Tower split to lift chance of takeover

An independent report has backed Tower's proposed separation into standalone Australian and New Zealand companies. It endorses management's view on the benefits to shareholders, but also points to the takeover appeal of the smaller units.

The report by valuation specialists Lonergan Edwards was contained in a "scheme book" Tower released yesterday, giving details of the proposal.

Lonergan Edwards found the plan was "in the best interests of shareholders".

The report lent weight to management's arguments that the dual-listed insurer and financial services group's value was not being recognised by the market.

That was because Tower was generally perceived as a New Zealand company despite generating more than half of its operating profits in Australia, Lonergan Edwards said.

The tax credit inefficiencies which would occur when Tower began paying dividends again were another reason why the group was trading lower than its peers, the report found.

Although Tower's management and 19.8 per cent shareholder Guinness Peat Group (GPG) have played down the prospects of either of the demerged companies being taken over, Lonergan Edwards found the separation would increase that potential, and that would further drive share price gains for both companies after separation.

It said GPG's stake in Tower, which in the case of Tower Australia would rise as a result of the rights issue which would follow the demerger, was unlikely to deter potential bidders. GPG would probably accept a bid that reflected full underlying value, Lonergan Edwards said.

According to detail contained in the scheme book, Tower Group's geographical separation will see about 45 per cent of the sharemarket value of the present group go to the New Zealand operation and the rest to the new Tower Australia business.

However, Tower chief executive Jim Minto, who will head the Australian unit, pointed out that Tower Australia would have a higher proportion of debt on its balance sheet.

Under the proposal, Tower is to issue 234.3 million new shares in Tower Australia. They will be allocated to existing shareholders on a pro rata basis of 0.6511 for every Tower Group share held. In return 47.6 per cent of existing Tower shares will be cancelled.

Tower New Zealand, made up of general, life and health insurance businesses and a funds management unit, all operating in New Zealand, will remain dual-listed. Tower Australia, a specialist life insurer, would be listed on the ASX alone.

Following the separation, under the A$160 million ($182.76 million) GPG-underwritten rights issue, a further 100 million Tower Australia shares would be issued and offered to shareholders at A$1.60 each.

The entitlements would be offered at a rate of 0.4269 for each Tower Australia share owned and could be traded before the exercise date.

Entitlements not taken up are to be bought by GPG.

The separation proposal requires the approval of 75 per cent of votes cast at a special meeting to be held in Wellington on November 6, while the rights issue requires 50 per cent.

Tower has estimated the one-off costs of the demerger at A$18.5 million, including GPG's A$2.8 million underwriting fee.

Tower shares closed 3c down at $3.14 yesterday.