Buyback likely Tower option

By RICHARD BRADDELL banking writer

Financial services group Tower is exploring capital-raising options that are believed to be aimed at funding a buyback of its partly paid shares.

The Business Herald has been told that Tower has explored possibilities with several investment banks, but opinions differ on the size of the deal. Estimates from one commentator of between $150 million and $250 million to be raised through a capital notes issue were rejected by another as being too high.

As yet, it seems nothing has been decided.

But a capital-raising at this time would have strong logic if the proceeds were used to fund the buyback of partly paid shares, at present worth $76 million, that account for 18 per cent of Tower's capital.

An outstanding instalment of $2.825 per share must be paid by October. And because it is likely to spark a round of selling when it falls due, the partly paids are seen as a drag on the share price which has seldom exceeded the $5.65 issue price until strengthening markedly in recent weeks.

Tower shares jumped 14c to close at a record $5.90 yesterday, while the partly paids were up 15c to $2.90. But in spite of their gains, the partly paids are still trading at a dividend-adjusted 12.5c discount to the head shares.

The discount may reflect the looming call on the second instalment, but it also is due to the partly paids' limited liquidity and lack of attraction to institutional investors.

Although the possibility that Tower may be moving to sort out the partly paids may be a factor, its recent strength is also due in part to expectations that it would for the first time join the Morgan Stanley Capital International (MSCI) share index, which it did over the weekend.

Even so, its performance this week surpasses lacklustre performances by the four other New Zealand stocks that made their debut, leading to speculation that the potential capital notes issue may be the reason.

But Tower is also regarded as the prime takeover target in the Australasian financial services market.

The stock peaked at $5.85 in June last year when there were rumours it might be subject to a takeover offer.

However, a takeover would have to be sufficiently attractive to dislodge the 10 per cent cap on maximum shareholdings that expires in four years.

Tower executives, who were at a board meeting in Sydney preparing for the first-half profit announcement yesterday, could not be contacted for comment.

The profit is expected to be unspectacular, with Macquarie Equities forecasting an 8 per cent drop on last year's first half to $36 million.