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FirstRand to unbundle merged entity to facilitate transaction and unlock value for shareholders

Published: Mar 31, 2010 8:00:00 AM South Africa Standard Time

All the suspensive conditions to the transaction between FirstRand, Momentum and Metropolitan were fulfilled this week, paving the way for the creation of the merged entity, MMI Holdings.

In a joint statement today FirstRand, Momentum and Metropolitan announced that they have reached agreement to merge Momentum and Metropolitan to create a major new South African insurance group.

Commenting on the transaction Wilhelm van Zyl, CEO of Metropolitan, believes the proposed business combination with Momentum is very compelling in terms of growth.

"The merger will create a leading insurance based financial services group and significantly expand Metropolitan's product offerings. The merged entity will benefit from enhanced growth opportunities, revenue synergies and economies of scale through complementary target markets, a strong human capital base and increased financial resources."

Nicolaas Kruger, CEO of Momentum, said that Metropolitan was a very attractive partner given the complementary nature of its various business units, including its strong franchise in the retail mass market, an area that Momentum was targeting for growth.

"For some time now Momentum has been pursuing a very clear growth strategy focused on diversifying its target market, distribution channels and geographic representation. During the past few months we have explored various strategic alternatives that would accelerate this growth path. The merger with a franchise as successful as Metropolitan is extremely compelling as it represents a quantum leap in strategic direction for both groups." Sizwe Nxasana, CEO of FirstRand, said the merger creates a powerful new player in the South African financial services industry."It is particularly exciting because it brings two businesses together that have created very successful franchises in different but complementary markets. We believe that the merger facilitates a significant expansion of the growth prospects for Momentum and Metropolitan."

With regards to the strategic benefits and opportunities of the merger, currently Metropolitan operates mainly in the low to middle-income retail markets whilst Momentum focuses primarily in the upper-income retail market. In employee benefits, Momentum's umbrella retirement funds have a strong market presence and Metropolitan has well-established relationships with a large number of public sector and corporate clients and attained critical mass in the retirement fund administration arena.

Metropolitan is the leading player in the healthcare administration of closed schemes. Momentum has a product-oriented focus primarily aimed at the Momentum Health open scheme, supported by a strong broker distribution arm.

The businesses also have different but complementary strategies in Africa. Momentum entered Africa on the back of its health business, distributed mainly to groups of employees. Metropolitan owns a number of life licences in Africa and is more retail-oriented. Between them the two businesses have a footprint in 12 countries in Africa. Following the merger the new entity will be well-positioned to expand its product range and activities.

FirstRand will unbundle its shareholding in the merged entity to FirstRand shareholders and no longer have a direct shareholding in Momentum. As a result of the unbundling FirstRand shareholders will own around 60% and current Metropolitan shareholders around 40% of the entity. RMB Holdings, which is a large shareholder in FirstRand, has expressed its intention to own more than 25% of the merged entity.

An asset exchange ratio has been agreed based on the consistently calculated embedded values of Momentum and Metropolitan. As Metropolitan is listed on the JSE it will be used as the vehicle to facilitate the transaction. The name of the listed entity will be changed to reflect the strategic vision of the combined group. The strong brands of Momentum and Metropolitan will continue to be used in the client-facing businesses where both have established strong and trusted legacies.

Nxasana says that FirstRand believes the unbundling is in the best interests of all shareholders.

"We carefully evaluated the consequences of retaining ownership of the new entity within the FirstRand Group however we reached the conclusion that shareholders benefit most from a complete unbundling.

"Not only will it unlock any potential value trapped within FirstRand but will also ensure that the new entity has sufficient free float on the JSE and the necessary flexibility to realise its strategic objectives."

Following the unbundling FirstRand remains committed to growing its operations across all the profit pools associated with lending, transactional and savings products and financial services.

"Whilst we will not own an insurance business after this transaction we will continue to pursue the synergistic benefits that exist between banking, insurance and asset management activities with the merged entity, particularly given the success of FNB Insurance and the significant growth opportunities for the new entity. This will be structured as a preferred strategic relationship based on commercial terms."

Nxasana reiterated that FirstRand's strategic intent remains intact.

"FirstRand's strategy remains unchanged - we aim to be the leading financial services group in Africa. We have a very powerful portfolio of financial services brands here in South Africa and these, combined with our accelerating African expansion plans and Asian corridor strategy are expected to deliver superior returns to shareholders"

In terms of next steps the parties have agreed that reciprocal due diligence investigations will now be undertaken. The primary objective of the due diligence investigations is to confirm the relative valuations of Momentum and Metropolitan.

The process to obtain regulatory approvals has also commenced. It is anticipated that these approvals will take a number of months to be finalised.

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