There is something faintly extravagant about spending roughly R21bn to simplify a corporate structure you already control.
That, stripped of the presentations and references to “unlocking value”, is what Sanlam proposes to do by buying the 37.3% of Santam it does not already own. So what exactly does R21bn buy?
A lot depends on whether there are synergies to be unlocked: to put it another way, how much overlap is there between long-term and short-term insurance sales? Aren’t the typical client needs so different that it’s actually quite hard to cross-sell?
For Kokkie Kooyman, global financial fund manager at Denker Capital and one of the country’s longest-standing insurance analysts, the answer is emphatically not some great commercial marriage.
Asked how much genuine synergy exists between the two, his answer is refreshingly short: “They’re not synergistic at all.”
There are exceptions, however. Kooyman says the clearest operational gains are likely to come elsewhere in Africa, “where they’ve been duplicating what they do in those countries, you can actually consolidate and simplify things a lot”.
There may be some cross-selling. But Kooyman doesn’t put much store by the idea that buying out Santam’s minorities suddenly produces a vast new distribution machine.
“The cross-sellers will be more referral, which should have been happening in any case.”
Sanlam and Santam have had ample opportunity to introduce their clients to each other before now in the long corporate history.
Greedy for more
The stronger argument is much simpler: Santam is a very good company and Sanlam would like all of it.
“I think the main thing is more to capture the 20% that is being paid out to minorities every year,” Kooyman says. Santam, as David Shapiro points out in his piece today, has consistently generated handsome returns on capital. Kooyman says Denker has owned the share in its financial and equity funds precisely because of those returns.
“It has actually outperformed Sanlam over the years, and each year given an average return on capital of maybe 30% vs Sanlam’s, which has been coming down a bit,” he says.
And in the recent past, returns on short-term insurance have been particularly good. Insurers pushed through substantial premium increases after Covid, while higher interest rates have lifted the returns on the large pools of money they hold before claims are paid. That combination has produced very strong underwriting margins and returns.
But it has also attracted fresh capital and competition. Claims costs remain high, catastrophe risks are increasing and inflation has proved stubborn, which gives insurers some justification for holding on to pricing. The broad picture is therefore one of profitability coming off exceptional highs rather than collapsing. That fits Kooyman’s view that short-term insurance has become more competitive over the past year or so. The easy part of the cycle is probably over, but well-run insurers with disciplined underwriting should still make respectable returns.
Full value?
Radebe Sipamla, co-portfolio manager at Mergence Investment Managers, has questioned why Sanlam should pay what amounts to full value for the minority stake in a business it already controls. News24 described investor reaction as mixed, with the sceptical case centred on whether the price being paid is justified by the relatively incremental change in control.
Sanlam is offering R505 a share, 26.6% above Santam’s undisturbed closing price and 25% above its 30-day volume-weighted average. Some minority shareholders may regard that as a very pleasant way to end Santam’s 62-year career on the JSE. Andrew Bahlmann, CEO of Deal Leaders International, comes down closer to Sanlam’s side. He regards taking Santam private as the logical next step in a relationship in which Sanlam already has control, arguing that the separate listing imposes cost and complexity with relatively little strategic benefit.
So there are really two different propositions here.
Bahlmann’s is the corporate-finance proposition: once one shareholder owns almost two-thirds of an operating subsidiary, a separate listing becomes increasingly difficult to justify.
Sipamla’s is the portfolio manager’s question: perhaps, but how much should you pay to get rid of it?
Kooyman falls somewhere between the two. He agrees that the obvious costs disappear, but his enthusiasm is less about a cleaner organisational chart than about owning all of Santam’s earnings.
Earnings accretive
“The initial saving on removing the listing and the earnings that they get from Santam that was now going to minorities offsets the costs of the finance,” he says. He says Sanlam expects the deal to be earnings-accretive from the first year.
That is the number Sanlam shareholders should probably watch rather more closely than the promised cross-selling.
Sanlam is exchanging cash and additional borrowing for a larger claim on the earnings of a business whose return on capital has generally been above its own. It also gains considerably greater freedom to move capital around the group. Sanlam itself says the acquisition will give it greater flexibility to “allocate capital, manage intra-group resources and execute strategic initiatives”.
Sanlam has no shortage of other ambitions. There is the Ninety One partnership, the SanlamAllianz operation across Africa and, most obviously, India.
Just last year Sanlam was explicitly telling investors that much of its discretionary capital had been earmarked for the Indian insurance transactions. India remains one of the group’s major growth engines, alongside South Africa and the wider African operation.
Why, then, put another R21bn into a mature South African business you already control instead of keeping your powder dry for India?
Kooyman isn’t particularly bothered. “Sanlam has been incredibly good in capital allocation,” he says.
More practically, he points out that the choice between Santam and India is not quite as binary as it sounds. Shriram Finance has received substantial outside capital from MUFG, while foreign ownership and the structure of Sanlam’s Indian insurance holdings constrain how rapidly Sanlam can simply throw additional capital into those businesses.
Complications?
“The Shriram finance business actually doesn’t really need capital,” Kooyman says. “MUFG, the large Japanese bank, took a 20% stake in Shriram and injected new capital. So Shriram has got excess capital at this stage.”
The SanlamAllianz joint venture raises another potential complication.
At first glance, buying the whole of Santam could make Sanlam’s general-insurance architecture more confusing. Santam dominates the South African operation while SanlamAllianz combines Sanlam and Allianz businesses through much of the rest of Africa.
Kooyman thinks the effect is negligible. “For Allianz it’s just a different shell,” he says. There is even an argument that full ownership of Santam makes future co-operation simpler. Sanlam will no longer have Santam minorities looking over its shoulder if it wants to share technology, underwriting capability, reinsurance capacity or other general-insurance resources with businesses elsewhere in the group.
Kooyman also suggests the deal is characteristic of South Africa’s low-growth corporate environment. “Just to keep returns high, CEOs are everywhere trying to keep costs low, and waiting for when South Africa does resume its normal growth.”
Sanlam does not really have to prove that owning 100% of Santam is better than owning 62.7%. That part is obvious. It has to prove that owning the extra 37.3% is better than everything else it could have done with R21bn.
For the moment Kooyman is inclined to give it the benefit of the doubt.
