owner in businesses in terms of Financial Sector Regulation Law 9 of 2017.
RMI’s association with Discovery and Momentum Metropolitan (historically through its sister company RMH Holdings (RMH) and before the separate listing of the group’s insurance business in 2011, which created RMI) dates from the early 1990s. group acquired a majority stake in Momentum Metropolitan in 1992 and also provided Adrian Gore and Barry Swartzberg with the start-up financing and the life insurance license to build Discovery in 1993.
Throughout this journey, RMI has achieved significant success with Discovery and Momentum Metropolitan by acting as a reference shareholder, benefiting from a close partnership with Adrian Gore, Barry Swartzberg, Hillie Meyer and their management and advisory teams. respective administration.
RMI believes this approach has fueled growth and innovation at Discovery and Momentum Metropolitan, which in turn have created some of South Africa’s most iconic financial services brands and products and delivered strong returns. financial. Discovery and Momentum Metropolitan have generated total returns of approximately 308% and approximately 115%, respectively, since the listing of RMI in 2011.
Discovery and Momentum Metropolitan are well-established companies led by leading management teams and boards of directors. Both companies have demonstrated the resilience of their underlying operations for many years, and in particular during the devastating Covid-19 pandemic. The Separation will have no impact on the respective solvency positions of these businesses.
RMI works with its managing partners in these businesses to ensure a coordinated and managed process to allow businesses to continue to focus on their core growth strategies, while providing more efficient ownership to RMI shareholders.
RMI will remain a committed and united strategic shareholder until the implementation of the Restructuring. In this regard, shareholders are requested to refer to Discovery’s financial results for the fiscal year ended June 30, 2021 published on September 2, 2021, in which Discovery informed its shareholders of a possible capital increase to finance its participation in a capital increase with Ping An Health Insurance. To the extent that Discovery funds this growth opportunity through equity rather than debt, RMI will support and intend to participate in this fundraising.
The non-executive directors appointed by RMI will remain on the boards of Discovery and Momentum Metropolitan, respectively, at least until the restructuring is implemented.
The unbundling is intended to be executed through a pro-rata cash distribution by RMI under section 46 (1) (a) (ii) of the Companies Act 71 of 2008, as amended and of Article 46 of the Income Tax Law. , 1962, as amended.
3. The question of rights
One consequence of unbundling is that RMI will need a capital increase to optimize its capital structure. A capital increase is considered to be the fairest and most efficient mechanism because it offers all shareholders the possibility of participating in the capital increase on a pro rata basis, thus ensuring the absence of nominal dilution.
RMI’s intention is to implement a fully committed and / or subscribed rights issue.
The gross proceeds of up to R6.5 billion will be used for:
– reduce RMI’s gross debt from R11.8 billion as of June 30, 2021 to a level of gross debt more commensurate with the asset base and expected dividend flow of the remaining assets, as RMI’s holdings in Discovery and Momentum Metropolitan served as collateral for the current leverage structure;
– maintain a target leverage ratio (defined as gross debt / attributable profit) not exceeding 2.5x;
– maintain an emergency cushion to support portfolio companies, if necessary; and
– target a dividend payout rate of 50% of the free cash flow generated.
RMI’s main lending banks, FirstRand Bank Limited (acting through its Rand Merchant Bank division) and Standard Bank of South Africa Limited, have indicated their support for the Restructuring as well as the capital structure and position. leverage of RMI after the implementation of the Restructuring.
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