South Africa's largest insurer Old Mutual said on Monday it was prepared to increase its stake in ailing bank Nedcor but allayed market concerns by saying it would be the last cash injection.
"We have grasped the nettle of Nedcor...We think that the recovery opportunities from where we are today are significant," Old Mutual Chief Executive Jim Sutcliffe told a conference call.
He added: "It (Nedcor) does not need any more capital."
The London-listed firm said it would take up 2.5 billion rand ($372 million) worth of shares in a five billion-rand rights issue Nedcor announced on Monday. The insurer has underwritten a total of 76 percent of the issue. Merrill Lynch and Deutsche Bank have jointly underwritten the rest.
This follows a two billion rand loan, which Old Mutual gave 52 percent-owned Nedcor in December, which will now be repaid.
Old Mutual's shares inched up 0.53 percent to 94 pence in London afternoon trade after Sutcliffe said Nedcor would not need further capital injections.
The shares earlier fell nearly four percent amidst worries that Nedcor's problems would persist and disappointment among some investors that Old Mutual had not sold its stake.
Concern over the price and dilutive effect of the rights issue sent Nedcor down four percent to 64.30 rand by 1440 GMT. Old Mutual lost 1.7 percent to 11.65 rand in Johannesburg.
Speculation had swirled that Old Mutual, which also unveiled a 10 percent drop in annual profits in line with expectations, wanted to offload Nedcor.
The bank reported a dive in annual headline profit to a fraction of 2002's figures.
But Sutcliffe said the Nedcor stake was not for sale, and the assurer would be happy to hike its holding while maintaining a free float of 30-35 percent.
Nedcor said it had also formalised its relationship with Old Mutual in an agreement under which management will be held accountable for performance and will be measured against Nedcor's return on equity.
"Management have made a commitment that this is the end of it. They have all the capital they need. We should start to see the improvements come through," said Craig Bourke, analyst at BNP Paribas, which has a "neutral" rating on the stock.
"Nedcor is basically a management issue now and I think they have a reasonably good record to point to." Guy de Blonay, fund manager at New Star in London, also welcomed the rights issue. "I think this is quite good news. It gives them the opportunity of having more control of Nedcor which is a positive."
A slide in earnings at Nedcor - hit by persistently high costs from its merger with smaller bank BoE, rand strength, a wrong call on interest rates and higher taxes - conspired to drag Old Mutual's annual operating profits down 10 percent to 650 million pounds ($1.23 billion).
Clouded by uncertainty over the size of Nedcor's earnings, a Reuters poll of 10 analysts had shown a range of 580-713 million pounds for profit, with a median forecast of 656 million.
Nedcor shares, which have under-performed peers by around half since early 2003, are trading at seven-year lows.
"No-one knows what to do with this stock, we'll have to wait for the rights issue price range," said an analyst in Johannesburg, who declined to be named.
Sutcliffe said it would be months before the legal situation at its US asset management arm, Pilgrim Baxter, was resolved after securities regulators charged the unit and its founders with improper trading of fund shares.
Sutcliffe said Old Mutual would like to settle the case out of court and noted that the company had not paid out $69 million owed to Pilgrim Baxter's founders, who had been forced to resign last year after an internal probe.
Nedcor CEO Tom Boardman said the rights issue would help it meet a proposed 7.5 percent Tier One capital requirement by year end from five percent now.
Sutcliffe declined to give any information on the likely price range of the rights issue, saying it would be announced after a shareholder meeting in March. But analysts said Nedcor was likely to find it hard to price it above 60 rand.
Sutcliffe said Old Mutual would fund its part through surplus funds in South Africa.
He said the group's well-aired ambition to expand in the UK remained but it would not be rushed into making an acquisition.
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