Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. My name is Tokelo Mulaudzi, and I'm Head of Investor Relations. Thank you all for joining us on this call today. Before we begin, let me outline a few logistics. [Operator Instructions] And with that, I will now hand over to Paul Hanratty to start the presentation.

Tokelo, thanks very much, and good afternoon to everybody, and thank you for taking the time to join us on this call today. I am joined on the call today by David Marshall, our Group Executive for Strategy and M&A; Abigail Mukhuba, our Group Finance Director; Tava Madzinga, the CEO of Santam; Wikus Olivier, the Santam Finance Director and CFO. We also do have Mlondolozi Mahlangeni with us, Abigail and myself here. I'll start by outlining the recent announcement, noting some key transaction terms and the strategic rationale with Tava then going through the rationale from Santam's point of view, while David and Abigail will follow up and speak further about some of the details about the value inherent in the deal, the terms and the expected financial effects and process. We have announced Sanlam's firm intention to make an all-cash offer to acquire the remaining Santam shares we do not already own, excluding treasury shares via a scheme of arrangement. Sanlam currently owns approximately 63% of Santam through its wholly owned subsidiary, Sanlam Life. If implemented, Santam would become a wholly owned subsidiary of Sanlam and delist from the Johannesburg Stock Exchange, the Namibian Stock Exchange and the A2X. The proposal builds on decades of collaboration between Sanlam and Santam, a shared culture and strong operational alignment. It is consistent with our Fortress South Africa strategy. South Africa has long been a core market of the Sanlam Group, and this investment reinforces our commitment to maintaining and building a leading position in the South African market. The purchase consideration is a fully funded all-cash offer of ZAR 505 per share, and it reflects extensive negotiations over the last 12 months with the independent Board of Santam. We believe it represents a compelling opportunity for Santam minority shareholders given the certainty and the speed of value realization that comes with this structure. Each eligible shareholder will receive a consideration of ZAR 505 per Santam share in cash. From a governance perspective, the transaction has been overseen throughout by Santam's Independent Board, working closely with its advisers and drawing on input from an independent expert. Having considered the terms in detail, the Independent Board has confirmed that it unanimously supports the scheme and will recommend that eligible shareholders vote in favor of the scheme. Change to the next slide. As previously mentioned, this transaction is supporting -- is supported by a compelling strategic rationale. We see this transaction as a meaningful accelerator of both Sanlam and Santam's 2030 strategies. From Sanlam's perspective, full consolidation and the associated efficiencies should help accelerate our Vision 2030 objectives, reinforcing our fortress position in South Africa and creating a clearer platform for long-term growth while reaffirming Santam's 2030 growth vectors. As we simplify the structure of the Sanlam Group and remove duplication, particularly around listing-related costs, we expect this combined earnings profile improves, which supports stronger earnings growth, dividend capacity and returns over time. From Santam's perspective, being fully embedded within the Sanlam Group allows us to scale its ecosystem more meaningfully through more deliberate cross-sell opportunities, deeper partnership-led distribution and stronger connectivity across the broader set of group capabilities. It also enhances Santam's ability to pursue international expansion over time, leveraging Sanlam's presence in India and the wider African footprint of the SanlamAllianz platform. This proposed transaction is directly aligned with Sanlam's strategy of leveraging quality and accelerating growth through its existing platforms, while further strengthening strategic alignment and operational efficiency. It allows for better coordination, decision-making and capital deployment, including a more integrated client proposition through enhanced cross-sell opportunities that we expect to emerge over time. By moving to a single clearer market entry point and a more streamlined group structure, we reduced structural complexity. In doing so, we believe the transaction strengthens Sanlam's equity story, supports improved liquidity for the stock over time and creates a clearer platform from which to execute. Santam shareholders have benefited over time from Sanlam's support in the financial and capital sense and access to our distribution, and we expect to be able to accelerate growth at Santam gradually through our enlarged ecosystem. Full ownership and a consolidated position in South Africa supports a more integrated proposition across general insurance, life insurance, asset management and broader financial services capabilities such as banking and credit. Over time, we expect this to enable a more coordinated client coverage and to expand cross-sell opportunities across the entire ecosystem. Sanlam and Santam have been cooperating closely with each other for over a century. But this transaction further solidifies the relationship, allowing for enhanced capital allocation, decision-making and strategic flexibility across the group. In terms of incremental value available to Sanlam through synergies, we do expect efficiencies over time, particularly through the removal of minority leakage and the unlocking of some cost synergies, but they will be limited. And the transaction stands on its own merits alone, simplification, deeper alignment, clearer resource allocation and stronger execution capacity. At this point of the presentation, I'm going to hand over to Tava, who will talk a little bit about the rationale of this transaction from the Santam business point of view. Tava, over to you.

