Tower's big boys man the guns in the high stakes game of predator control

Friday 19th April 2002

The two-and-a-half years since listing haven't been kind to Tower Ltd's 123,000 shareholders. Following demutualisation and an issue to public and institutional shareholders at $5.65 a share, the stock has by and large lurched along sideways, excepting two bursts of movement.

In 2000 the shares sank to $4.40 and then climbed towards $6. In 2001 the process happened in reverse.

The spikes are easy enough to explain. The company is a perennial takeover tip and the shares invariably get a fillip every time word goes round the traps that a predator is lurking in the undergrowth.

Last year the September 11 terrorist attacks took their toll on insurance companies and Tower copped the fallout, even though it doesn't have any direct exposure to the sectors affected.

Since then the shares have settled at around the middle of the 100-day moving average range. At $5 they are 11% below the price investors paid in 1999.

The company's poor share price performance is, at first glance, a bit perplexing.

It has been growing at breakneck pace, in Australia in particular. Last year more than 70% of its revenue was generated across the Tasman and it conceded it would have to shift its head office over there before long.

In 1997 total assets were $3.9 billion. By 2000 they had grown to $6.6 billion, an annual average growth rate of nearly 20%.

Profits were growing too. The company booked after-tax gains of $68 million in 1998, $73.1 million in 1999 and $99.6 million in 2000.

Last year things went a bit awry in what was admittedly a difficult environment not made any easier by Osama bin Laden's activities.

Total assets fell to $5.8 billion as the value of Tower's fixed interest and equity investments plunged.

Net profit fell to $77.2 million, down 22.5%, even though the tax bill fell to $9 million from 2000's $30 million.

But, under the circumstances, it was a creditable performance. Before a one-off insurance gain of $18.9 million the 2000 result was $80.8 million, down just 4.4%.

"Profit from operations" rose from $64.4 million to $78.5 million, more than offsetting investment returns, which fell from $27.3 million to $17.5 million.

So why hasn't the market acknowledged Tower's growth record?

The answer probably lies in its performance at the operating profit level - that is, profit before tax and financing expenses.

This stood at $109.3 million in 1997 and fell to $81.8 million in 1998. It lifted for two years running - to $121.8 million in 1999 and $152.1 million in 2000 - before falling again last year, to $118.1 million.

So in the last four years the group has added assets of nearly $2 billion, even after a bad year, but it last year made only $9 million more of operating profit than in 1997.

The conclusion is that Tower's growth hasn't been profitable. What's more, it doesn't seem to have followed other transtasman financial services companies in seeking to insulate itself from the vagaries of investment markets by developing or acquiring fee-based revenue streams.

Nonetheless, Tower has a strong New Zealand business and Australian operations that it would make a lot of sense for another transtasman operator to acquire, especially at the unexuberant price the market has accorded Tower's shares.

Most of the major Sydney-based groups are thought to be watching Tower expectantly ahead of September next year, when the 10% shareholding limit Tower set up on demutualisation to protect itself from takeover expires.

Nor will potential predators necessarily wait until then. Some around the markets reckon the restriction, which can ostensibly be waived before its sell-by date only by a 75% shareholder voting majority, isn't nearly as legally robust as Tower would like to think.

The fly still in the ointment is Tower's holdings in itself.

Last year's annual report shows the group and its subsidiaries held 14.2% of the shares. Most of the stock is held in the funds Tower manages on behalf of its investor clients and, should a takeover bid come in, the managers of those funds will be duty-bound to consider only the interest of their unitholders in deciding whether to sell or hold.

Also included in the 14.2% is the 4.9% held by Tower Safe Ltd. As this is almost half the "hold-out" amount needed to deny a bidder 90% and compulsory acquisition it's a pretty strategic stake.

The shares are held by the Tower Safe Trust on behalf of about 124,000 former members of the mutual company whom Tower hasn't been able to find.

Under the terms of the trust deed the trustee company, and Tower, could elect at any time after August 31, 2001, to wind up the trust and dispose of the shares in any way they think would benefit the rest of the shareholders, provided they "consider sufficient attempts have been made to locate such members."

Six months after the first available windup date no decision has yet been made. Who will make the decision?

According to Tower's prospectus the directors of the trustee company will be Tower nominees and independents.

Make that independent. According to Companies Office records, only one director of Tower Safe Ltd, Robert Thompson, isn't a director of Tower or one of its subsidiaries. The others are Tower chairman Colin Beyer, managing director James Boonzaier, main board director Lindsay Cunningham, and Bob Stannard, who is a director of subsidiary TEA.

Quite a line-up for a mere administrative side-show. Shoeshine awaits full-page ads inviting former Tower members to come and get what's theirs.

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