Tower's moat far from solid

By Richard Braddell

Between the lines

"I'm delighted to tell you all that I've been reappointed as managing director of Tower Ltd... I'll be around for a while yet." So said its managing director James Boonzaier before the new company listed on the Stock Exchange on Tuesday.

Given that Tower has a five year cap on individual shareholdings, Tower looks secure from takeover and unless something goes badly wrong, so does Mr Boonzaier's job.

But is Tower safe from predators? Possibly not. Despite its strong position in the Australian and New Zealand markets, it is still of the mid-size which common wisdom has is too small to reap economies of scale.

Tower, which is generally viewed as a well-run company, may yet prove the sceptics wrong. But while the share cap requires a 75 percent vote of shareholders for it to be removed, that might not prove too much of an obstacle for a predator wanting the entire company.

Instead of trying to buy the shares outright, it could enter conditional contracts for their purchase which also include the proxy rights to vote the shares at a special meeting. If 75 percent of proxies are received, a takeover would be impossible to block. Otherwise, it fails.

All well and good. But the scenario involves some risks. As AMP's disastrous foray into Australian insurer GIO demonstrates, hostile takeovers are not always the greatest idea in the financial services arena.

And in spite of Tower's own extensive due diligence ahead of the float, a hostile bidder for the company is going slightly blind, despite a range of financial information in the prospectus.

Nevertheless, the lacklustre performance since listing makes Tower look a bargain compared with the massive 23 times earnings that expansion minded Royal & Sunalliance paid for Tyndall Australia.

As Guinness Peat Group, which wanted to merge Tower with Tyndall, said so often, the two put together would have created a financial services group that would have had the undoubted heft to foot it in the trans-Tasman market.

Just because Tyndall is no longer controlled by GPG doesn't alter the attractions of what would be a merger of Royal & Sunalliance and Tower, although it is hard to think that either side would be keen on any other than a negotiated merger.

Meanwhile, Tower remains caught in a downdraft which has taken the shine off all the life office stocks. Australian changes to life, superannuation and fund taxation, although they will take a year or two to come into effect, have resulted in some price discounting, while the more immediate pressures of weak world equity markets and the $800 million cash drain of Westpac's New Zealand issue have not helped.

But Tower's weak, if volatile, share price has one bright spot. Unlike the disappointments meted by some of its peers since demutualisation, the only way would appear to be up.