Thank you very much, Paul, and good afternoon, everyone. Building briefly on Paul's remarks. From a Santam management perspective, we are fully aligned to the strategic direction of the transaction, and we are of the view that the transaction is a compelling proposal for Santam's shareholders. And I'd like to highlight the rationale for at least from our perspective. And so as the Santam Group, we have benefited from and are certainly grateful for Sanlam's long-standing support and partnership and for being able to rely on Sanlam through the challenging times and also the strong periods. And so for us, moving to full private ownership deepens Sanlam's commitment to Santam's growth. And this is backed by Sanlam's scale, their capital strength, distribution capabilities and more importantly for us into the future, the broader financial services platform that Sanlam is building out. And so this combination strengthens the foundations that underpin Santam's longer-term objectives and effectively allows us to accelerate our current future fit strategy to 2030, which is based on 3 key vectors that is strengthening our position in our domestic market here in South Africa, driving our international expansion and scaling our ecosystems via our partners. And so the transaction for us enhances our client proposition by broadening the addressable client base and strengthening the breadth of our existing offering, and this creates additional opportunities for cross-sell in time, underpinned by greater access to Sanlam's greater ecosystem and partnerships. And so I think for us, this certainly is strategically supportive of the Santam Group to 2030. I will now hand over to Paul to cover the key transaction terms.

Tava, thanks a lot, and apologies to the audience because I know Tava was breaking up a little bit on our side, possibly on yours as well. We believe this proposal represents a very attractive offer to Santam's shareholders. So, as I mentioned earlier, under our proposal, each eligible shareholder will receive a total cash consideration of ZAR 505 for each Santam share. We think it's a compelling proposal for Santam shareholders, representing a premium of roughly 27% to spot. That was obviously before the jump up today, around about 25% to the 30-day VWAP and around 29% to the 90-day VWAP. The price also sits 9.4% above the 52-week market trading high. On a trading comparables basis, using market consensus numbers, it corresponds to a forward P/E of 11.7% and a price to book on '26 numbers of 3.2x. The all-cash consideration will be funded from existing balance sheet capacity at Sanlam, remaining well within our solvency targets. And we expect the leverage that we take on initially to reduce steadily over time, but we do not expect it to have any dividend impacts on Sanlam itself. I'm going to hand over now to Abigail Mukhuba, our Chief Financial Officer, to talk through some of the pro forma financial effects.

Thank you, Paul. So the compelling mutual benefits are clear with incremental value created through the consolidation. Please note what we're showing on the slide is illustrative financial effects on the group and aimed to be used just as a guidance. So the combination of a simplified structure, unlocking the final layer of synergies and eliminating duplicated listing-related costs are expected to translate into a near-term uplift in earnings metrics as well as modest earnings per share accretion. This reflects a stronger return on equity profile expected to surpass the ROE level that could be achieved as a stand-alone group. On funding, an important point is that the consideration is all cash and it is funded from existing balance sheet capacity, remaining well within the Sanlam solvency targets. You should expect a temporary increase in leverage immediately post the transaction. We expect gearing to reduce steadily over time as retained earnings strengthen the equity base. Importantly, we don't expect an impact to Sanlam's dividend policy and management remains committed to our existing capital return framework. I'll hand over to David to cover the execution process and the next steps.

Thanks, Abigail. Hi, everyone. So, as mentioned earlier, the proposal is a fully funded one, supported obviously by a bank guarantee as required by the TRP. We think that the execution risk in the transaction is significantly mitigated by the fact that Sanlam already has existing control and a long-standing relationship and obviously, operational familiarity with Santam, which means that no formal due diligence is required. The transaction is subject to customary regulatory approvals, but importantly, no Competition Commission approval is needed given the existing controlling stake. And based on our preliminary assessment of all the other approvals that will be required, we do not expect any significant impediments or delays to closing of the transaction. Additionally, as the transaction is a Category 2 one for Sanlam. No Sanlam shareholder approval will be required. For further details on the transaction, a shareholder circular will be distributed at the latest by the 3rd of November, and that will obviously include a lot more information about the subsequent steps in the process. The transaction remains subject to Santam shareholder approval, and that vote is then expected to take place on or around the 30th of November. And subject to the -- to those approvals being obtained, we would expect the transaction to become unconditional fairly early in Q1 of 2027, at which point Santam would then become a wholly owned subsidiary of Sanlam and its listings on the relevant exchanges would be terminated. We will open now for questions. Thank you.

