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OUTsurance owner RMI to unbundle Discovery, Momentum and raise R6.5bn via rights issue

RMI have announced that it will unbundle its stakes in life-insurers Discovery and Momentum as the investment holding company looks to streamline operations in order to focus on property and casualty (P&C) insurance businesses. The unbundling will narrow the discount between its share price and the underlying value of its assets, with RMI shares skyrocketing around 15% in trade on Monday. RMI’s restructured portfolio will consist of OUTsurance, of which it owns 89% and UK-based P&C insurer Hastings, of which it owns a 30% stake. The restructured RMI will mean that its portfolio companies will primary derive earnings in South Africa, the United Kingdom and Australia. The company will also look to raise R6.5bn via a rights issue, as it looks to optimise its capital structure in order to maximise value for shareholders. – Justin Rowe-Roberts

Rand Merchant Investment Holdings (RMI) SENS statement: 

Proposed strategic restructure of RMI

1. Introduction Historically, RMI’s strategy has focused on being an active and influential shareholder invested in a portfolio of principally life and property and casualty (P&C) insurance businesses which have an entrepreneurial and aspirational culture. More recently, RMI has deliberately focused on evolving its geographic and earnings mix to become an international P&C-biased insurance investor. In line with the ongoing execution of this strategy, and consistent with RMI’s objective of continuing to maximise shareholder value via optimal corporate structures, shareholders are advised that the board of RMI (RMI Board) has resolved to restructure RMI’s portfolio (the Restructure).

The Restructure 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 RMI shareholders (the Unbundling); and

– an equity capital raise of up to R6.5bn by way of a pro rata rights issue by RMI (Rights Issue), to optimise RMI’s capital structure.

The RMI Board believes that the Restructure:

– provides structural alignment to the evolved strategy by creating a focused P&C investment group with exposure to, and influence over, unlisted insurers in South Africa, Australia, and the United Kingdom via OUTsurance Group Limited (OUTsurance), Youi Holdings (Youi) and Hastings Group Holdings (Hastings);

– will create an efficient and agile corporate structure with regulatory robustness which optimises the capital structure and enhances the dividend yield; and

– will unlock material shareholder value through a reduction in the discount at which RMI currently trades to its underlying intrinsic value.

RMI has received in-principle support for the Restructure from shareholders, together representing approximately 65% of the issued shares in RMI. These shareholders comprise:

– RMI’s largest shareholders, Remgro Limited (Remgro) and Royal Bafokeng Holdings Limited (RBH);

– the founders of the RMB group of companies, Messrs Laurie Dippenaar, Paul Harris, GT Ferreira and Pat Goss; and

– RMI’s large institutional shareholders, Coronation Asset Management, Allan Gray and Abax Investments (all on behalf of various clients).

The indicative salient terms, potential mechanism, and conditions of the Restructure are set out herein. Further details (which may, where circumstances dictate, be different to these indicative terms) will be provided to shareholders in subsequent announcements to be published on the Stock Exchange News Service (SENS) of the JSE Limited (JSE) in due course. It is envisaged that the Restructure will be completed by the end of Q2 2022.

2. The Unbundling

RMI is currently the largest shareholder in both Discovery and Momentum Metropolitan and is classified as a significant owner in the businesses in terms of the Financial Sector Regulation Act 9 of 2017.

RMI’s association with Discovery and Momentum Metropolitan (historically through its sister company RMH Holdings (RMH) and prior to the separate listing of the group’s insurance businesses in 2011, which created RMI) dates from the early 1990s. The group acquired a controlling interest in Momentum Metropolitan in 1992 and also provided Adrian Gore and Barry Swartzberg with the seed funding and the life insurance licence to build Discovery in 1993.

Throughout this journey, RMI has achieved significant success with Discovery and Momentum Metropolitan by acting as the cornerstone shareholder, enjoying a close partnership with Adrian Gore, Barry Swartzberg, Hillie Meyer and their respective management teams and boards.

RMI believes that this approach has driven growth and innovation at Discovery and Momentum Metropolitan which has, in turn, created some of the most iconic financial services brands and products in South Africa and delivered strong financial returns. Discovery and Momentum Metropolitan have delivered c.308% and c.115% total return, respectively, since RMI’s listing in 2011.

Discovery and Momentum Metropolitan are well-established businesses under the stewardship of leading management teams and boards. Both businesses have demonstrated the resilience of their underlying operations over many years, and particularly over the course of the devastating Covid-19 pandemic. The Unbundling will have no impact on the respective solvency positions of these businesses.

RMI is working with its management partners in these businesses to ensure a co-ordinated and managed process to enable the businesses to continue to focus on their core growth strategies, while providing more efficient ownership for RMI shareholders.

RMI will remain a committed and supportive strategic shareholder until the implementation of the Restructure. In this regard, shareholders are referred to the Discovery financial results for the year ended 30 June 2021 published on 2 September 2021, wherein Discovery advised its shareholders of a potential capital raise to fund its participation in a capital raise at Ping An Health Insurance. To the extent that Discovery funds this growth opportunity through equity rather than debt, RMI will support and intends to participate in this capital raising.

RMI’s appointed non-executive directors will remain on the Discovery and Momentum Metropolitan boards respectively, until at least the implementation of the Restructure.

The Unbundling is intended to be executed by way of a pro rata distribution in specie by RMI in terms of section 46(1)(a)(ii) of the Companies Act 71 of 2008, as amended and section 46 of the Income Tax Act, 1962, as amended.

3. The Rights Issue

A consequence of the Unbundling is that RMI will require an equity raise to optimise its capital structure. A rights issue is considered the most equitable and efficient mechanism as it provides all shareholders with the opportunity to participate in the capital raise on a pro rata basis, ensuring no nominal dilution.

RMI’s intention is to implement a fully committed and/or underwritten Rights Issue.

The gross proceeds of up to R6.5bn will be used to:

– reduce RMI’s gross debt from R11.8bn as at 30 June 2021 to a gross debt level more commensurate with the asset base and anticipated dividend flow of the remaining assets, as RMI’s shareholdings in Discovery and Momentum Metropolitan have served as collateral for the current leverage structure;

– sustain a target leverage ratio (defined as gross debt/attributable earnings) of no more than 2.5x;

– maintain a contingency buffer to support portfolio companies, as required; and

– target a dividend pay-out ratio of 50% of free cash flow generated.

RMI’s primary 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 Restructure and the resultant capital structure and financial leverage position of RMI post implementation of the Restructure.

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