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Is Old Mutual set for Swede success?

Old Mutual’s plan to take over Skandia would see the mer- ger of two companies that dominate the financial services market in their home countries of South Africa and Sweden.

Old Mutual is valued at 4.7bn while Skandia is worth 3.3bn. Skandia has 56bn in assets under management worldwide, with the UK business having 20bn. Its Swedish roots go back 150 years and the company now has operations in 22 countries, with the biggest markets being the UK and Sweden but with significant holdings in Australia and in growth markets in Europe and Asia. Skandia’s UK operation, which was set up in 1979, has been described by analysts as the jewel in its crown.

The UK group’s 2004 results showed a 43 per cent rise from the previous year to 514m. The business comprises Skandia Life, an onshore bond, pension and pro- tection business; Royal Skan- dia Life for offshore bonds; fund supermarket Skandia MultiFunds; Skandia Life Ireland for European offshore bonds; and Skandia Investment Management , the asset management business. Skandia UK also owns an 80 per cent stake in IFA support service provider Bankhall.

Chelsea Financial Services managing director Darius McDermott considers that Old Mutual is most likely to be after Skandia’s distrib- ution power in the UK, its primary interest being as a life company rather than as an asset management firm.

Old Mutual’s UK select mid-cap fund, managed by Ashton Bradbury, stands out for McDermott. It is up by 41 per cent over three years and is ranked sixth against a sector average of 6.2 per cent of 258 funds.

McDermott says: “Over here, Old Mutual are really represented by their fund management business and we hold them in reasonably high regard in this respect. Skandia’s investment management business performance is barely average and has been running less than two years. I would expect the two businesses to be run separately if Old Mutual bought Skandia in the UK. But in the UK, life companies are desperate to protect their distribution, with Norwich Union and Scottish Equitable both buying IFA businesses. I would suggest that this is the trend Old Mutual are buying into with their Skandia bid.”

Credit Suisse multi-manager Gary Potter says distribution is going to be key in the investment market and Skandia’s well established presence in the IFA market will benefit anyone who buys the company.

With nine sales teams and over 100 sales consultants, Skandia’s UK distribution presence is strong. It is known for paying high rates of commission, which Man Securities equities Analyst Trevor Moss feels makes the group a risky purchase. He thinks that Skandia’s strong IFA links are largely commission-based and not about product capability.

Moss says: “They can only continue to pay high commission if they continue to over-charge the consumer. If Old Mutual bought the company and cut the commission they pay to advisers, I think the love felt for Skandia would very quickly dry up. I was recently offered a Skandia pension with unlimited fund switching but it would have charged me 1.2 per cent more than the fund I ended up going for, which offered only four switches a year. That is a case of overcharging for privileges that people do not actually need.”

Egg design and market- ing managing director Mar- tin Fox says Old Mutual is likely to want to rebrand Skandia. With Old Mutual having expressed a desire to get back into the UK retail market for some time, Fox wonders whether some kind of collaborative arrangement could be on the cards with Skandia fund supermarket rival Selestia, which is owned by Old Mutual.

Fox says: “Whether Old Mutual decides to rebrand Skandia depends on their long-term objectives, they have a relatively strong name and while Skandia’s name is strong in the UK, big names come and go. Other big names such as Scottish Amicable have disappeared and life goes on.”

Skandia is, of course, more than the UK business. With the Swedish arm having lost 90 per cent of its value following management controversies several years ago, ana- lysts are unsure whether Old Mutual will want the wider group or to sell it off entirely.

Oriel insurance analyst Roman Cizdyn says, having spoken to Old Mutual the day after the bid announcement, he understands it to be after the whole group, particularly for its business in the Italian and German markets.

New Life principal John Burnard says he does not think that IFAs in the UK are too concerned about the future for Skandia in Europe but it is sad that the UK operation appears not to be independent enough to survive on its own. If things continue like this, he says, there will be only one life insurance company in the world.

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