Thank you, David, and thank you to the Sanlam and Santam executives. With that, as mentioned earlier, we will start with the call -- the questions on Chorus Call. Operator, do we have any questions?

[Operator Instructions] At the moment, we don't have any participants in the queue.

Thank you, operator. With that, I'll just move on to the questions on the webcast. The first one is from Richard Cheesman and he is from Urquhart Partners, and he says, congratulations on the transaction. Assuming the shareholder approval and regulatory processes proceed as expected, is there any reason why the transaction couldn't close in January or February? And if there are delays and it closes late March, could you give us color around potential Santam dividend? Have the relevant dividend dates been fixed? And would it be purely mechanical, i.e., if the transaction closes the day before the relevant date, the distribution is not made? Or if the transaction closes the day after the date, it is -- or would there be any discretion around timing and distribution?

Thanks very much, Richard. David, it's probably a question for you.

Yes. Thanks, Richard. So as I indicated, this transaction should be -- given its context should be about as straightforward as a transaction like this will be. But that said, one can never predict regulatory approvals. But we see no reason -- to answer your question directly, we see no reason why the transaction in the normal course shouldn't be closing sometime in February. And yes, assuming that the transaction closes before the normal date on which Santam would have declared a dividend, then that point is moot there will be no dividend declared. Should it go for whatever reason beyond that normal date, then a dividend would be declared in the normal course.

The next question is from Michael Christelis from UBS and he asks, how much capacity will the Sanlam Group have to issue debt once this deal is concluded, if need be?

Okay. I'm going to ask Abigail and Mlondolozi to comment on that. But I guess the answer, Michael, in sort of broad terms would be that our leverage will obviously be elevated above that point, which we would normally be comfortable with, and we've indicated our intention to reduce leverage. So there would be no intention on our part to take any more debt on -- post this transaction. Is there anything either of you want to add to that?

No, nothing to add.

No, it is good.

The next question is from Warwick Bam of RMB Morgan Stanley. He asks, integration between Sanlam and Santam Distribution in South Africa has been cited as a strategic opportunity for several years. Can you remind us how much overlap there is in customers and advisers between the 2 entities? And why you think this transaction of this kind could enhance cross-sell execution?

Okay. Warwick, thanks a lot. I'll ask Tava to comment in a minute. But at a very high level, the way I think about it is that Tava has got around about 1 million personal lines policyholders. So I'm ignoring the corporate business for the purpose of this question and talking purely about retail or personal lines customers. So there are about 1 million of whom Sanlam has an equivalent base of something like 5 million to 6 million. Historically, the business at Santam has been more heavily focused on the affluent market. And in fact, a very significant -- I think the largest channel historically for Santam has been the Sanlam Financial Advisers and customers. So clearly, there is an overlap and Tava may or may not have -- or David may or may not have to be able to give some guidance on the proportion. What is true is that in the last number of years, under Tava's leadership, we have begun to significantly change the mix of business by distribution channel. So there's an increasing proportion of personal lines business at Santam that is now coming through direct rather than broker intermediated channels. What that does is it opens up, I believe, going forward, 2 things. One, the ability to much more directly access customers from the Sanlam client base. And secondly, Sanlam itself is probably much better positioned in the mass -- the retail mass market than Santam, which has been focused historically a little bit more at the upper end of the market. So I think that there is tremendous potential. But remember, you would know this, Warwick, is that with revenue synergies, these things can take a long time to build up and to compound. And so if you try and put a value on it, it's quite speculative. But Tava, do you want to add anything to this?

