KEY POINTS:
Tony Gibbs would be a fantastic mentor of wayward teenagers. Based on his stewardship of Tower he has great patience, nurturing skills, the courage to make tough decisions and, most importantly, the ability to deliver a positive outcome over the longer term.
With this in mind Tower shareholders
now face a big dilemma: do they accept Gibbs' partial takeover offer at $2.30 a share or do they stick with the master as he tries to nurture and encourage the insurance group to reach its full potential?
Gibbs first became involved with Tower in 1998 when Guinness Peat Group (GPG), through its Australian subsidiary Tyndall, tried to convince the company its best option was to back the organisation into Tyndall instead of the proposed stand-alone demutualisation.
After a bitter battle, Tower's members voted overwhelmingly in favour of demutualisation and GPG/Tyndall finally dropped its Privy Council action.
When Tower listed on the NZX in September 1999, after the issue of shares through an IPO at $5.65 each, the company had a 10 per cent shareholding limit that wasn't due to expire until September 2003. This was essentially put in place to stop Gibbs and GPG from gaining control of the 130-year-old organisation.
Tower adopted an aggressive acquisition strategy, both before and after the IPO, under the stewardship of managing director James Boonzaier.
This included the purchase of FAI Life, IOOF Australia Trustees, 25 per cent of Financial Services Partners and Bridges Financial Services Group, all in Australia, and AXA New Zealand Health. The company also acquired a life insurance licence in China and opened an office in Beijing.
The wheels began to fall off in 2002 when the company reported a disappointing result for the six months ended March 2002. Boonzaier resigned in July and on December 5 Tower announced a loss of $75 million for the September 2002 year.
The group's share price plunged from a 2002 year high of $5.34 in early February to $1.80 by December 19.
The next day GPG started buying Tower shares and over the next seven weeks it purchased 17.5 million shares, or 9.9 per cent of the insurance group, at an average price of $2.05 a share.
In May 2003 Tower revealed a loss of $154.4 million for the six months ended March 2003, with most of the problems occurring in Australia. At the same time the company revealed a highly controversial $200 million-plus capital raising plan.
The original proposal was for a placement of 50 million new shares to GPG at $1.35 each to be followed by a 3 for 5 rights issue at 90c.
The proposed placement was later abolished and the company proceeded with a 4 for 3 rights issue at 90c, which was fully underwritten by GPG.
After a large amount of public conflict and controversy, which included Eric Watson and Mark Hotchin's Hanover Group buying a spoiling 9.5 per cent stake, GPG had achieved a 19.4 per cent holding by February 2004.
Gibbs had finally achieved his cherished grip over Tower. He then divided the company into:
* Tower Australia (Tower's insurance businesses in Australia).
* Australian Wealth Management (Bridges and the group's Australian trustee operations).
* Tower Investments (Tower's investment businesses in NZ).
* Tower Insurance Group (Tower's insurance business in NZ).
* The corporate head office.
In February 2005 Australian Wealth Management (AWM) was listed on the ASX after a pro-rata distribution to Tower shareholders. Based on yesterday's AWM share price this has added an estimated 74c in value per Tower share assuming investors took up their entitlement to extra AWM shares at A80c ($1) each.
In November 2006 Tower Australia (TAL) was split off and listed on the ASX. This pro-rata distribution has been worth a further $1.75 a share to Tower shareholders that took up extra TAL entitlements at A$1.60 a share.
Thus the average cost for each Tower shareholder who participated in the IPO at $5.65 a share and then took up their 4 for 3 rights issue at 90c would be $2.94 a share compared with the current estimated value of $4.71 a share, assuming the AWM and TAL entitlements were taken up. That is an excellent example of Gibbs' creativity because when GPG started buying shares in December 2002 the average cost for IPO participants was $5.65 a share and Tower's share price had slumped to just $1.80.
The current bid was revealed after the market closed on May 2 when GPG announced its intention to make a partial offer at $2.30 a share that would increase its shareholding from 19.7 per cent to 35 per cent.
Under New Zealand takeover rules if the bidder does not reach 35 per cent it must return all shares that accepted the offer. A bidder cannot go beyond 35 per cent and if acceptances are received for more than this they will be scaled back on a pro-rata basis.
In addition partial offers for less than 50 per cent are subject to shareholder approval.
The offer price of $2.30 represents a premium of only 10.6 per cent on the pre-offer announcement price of $2.08. This is an unusually low bid premium.
Independent adviser Grant Samuel believes that the full underlying value of Tower is in the range of $2.45 and $2.89 and the independent directors do not recommend that shareholders accept the offer. Grant Samuel believes Tower Health and Life, which has a mid-point independent valuation of $330 million, is well positioned to increase its market share.
The General Insurances division, with a mid-point value of $192.5 million, is exposed to adverse weather events along with all other insurers while the remaining operation, Tower Investments, which has a mid-point value of only $75 million, should benefit from its role as a default provider for the KiwiSaver scheme.
It is fairly clear from a combination of factors mentioned above, including Tower's performance since GPG became involved, the low offer premium, Grant Samuel's valuation and the directors' recommendation, that shareholders are probably best advised to reject the offer.
But shareholders also have to decide whether they will vote for or against the partial offer.
This decision is particularly important in light of GPG's announcement this week that it had received advice from certain Tower shareholders that they intend to accept the offer "for in aggregate 10.5 per cent of Tower's shares" and "on this basis GPG is highly confident its partial offer will be successful as if such acceptances are received, then, when aggregated with acceptances already received, this will result in acceptances for approximately 11 per cent of Tower's shares".
This compares with the partial bid target of 15.3 per cent.
For investors willing to take the longer-term view the best option may be to reject the offer but vote in favour of it. This will allow Gibbs to mop up weak holders and given him a greater incentive to create long-term value because he will then own 35 per cent of the insurance group instead of 19.7 per cent if the bid fails.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management, which holds 20,600 Tower shares on behalf of clients.
TOWER TALE
The rise and fall and rise of Tower
* June 19, 2008: GPG's partial offer closes.
* May 2008: GPG makes a partial offer at $2.35 a share that would raise its shareholding to 35 per cent.
* November 2006: Tower Australia is split off with shares distributed to Tower shareholders.
* February 2005: Australian Wealth Management is split off with shares distributed to Tower shareholders.
* February 2004: GPG reaches 19.4 per cent of Tower.
* August 2003: Tower raises $211 million through a 4 for 3 rights issue at 90c a share.
* December 2002: GPG starts acquiring Tower shares.
* December 2002: Tower reports loss of $75 million for September 2002 year and its share price drops to $1.66.
* September 2000: Tower acquires Bridges Financial Services Group in Australia for A$168 million.
* September 1999: Tower is demutualised and lists on the NZX after an IPO at $5.65 per share.
* 1990: Ownership of Tower is transferred to policyholders.
* 1987: Government Life changes its name to Tower.
* 1869: Government Life Insurance Office established by NZ Government
