Opinion: Splitting the straightened Tower better for some than others

By Simon Louisson of NZPA

Friday 3rd December 2004

It was about this time two years ago that shares in financial services company Tower went into free fall and the company was being ridiculed as "Fawlty Tower".

On December 5, 2002 the company posted a shock $75 million loss, most of that stemming from its foray into Australia. The loss, and earlier warnings, sent the shares plummeting from $5.34 in January 2002 to a low of 98 cents by May of 2003.

The plunge in value prompted corporate raider Guinness Peat Group (GPG) to attack.

The "leaning Tower" was straightened by way of a controversial $211m rights issue to recapitalise, that involved some sleight of hand by GPG that allowed the raider to lift its 13.75% stake to 19.9% on the cheap.

Last month, Tower reported it had rebounded from last year's $149m loss to a September year net profit of $54.6m and plans to spin off its Australian funds management business.

The company appears well on track to recovery and its shares have far outperformed a buoyant sharemarket with a 74% gain this year to $2.17.

This week, Tower detailed its plan to spin off Australian Wealth Management (AWM), comprising Bridges and Tower Trust (to become Australian Executor Trustee). It will be listed in Australia in February.

According to chief executive Keith Taylor, the move is designed to unlock unrecognised value in both Tower and AWM.

It will further simplify Tower from 11 operating companies down to two.

"Tower will now have a very clear focus on its main life insurance businesses and those related investment products that we sell, so that we are a simpler business, and that's been our whole strategy over the last two years of this recovery period," he said.

"We certainly think the AWM business has been undervalued as part of Tower. People have not seen the quality of businesses that are in there."

Tower will receive $A250m ($NZ274m) for AWM of which $A120m will be paid via a distribution of shares. The rest will come from a rights issue so that Tower shareholders will have to stump up with more cash. Part of the scheme also involves Tower cancelling shares.

An investor with 1000 Tower shares today will end up with 865 Tower shares, plus 291 AWM shares, plus 394 AWM rights. An investor who exercises those rights will pay $315.20 for shares that Tower's advisers say should be worth about 90c each.

Taylor expects Tower shares to hold around their current value - the sale of the Australian units offset by the lower number of shares on issue.

AWM will have $A13.6b funds under management and is forecast to generate a profit of $16.6m in 2005.

The New Tower, comprising risk insurance and funds management in New Zealand and risk insurance and investment products in Australia, would have assets of $4.8 billion and its 2004 net profit was $42m when AWM is stripped out.

Taylor is adamant the spin-off is not designed to flush out takeover offers. It was simply a way of extracting more value.

"It's certainly not part of our strategy. I guess there is always a double edge to this - if you make it more attractive, then people may be interested in you, but as a listed company that is always a risk and if it happens, we will face it at that time."

However, analysts are not enthusiastic about the plan.

Firstly, they note the transaction is costing $A9.9m, of which GPG will collect $2.28m as underwriter of the AWM issue.

Secondly, AWM will incur head office costs of $A2m, which is why its projected net profit will only rise 7.8% compared with a 9.5% increase in projected income.

One analyst, who declined to be identified, said the deal had "all the hallmarks of GPG driving this investment".

He said Sir Ron Brierley's company as underwriter would be in a position to take far more than its 19.9% entitlement to AWM. Many of Tower's 115,000 shareholders acquired their stakes when the company was demutualised and were not natural share owners. Many would fail to take up their rights and these would fall to GPG.

He believes the resulting two groups would be far too small and selling AWM by a trade sale to one buyer would have been a far preferable option.

"It could well be the end game is to position the Tower life risk business so it becomes a potential takeover," he said.

"What could be the end game is to make what is left - the original Tower Australia life and the fire and general fund in New Zealand and the life fund in New Zealand - more attractive to a potential buyer."

Macquarie Equities NZ investment director Arthur Lim believes that while the spin-off of AWM may be reasonable for Tower shareholders, it will be better for GPG.

He said if the underlying logic was to effect a re-rating of Tower by making the company more transparent, as had been done with the Fletcher Challenge conglomerate, then that was positive.

"But the way the deal is structured, seems to favour GPG."

Effectively, Tower was conducting a new rights issue with many of the details unexplained despite the publication yesterday of a 177 page book on the deal. The plan to despatch the offer over the January holiday period and hold a shareholder meeting on January 25 would also mean many shareholders would miss out.

"There is suspicion in the marketplace - if we look at the last time Tower did a rights issue, it was glaringly skewed in favour of GPG," said Lim.

"The track record of GPG in respect of Tower is that GPG will take care of itself first and Tower No 2.

Lim agreed the ultimate end game for AWM was for it to be taken over by a financial service player or bank.

For a takeover of Tower to occur, there first needed to be "higher level industry consolidation to occur first".

Lim said organic growth in the Australian industry was starting to wane and the next phase was likely to involve mergers and acquisitions.

"It's on everybody's lips that there is likely to be some kind of corporate activity emerge on that front and, if and when something happens to AMP, one would expect that to cascade across to other players like the Towers of this world."

Watch this space.

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