Yes, Paul. Maybe just starting with the limited synergies on the cost side. The 2 businesses already at an operational level, share quite an extensive quantum of resources. So for example, on the procurement side, Santam already manages the Sanlam Group's entire procurement. And then if you look at, for example, on the IT side, we benefit from Sanlam's scale on the IT side, cybersecurity and IT platforms that we currently run. So I think a huge proportion of cost synergies would largely be already exhausted, save for some limited synergies. And then on the revenue side, I think as Paul has correctly articulated, I think in time, we will benefit in our view from the broader platform that Sanlam is building, which is around the ecosystem. There is limited overlap between our customer base. We have a much smaller customer base than the Sanlam Group. But I think it's also important to say that we've been very mindful of how we deploy the Santam resources, particularly where we have shared opportunities with the Sanlam Group into Rest of Africa and into India. And so I think with this transaction, it does simplify how we work together at an operational level. I think it makes it much easier, not having to worry and to track the costs into building platforms and distribution and avoiding the splitting of hairs between the various entities. And so I think operationally and practically, it just makes it easier for us to work together on the revenue side moving forward.

It is quite interesting, Warwick, that a bit of history, which I'm sure you know, is that the MiWay business, which is now an increasing proportion of Tava's personal lines business originally was built by Sanlam and then migrated across to Santam, illustrating the ability to access a customer base in a bit of a different segment.

Thank you. The next question is from Warren Riley from Bateleur Capital. He asks, what share of the minority register has indicated support? Why are there no irrevocables? And do minorities receive the '26 dividend if closing slips to late Q1 '27?

Okay. So I think the second question was answered very fully. You may have posted the question before it was asked. On the first one, we have had the opportunity to carry out a wall crossing with some of the key shareholders of Santam, the minority shareholders. And I think it's fair to say that we would not be moving forward if we hadn't had very strong support and indications of support. The way in which people express irrevocables varies quite a lot. And therefore, it's quite difficult to express that simply, but we're confident that we will have the support of minority shareholders in this transaction.

Thank you, Paul. Murray, I think -- Murray, your question is -- has been answered in that last question. And then Lonwabo Maqubela from Perpetua asks, Santam's capital coverage is at the higher end of its targeted range. Are there any capital model efficiencies that are expected at Santam level prior to 2026 results? And are there any capital model efficiencies that accrue to Sanlam as a result of this transaction?

And the answer to that is that historically, we've actually managed Santam on the basis that it is fully integrated from a capital point of view. And the regulator has always permitted us to manage capital at a level that is consistent with a single view of a balance sheet, even though there have been 2 separate entities. That's actually relatively unusual. But what it means is that there are no direct capital synergies from this transaction. And in fact, what we have established through this process is that the Santam shareholders have historically had effectively a free ride and a subsidy from Sanlam around capital support. If Santam stood alone, it would have to run at higher capital levels than it's been able to. So the answer to that question is, no, we don't foresee any capital synergies. But clearly, in the fullness of time, as we look to refinance the bridging finance, we will look at what is optimal for the total balance sheet.

Thank you. And then the next question is from Asanda Notshe at Mazi Asset Management. He says, thank you. In terms of timing, why is the transaction being done at this point?

All right. I have to interpret the question, and please feel free if we've misinterpreted it. I assume you don't mean at this point in the year or whatever, but why are we doing this now as opposed to last year or the year before? So let me say that I've always viewed the eventual integration of Sanlam and Santam as something that would happen and have to happen at some point in time because it's very natural to simplify the structure of the group to do away with the inefficiency of 2 entry points, to do away with 2 listing sets of costs. But most importantly, we've reached a point in time in South Africa where as a group, we have taken the view that to drive further forward from where we are, we need to work in a much more integrated fashion from a customer point of view. And so the notion of having great individual businesses in product silos is going to have to adapt. So we run what we call an ecosystem model where there's a high degree of integration from the customer point of view. We've reached that evolution in our business. And therefore, it's natural that we should take this step. It's also important to note that our business and group have changed somewhat over the years. So we now have a majority interest in the P&C business in India as well as, of course, across the African continent. So when you sit at Sanlam level and you're trying to work out whether to allocate a rand in India to Lloyd's or to Africa, the position of minorities in Santam actually muddies that decision-making and that clarity on where best to allocate capital. So it's a natural simplification in my view. It's a difficult transaction to get to happen because we have shareholders who are on both sides, in many cases of this equation. And so there's a very narrow price at which minorities will accept a transaction, but which is still valuable in the long term for Sanlam shareholders. And there are points in time where that becomes possible, and we happen to be at one of those points in time right now where we believe it is possible to give something compelling to the Santam minorities and at the same time, do it on terms that make long-term success. So we're giving effect to what I believe is a long-term necessity and will happen at some point in this group, but the time is right right now to make this work

The next question is from Harry Botha at Bank of America Securities. He asks whether we can elaborate on the growth opportunities and synergies that Santam provides the group in Africa.