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Towering expectations

By Jenny Ruth

Saturday 1st February 2003

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 Jenny Ruth
It can't have been an easy Christmas for the directors at Tower. Instead of basking on the beach, knowing the tough job of choosing a chief executive was at last over, the search - and the waiting - goes on. Christmas came and went without the anticipated announcement of a saviour for the group that now has assets worth $21.2 billion under management, but started life 134 years ago selling insurance policies as the state-owned Government Life Office.

As Unlimited went to press, the new chief executive still hadn't been announced, even though it is now nearly six months since the last incumbent, James Boonzaier, departed. Instead, the only announcement from acting chief executive Keith Taylor was that Tower troubleshooter (and hot chief executive contender) Jim Minto had been appointed permanent head of the Australian operations. Minto's original appointment in early November had been intended to be temporary so as not to crimp the new boss.

Taylor says Minto had to be allowed to get on with fixing the company's problems in Australia, the source of all its current woes. It was also unreasonable to keep Minto, formerly head of the New Zealand operations, in indefinite suspense as to whether he would be living in Sydney or Auckland, Taylor said. "You can't sit around putting off making decisions for six months."

Meanwhile, the top job isn't getting any easier. In December, Tower announced $75 million losses for the year ended September due to a mixture of poor acquisitions and the impact of a global bear market. From a rumoured $7 takeover offer three years ago, its share price slumped to $1.56 after the company's results briefing taking the company's total worth from $1.23 billion to just $274 million. At press time, the share price was $2.20.

The recent Tower story has been one of bungled management and confused messages to shareholders. The last six months of 2002 were chaotic. First, there were three very senior departures: chief executive James Boonzaier on July 24, Tower Life managing director Ken Boag in early August and Andrew Moon, head of Tower's Australian operations, at the beginning of November. Then, only days after remaining senior executives had made soothing noises at investor briefings, the company announced the expected $70 million annual profit was more likely to be a $40 million loss. Even that turned out to be optimistic, with final losses totalling $75 million, including a $35.8 million writedown on Tower's Australian financial planning group Bridges. Look for further writedowns, analysts say.

Company watchers - and even at times Tower management - insist the group needs to rationalise its assets in Australia, which range from life insurance and other savings and investment products to risk insurance and supposedly independent financial planning groups. Boonzaier said in July when announcing the Tower Trust trustee business was up for sale: "Today's business environment requires a much greater degree of focus ... We can no longer be all things to all people and must try to do a few things well."

Yet the company has sold nothing and continues on the acquisition trail. After Boonzaier's departure in July, it investigated buying some or all of insurance giant Royal & Sun Alliance business in Australia and New Zealand. In mid-November, acting chief executive Keith Taylor announced Tower Trust would remain in the group (a number of parties did due diligence but a deal was never agreed, probably because Tower didn't like the price). Just before Christmas, Tower announced the purchase of 16% of Australian financial planning group Mawson for an undisclosed sum.

Many believe Tower's Australian operations, which account for about 60% of total assets, are already floundering and further acquisitions can only make matters worse. Many of its products don't have a strong brand, say analysts, and have a chequered track record across the Tasman. Moreover, the disparate parts of the group haven't merged well. Another analyst, who wanted to remain anonymous, describes the Australian company as a "hodge-podge". That's one of Tower's weaknesses, he says. "The strategy of buying all those bits and pieces and putting them together hasn't worked."

The near universal view is that Tower should retrench, focus on its strengths - its New Zealand operations - and cut its losses in Australia before it destroys even more value, using the capital realised to bolster its home market position. Many of its "bits and pieces are clearly of interest to some people", the analyst says. "My gut feeling is that the break-up value is certainly north of the current share price."

