The enigma of Enterprise Group
Enterprise Group Ltd (“Enterprise”) held its annual general meeting on Tuesday August 8, 2017. Like the dog that did not bark in Silver Blaze, one of Sherlock Holmes’s mysteries, the most intriguing feature of that meeting was the dearth of praise for an impending corporate transaction that exposes the tremendous value created for Enterprise’s shareholders over the last two decades.
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I refer to the inauguration of a new strategic partnership between Enterprise and Prudential Financial Services, Inc/Leapfrog (“Prudential”) of the United States.
Listed on the New York Stock Exchange, Prudential is one of America’s largest insurance groups, sporting a market capitalisation of $45 billion.
New valuation
This new partnership raised the valuation of Enterprise Group, even before its impending rights offering, from a market capitalisation of $1.3 million on January 2, 1997 to $181.9 million on June 23, 2017-the announcement date of that partnership. According to the Ghana Stock Exchange, Enterprise’s market capitalisation on that very June 23 date was a materially lower $72.3 million. Since 1997, Enterprise’s shareholders have received $17.5 million in dividends. Thus, if one goes by the Ghana Stock Exchange’s valuation of Enterprise, its long-term shareholders have enjoyed an annual compounded return, in US Dollars, on their 1997 investment of 23.6 per cent; if one accepts the implied valuation of Enterprise by Prudential, that return rises to 28.6%.
To provide some perspective, the annual compounded return of Standard Chartered Bank of Ghana over this 20 year period was 18.4 per cent; that of Naspers, owner of DSTV and the largest company in South Africa, was 17%, while that of Berkshire Hathaway, Warren Buffet’s insurance group, was 11%.
Enterprise has been a dark star on the Ghana Stock Exchange. How could an experienced foreign insurance group recognise its stellar quality by according it a valuation 2.5x higher ($181.9 million/$72.3 million) than the valuation of investors on the Ghana Stock Exchange? The goal of this article is to attempt to answer that question.
Allow me a confession! My interest in Enterprise is far from academic. My clients are shareholders of Enterprise. Take my opinions, therefore, as those of a biased believer in Enterprise. I do not urge anyone to take any action-whether buying or selling or subscribing to Enterprise shares or relating to Enterprise based on this article. Action-oriented individuals should consult their professional advisers about the wisdom or folly of owning or selling Enterprise shares. Allow me also a pre-emptive apology. This article employs a lot of jargon and words to attempt to explain how to understand the life company at the heart of Enterprise. I apologise for the terminology and length of this newspaper article.
The first question posed by Prudential’s entry into Ghana is: Why Ghana? Ghana offers potent prospects of profit for the insurance and pension industries. 2015 insurance penetration (gross premiums paid as a % of Ghana’s gross domestic product) was 1% versus 3.9 per cent for Botswana, 2.9 per cent for Kenya and 2.8 per cent as the average insurance penetration rate for emerging markets. As an aside, Nigeria’s insurance penetration rate of 0.3 per cent makes Ghana look positively mature.
Inflation-adjusted returns to Ghanaian savers have been high. Ghana’s economy, in a bad year, grows by no less than 3% while its youthful population is forecast to grow at a 2% annual rate. Unsurprisingly, a down year for Ghana’s life industry, like 2016, is one in which premiums rise by less than 20 per cent in nominal cedi terms.
Contrast this state of affairs with the conditions faced by insurers in developed markets such as the United States of America (USA), France, or the United Kingdom (UK): stagnant and aging populations, negative real interest rates and insurance penetration rates in the 6% range. One can see, then, how Prudential, Sanlam, and other major insurance groups have been attracted to Ghana. Our long-term private financial assets industries (insurance and pensions) combine infancy with the allure of explosive profitable growth. Enterprise is one of the strongest private insurance operators in Ghana; therefore, it is a logical acquisition or joint venture partner for foreign entrants into Ghana and West Africa.
Background
What is Enterprise? It is a holding company with majority and wholly-owned operating subsidiaries in six fields: a 51 per cent Ghanaian life assurance subsidiary with the largest market share (by gross premiums) in that field; a 60% Ghanaian property and casualty insurance subsidiary, which has the second largest market share; a 60 per cent pensions management and administration subsidiary, which has the largest market share in Ghana’s new private pensions industry; a 100% owned property developer subsidiary; a 51 per cent indirect subsidiary in the funeral services field; and a majority-owned life assurance subsidiary in The Gambia. In terms of net profits, it was no. 1 in the Ghanaian life industry in 2015 and no. 3 in property and casualty insurance. Operating in different industry segments, its overall market capitalisation should be the sum of its parts (or subsidiaries) in the six fields. But, first, some history.