Rand Merchant Bank to top Discovery shareholder list

A couple of days ago we commented on Discovery's interim results for the half year to June 2007. We were impressed with the performance from the groups local operations Discovery Life, Discovery Health and Vitality and encouraged by prospects for UK joint

We join the thousands of Discovery shareholders who eagerly await the outcome of the group's strategic announcement which will decide Destiny Health's fate.

Our coverage of Discovery's interim results did not include the big announcement from majority shareholder FirstRand. During the results presentation, Discovery chief executive Adrian Gore announced that FirstRand's would dispose of its 57.10% shareholding in Discovery. Now that more information is available we take a quick look at what motivated the decision, how the transaction will be accomplished and who tops the Discovery shareholder list.

Sound business reasons for the unbundling

Discovery's board acknowledges that "there has been a continuous trade-off between the considerable value added by FirstRand against the marketplace competition between Discovery and other FirstRand companies, in particular, Momentum."

They believe that the unbundling will have significant advantages for Discovery in coming years, particularly as the group launches its investment product offerings. The major benefit from the change is that possible strategic conflicts between Discovery and FirstRand are removed. Discovery will have increased scope to pursue business opportunities without having to consider the impact on FirstRand. The deal will ensure that FirstRand shareholders have a direct shareholding in Discovery and will increase the liquidity of Discovery on the JSE. The decision will effectively free Discovery and Momentum to pursue their respective business objectives.

When the FirstRand unbundling is complete, RMBH becomes the major shareholder in the group. The Discovery board is quick to suggest that this move is nothing more than Discovery returning to its roots. "It is important to point out that RMBH was the original shareholder of Discovery and in effect, from a philosophical point of view, Discovery is now returning to the shareholder structure it had when it was formed in 1992."

RMB Holdings becomes Discovery's biggest shareholder

The FirstRand unbundling is quite complicated and will be completed in two separate parts. The first will be the sale of approximately R577.4 million worth of stock. And the second will be the unbundling of the remaining 53.44% Discovery shares to FirstRand shareholders. Thus RMBH will obtain the majority of its Discovery shares through the FirstRand unbundling, with the balance purchased from FirstRand, FirstRands staff trusts and Remgro.

RMBH issued a SENS announcement on 13 September 2007 in which the group outlined how it would take its total shareholding in the Discovery group to 25%. RMBH, through its 30% stake in FirstRand will receive more than 95 million shares from the unbundling process. A further 3 million shares will be acquired directly from FirstRand (at a cost of R85.9 million). The result is that immediately after the unbundling RMBH will have a 16.61% stake in Discovery.

The balance of shares will come from FirstRand staff trusts and Remgro. In an agreement with the trustees of the FirstRand staff trusts RMBH "will acquire 22,691,417 Discovery shares for a total consideration of R607.5 million, at the acquisition price of R26.77 per Discovery share." This transaction will increase RMBHs Discovery shareholding to 20.45%.

And finally, "in terms of a separate agreement with Remgro, RMBH will acquire the 27,008,623 Discovery shares that Remgro (through a subsidiary) will receive pursuant to the unbundling" This transaction will cost RMBH in excess of R900 million as the agreed R33.94 per share. The end result is that RMBH will replace FirstRand as the largest shareholder in the diversified financial services group. They will hold 25.01% of the entire issued share capital of Discovery.

A like for like replacement

Given this latest development one is left wondering whether Discovery had not made a like for like swap of major shareholder by simply replacing FirstRand with RMBH. After all, RMBH lists major interests in short-term insurance through its 62.2% investment in Outsurance and has limited life insurance exposure through an 80% stake in RMB Structured Insurance. Then there is also the 15.8% exposure to financial services group GlenRand MIB. Will these activities not lead to similar tensions as Discovery continues to grow?

The saving grace is that RMBH is a holding company. It is unlikely that RMBH group interests will conflict with Discovery operations. Once the unbundling is complete, Discovery will be free to expand its financial services product offering and continue in its quest to establish itself as the dominant company in the domestic financial service industry.

Editor's thoughts:
Subsequent to the announcement that FirstRand would unbundled its holding in Discovery, Rand Merchant Bank Holdings has announced it will increase its stake in Discovery to 25.01%. To many outsiders it appears as if the crown has simply passed from FirstRand to RMB. Discovery is adamant that the change will ensure adequate freedoms to pursue unfettered financial services industry growth. Do you believe that FirstRand's 57.10% shareholding in Discovery was holding the group back? Send your comments to gareth@fanews.co.za