Tower chairman Colin Beyer doesn't agree. In fact, while analysts see the company's strategy of growth by acquisition as a proven failure, the company seems hell-bent on continuing that strategy. Beyer says Tower's been in Australia 11 years and "we're starting to understand that market pretty well". Tower's Australian acquisitions are well integrated, he insists, although he does accept the purchase of FAI Life wasn't such a good idea. Tower paid $245 million for FAI in May 1999 just before Tower's demutualisation and share market float. FAI was "somewhat more difficult to digest" than the other acquisitions, he says, having "unusual policies" and "various other unusual forms of investment and risk insurance policies that seemed quite a good idea at the time but left a few problems for people to sort out later".

Beyer blames Tower's former chief executive. "FAI was our biggest investment. [Boonzaier] should have paid more attention to it and put more into it. The ball was dropped in a few areas." In fact, blaming Boonzaier has become Beyer's main defence in the past few weeks for poor performance. At the December results briefing, he attacked Boonzaier's stewardship, and unnamed senior managers whom Boonzaier was said to have been slow to sack.

Boonzaier concentrated too much on attending meetings, making announcements, meeting major shareholders and trying to boost the share price, Beyer said. "He should have realised the changing Australian environment was having adverse affects on the business," Beyer said, promising "there will be no more nonsense".

His own performance, Beyer insists, is exemplary - despite the financial woes and the fact he left Tower without a permanent chief executive in a time of crisis for almost six months. Beyer is adamant he won't be resigning and intends to offer himself for re-election at the next shareholders meeting in March. "Do you want a public hanging?" in asked in response to suggestions the board may have been at fault.

Beyer's only discernible step towards addressing Tower's problems has been to put Jim Minto, previous head of Tower New Zealand, in charge. Minto has taken immediate steps to cut operating costs, aiming to reduce them from $102 million in the year ended September to $85 million this year in what he describes as a low-risk plan.

There has been industry talk of selling all or a big chunk of Tower's assets, but there isn't an obvious purchaser. One possibility was that Commonwealth Bank's New Zealand subsidiary ASB might have wanted it with the idea of using its strong New Zealand operations to boost ASB's funds management capabilities and absorbing the Australian assets into Commonwealth Bank.

But without such a rescue plan, it remains to be seen whether the new chief executive is able to turn the company around. He could do worse than to take a leaf out of a competitor's book, industry giant AMP. Faced with similar woes, AMP has acted quickly and seems to be on the road to recovery.

AMP chief executive Paul Batchelor fell on his sword on 23 September after solvency problems in its British operations were found buried in a fixed interest prospectus. Senior executive Andrew Mohl was immediately appointed acting chief executive and his permanent appointment was confirmed just six days later. Chairman Stan Wallis explained that after taking advice about suitable candidates, the board had decided an extended international search wasn't in AMP's best interests and outlined Mohl's suitability.

Since then Mohl has instituted a sweeping review of all AMP's operations, quickly abandoning AMP's ambitions to be one of the big five players in Britain, axing its loss-making New Zealand and British banking arms and severely curtailing its Australian banking operations. By early December, Mohl announced 2000 jobs were to go in addition to the 2700 lost since June as part of massive restructuring. While it's too early to tell whether Mohl's medicine will be effective, the market is still taking comfort that something is being done. And the market didn't lose as much confidence in AMP as it did in Tower. By mid-December, AMP shares were down 40% on a year earlier compared with Tower's 66% slump.

So far analysts are sceptical about Tower's ability to take criticism and face up to its problems. Boonzaier had a reputation for dismissing analysts' opinions and Beyer doesn't appear to be about to change that tradition. "We are accountable, they're not," he said.

The comments of former acting chief executive Keith Taylor, Tower's chief financial officer for 12 years, don't inspire confidence. He continues to insist most of the year's losses are one-off and no dramatic action is needed. He has said Tower's strategy "has certainly been refined", despite the fact it hasn't essentially changed. Analysts see this as another sign the company is reluctant to face up to reality.

As one analyst said: "From Tower's viewpoint, for some unknown reason they seem to think this is no big deal."

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