Tower chairman Michael Stiassny says it will consider the impact on its business and whether a capital raising will be needed after the Commerce Commission rejected a bid by Vero Insurance to merge the two businesses.
Shares in Tower took a pounding at the opening of trading on the NZX this morning, falling 29 per cent to 90c after the commission's decision to knock-back the $1.40 a share offer.
The shares have since bounced back to 96c but are at the lowest they have been since February before Tower received a bid by Fairfax Financial Holdings to buy the company for $1.17 per share.
Vero, which is owned by Australia's Suncorp, fought off Fairfax, with its higher bid but needed approval from the commission for the deal because it is already a key player in the New Zealand insurance market.
But commission chairman Mark Berry said the merger would remove Tower as the only independent competitor to Vero and IAG with the scale and brand strength to compete across the personal insurance market.
"While there are other smaller competitors in personal insurance, we do not consider that they replicate the level of constraint that Tower imposes.
"Without the competition that Tower provides, there is a real risk that consumers would end up paying higher prices for insurance cover while receiving lower quality, such as reduced insurance coverage," Berry said.
Berry said there was also a real chance that Tower would be purchased by a third party which would enhance the company as a competitor in the market.
Stiassny said it was awaiting the full release of the commission's decision to fully understand the reasoning.
But a shareholder vote on the Vero scheme would now no longer take place in September.
Matt Goodson, managing director of Salt Funds Management which owns shares in Tower, said the decision was disappointing.
"As a Tower investor of course it is disappointing. There were significant synergies from all sorts of angles."
Goodson said the commission had approved IAG's purchase of Lumley in the past but this assessment seemed to have been done on a different metric.
He also questioned the statement by Berry about the potential for Tower to be purchased by a third party.
"What does the Commerce Commission know that Tower and the market don't know?."
Goodson said there was nothing stopping Fairfax Financial from coming back for another bid but there was also nothing to make them come back.
"They are a massive company and New Zealand is a small market."
Goodman said Tower's underlying business was performing well but its capital position had been hit by ongoing claims relating to the Canterbury earthquakes.
He said there were several possibilities now - Vero could appeal, another buyer could emerge or Tower could go back to shareholders for money.
- with BusinessDesk