Impact of the Group Transactions on Old Mutual plc Shareholders

1. Impact of the Group Transactions on Old Mutual plc Shareholders

1.1. Accounting Treatment of the Group Transactions

In accordance with the rules of the UK Listing Authority (“UKLA”) and the JSE Securities Exchange South Africa (“JSE”), the underlying accounting treatment is in accordance with the accounting policies set out in the last published audited financial information. In presenting the consolidated impact for Old Mutual plc of the Group Transactions, information is to be presented in accordance with UK GAAP as it existed at 31 December 2004.

The accounting treatments adopted may require transactions to be accounted for in a different manner to their legal substance and form. The accounting treatment described below has been determined based on accounting advice and emerging interpretations.

Effective 1 January 2005, the Old Mutual Group will prepare its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). It has therefore been necessary to consider the accounting treatments under both bases of reporting. Restated 31 December 2004 results on an IFRS basis will be published by Old Mutual plc on 3 May 2005.

The following accounting principles are applicable:

Consolidation of Special Purpose Vehicles (“SPVs”) – where control is deemed to remain within the Old Mutual Group, the entities established to support the Group Transactions are regarded as subsidiaries. The acquisition of Old Mutual plc shares by the consolidated SPVs are regarded as issues of treasury shares, resulting in a reduction in equity within the consolidated financial statements.
Earnings per share – the weighted average number of shares is impacted by the Group Transactions only to the extent that any issue of shares is not regarded as treasury shares for the purpose of the consolidated financial statements.
Embedded value per share – the number of shares in issue will increase to include the Old Mutual plc shares acquired by all SPVs. Where deferred consideration is to be received for the issue of the shares, an adjustment to the embedded value is required to represent the discounted present value of the consideration.

1.2. Combined Pro forma Financial Effects for Old Mutual plc Shareholders

The pro forma financial effects of the Group Transactions for the financial year ended 31 December 2004 are set out in the table below to assist Old Mutual plc shareholders to assess the impact of the Group Transactions on adjusted operating earnings per share (“Adjusted EPS”), basic earnings per share (“Basic EPS”) and adjusted embedded value per share (“Adjusted EV per share”).

The pro forma financial effects have been prepared in accordance with UK GAAP as it existed at 31 December 2004. They are provided for illustrative purposes only. Due to the unaudited pro forma nature of the information, it may not give a true reflection of the Group’s financial position after completion of the Group Transactions, nor the effect on the Group’s future earnings.

United Kingdom pence	Before the Group Transactions and the issue of shares	After the Group Transactions and the issue of shares	change %
Adjusted EPS(1)	15.3	14.8	(3.3)
Basic EPS(1)	14.1	13.3	(5.7)
Adjusted EV per share(2)	139.1	136	(2.2)

South African cents	Before the Group Transactions and the issue of shares	After the Group Transactions and the issue of shares	change %
Adjusted EPS(1)	181.1	175.7	(3)
Basic EPS(1)	166.2	156.8	(5.7)
Adjusted EV per share(2)	1 508.0	1 475.0	(2.2)

Notes:

The “Before the Group Transactions and issue of shares” column reflects the audited earnings and adjusted earnings per Old Mutual plc share for the year ended 31 December 2004. The “After the Group Transactions and issue of shares” column reflects the earnings adjusted for the financial effects of the various Group Transactions based on the assumption that the Group Transactions were implemented on 1 January 2004.

The financial effects on earnings include the initial impact of entering into the Group Transactions of £10m (R120m) and the first year of annual impact of £18m (R203m). The initial impact is excluded from the adjusted operating profit, and hence adjusted EPS. As a result of the Group Transactions, Old Mutual plc’s interests in its subsidiaries Nedcor and Mutual and Federal will be reduced. The financial effects take into account a reduction in the Group’s share of earnings from these subsidiaries accordingly.
The “Before the Group Transactions and issue of shares” column reflects the audited adjusted EV per Old Mutual plc share at 31 December 2004. In determining adjusted EV per share, the total number of shares in issue as at 31 December 2004 of 3 854m includes 383m treasury shares, consisting of 92m shares held in ESOP Trusts and 291m shares held in policyholder funds. The “After the Group Transactions and issue of shares” column reflects the adjusted EV per share after the considerations received from the various scheme and an enlarged number of shares based on the assumption that the Group Transactions were implemented on 31 December 2004. In determining the adjusted EV per share, the number of shares in issue of 4 085m includes all Old Mutual plc shares issued under the Group Transactions.

The financial effects on embedded value “After the Group Transactions and issue of shares” include the initial consideration received on the issue of Old Mutual plc shares to SPVs which are considered external to the Old Mutual Group. Embedded value is unchanged for the initial consideration received in respect of treasury shares issued to consolidated SPVs. A pro-forma uplift adjustment is included to reflect the discounted present value of the deferred consideration to be received from external parties in respect of all schemes.
The weighted average number of shares in issue remains unchanged. Shares issued to consolidated SPVs are to be excluded as they are accounted for as treasury shares. Shares issued to unconsolidated SPVs are excluded due to the restricted nature of the issue. The weighted average number of shares in issue used in calculating basic EPS as at 31 December 2004 was 3 432m. The weighted average number of shares in issue used in calculating adjusted EPS, after allowing for shares held in policyholders’ funds, was 3 748m.

IFRS financial effects

The accounting treatment under IFRS differs from the accounting treatment under UK GAAP as it existed at 31 December 2004 to the extent that IFRS 2 “Share based payments” applies to the Group Transactions. As the additional IFRS 2 costs incurred are in respect of equity settled share based payment transactions, the charge to the profit and loss account will result in a corresponding credit to an equity reserve and, therefore, has no impact on the embedded value. There are no other differences in the calculation of adjusted EV per share.

1.3. Opinions and Recommendations

1.3.1. Opinion of the Old Mutual plc board

The board of Old Mutual plc, together with its advisors, has structured the direct black ownership initiative in an attempt to ensure that it is in line with the BEE strategy of the Old Mutual Group.

Although not required in terms of the UKLA Listing Rules, nor the JSE’s Listings Requirements, the board of Old Mutual plc appointed Deutsche Securities (SA) (Proprietary) Limited (“Deutsche Securities”) to consider the terms of the Group Transactions from a financial point of view.

Deutsche Securities in giving their financial advice to the director’s of the board of Old Mutual plc have relied upon the board of Old Mutual plc for the commercial assessment of the Group Transactions. The board of Old Mutual plc, having received this advice, considers the terms and conditions of the Group Transactions to be fair and reasonable.

Accordingly, the board recommends that ordinary shareholders vote in favour of the resolutions to approve the Group Transactions. In respect of their personal holdings in Old Mutual plc, the board members currently intend to vote in favour of the proposed resolutions.