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NAB's AMP move raises the Tower stakes

By Shoeshine

Friday 5th September 2003

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The most obvious effect of National Australia Bank's sudden tilt at AMP is to knock the bank back as a likely bidder for National Bank but the repercussions may be wider than that.

One case in point is Tower. With a couple of months to go before its September-year profit announcement, and with Guinness Peat Group and finance company Hanover sitting quietly at 17.1% and 9.5% respectively, the embattled insurer has fallen out of the media spotlight recently.

Both players have been drawing up plans for the next move. NAB's raid will have reminded them, if any reminder was needed, of how rich a prize they are potentially playing for.

GPG finds itself in a curious situation due to the mishmash of regulations that make up our securities rules.

A fight with Hanover and the Takeovers Panel over the rules governing underwriters who breach the 19.9% compulsory bid level proved pointless as GPG in the event never went over that level.

GPG also did a few less-publicised rounds with the Stock Exchange's market surveillance panel over some incomprehensible issues surrounding its role both as an underwriter and as a related party.

The outcome is that the company will, before January 7 next year, have to sell down its holding to 13.75%.

GPG New Zealand director Tony Gibbs says that's a technicality and irrelevant ­ GPG has under common law the right to go to 19.9% at any time it chooses and could in any case sell the shares and buy them back five minutes later.

But in the meantime, analysts reckon, GPG could use the 13.7 million shares concerned to keep Tower's share price down or save them for a "grand slam" on the price just before making its next move.

Whatever, the raider is unlikely to sit on its hands for too much longer.

GPG chairman Sir Ron Brierley said a while ago he still thought the original proposal, under which GPG would have injected capital, underwritten the whole of the issue, and potentially emerged with up to 30%, was fair. Recapitalisation, he said, was only the first of a number of steps necessary to restore Tower to financial health.

The other steps presumably include measures such as replacing elements of the board and management and sorting out the haemorrhaging of Australian business.

To be both able and willing to do that, GPG will have to have a far greater stake than 17%. Any effort it expends shaking Tower out will represent a "free ride" to Tower's other shareholders. Analysts reckon an incursion into the "no fly zone" between 20% and 50% is the next likely move.

The fly in the ointment is Hanover.

Having bought a blocking stake now worth $50 million, the Eric Watson-Mark Hotchin group asked for board representation but was turned down by Tower chairman Olaf O'Duill, probably because he didn't want warring factions on the board.

The word around the market is that Hanover is planning to raise $100 million through a retail debt issue. With that sort of money to hand it could launch a raid to get to 19.9%, at which point it would be difficult to deny it a place at the boardroom table. Such a move would also soak up a lot of the "free float", meaning GPG would have to pay a far stiffer price to further lift its holding.

Parallels with the situation GPG faced when Perry emerged with a 16% stake in Rubicon are tempting but misleading. Gibbs told the Perry court hearing GPG would not have bought in had it known another major shareholder was sitting there. But Tower isn't Rubicon.

The NAB raid on AMP, according to Australian pundits, signals a tectonic shift in the transtasman banking sector. The big four banks, they argue, constrained by the Four Pillars policy from buying one another, have previously been happy to live and let live.

Sure, there has been some nibbling around the edges of the broader financial services area.

But attempts at adopting the "bancassurance" model, typified by Commonwealth Bank's takeover of insurer Colonial in 2000, have been less than resoundingly successful. So have banks' forays into sharebroking, funds management and investment banking, all industries with cultures that proved incompatible with the banks' own.

But if NAB gets AMP, the pundits reckon, all bets are off. The combined group would control more than 30% of Australia's "wealth management" market. The prospect has sparked renewed calls for the Four Pillars policy to be scrapped.

The danger for the other banks is that NAB, notwithstanding bancassurance's previously patchy record, will be able to weld its salaried advisers and AMP's agents and independent advisers together into a cross-selling distribution super-network capable of delivering massive market share.

The other banks would have to try as best they could to follow suit. But if they get into a scramble to buy insurance and funds management groups, who is there to buy?

The most obvious candidate, Axa Asia Pacific, is a subsidiary of a French group. Promina could be tempting but it has a large general insurance arm as well as risk and wealth management and the banks haven't previously shown any interest in getting into general insurance.

Tower, although often derided for its lack of critical mass, is one of the only life insurer-funds managers that lacks a strategic shareholder and has sufficient scale to interest the banks.

The prospect of becoming that shareholder, and watching the banks get into a bidding war to take Tower out, will have both GPG and Hanover licking their lips.

Expect one or the other to make a move soon.

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