By Nick Stride
Friday 8th November 2002 |
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Tower's shares were trading at $1.90 on Thursday afternoon after a fall that slashed $290 million from the company's market value.
Acting chief executive Keith Taylor was left defending the company's disclosure and information systems but his explanations have not impressed the market.
Tower's board has insisted it was in the dark about the company's problems until Thursday last week when the shares were suspended from trading.
"Either they're incompetent or they're lying," New Zealand Shareholders Society chairman Bruce Sheppard said. "It is a deficient board."
If the board's explanation was taken at face value, Mr Sheppard said, it was not fulfilling its function as a due diligence check on management.
Three directors on the nine-strong Tower board must stand for re-election at the upcoming annual meeting at which shareholders are expected to vent their feelings.
Tower chairman Colin Beyer was overseas yesterday and unavailable for comment. The other directors are Lindsay Cuming, Lance Cottam, Alan Eyes, Keith Barton, Len Bayliss, Sir Colin Maiden, Olaf O'Duill and Susannah Staley.
Shareholders were astonished by the announcement late last Friday that the company would lose up to $40 million for the September year.
Trading in Tower's shares was suspended at the company's request only 48 hours after a briefing for institutional investors that gave not a hint of the company's problems.
Mr Taylor told The National Business Review he had made it clear the Tuesday briefing would not include any comment on the upcoming financial result.
Asked what had happened between the Tuesday and the Thursday, he said the two major problems had become apparent only on Wednesday. On that day internal review teams had made recommendations to senior management on the treatment of capitalised expenditure, capitalised loss recognition and "experience losses."
Mr Taylor said there was "a range of views" among directors and senior management. But decisions were taken to write down capitalised expenditure by $34 million and losses by $36 million.
This was not an auditing issue, he said. "These are items you review at the end of the financial year. It's a normal year-end thing to do."
Brook Asset Management director Simon Botherway was unconvinced. "Even if that was the case you've got to question their internal controls and reporting systems," he said.
"The stock price has halved. I think you can read into that that they do have a disclosure issue."
Tower's management information systems appeared "shambolic."
"If we were a shareholder I'd find that unacceptable. I think the board need to offer their resignations on this," Mr Botherway said.
Mr Sheppard said the key issue was that operating cashflow had been "butchered."
"I'd say the policyholders would have to start to be concerned because basically they're second-tier equityholders."
Tower has claimed its profit warning was prompted by actuarial issues that came to light only the day before the trading suspension. Mr Sheppard said that explanation didn't hold water.
"Actuarial issues don't creep up on you. You can do all these calculations in real time. You know the [insured's] age, date of birth, etc, and your reserves are known too if you've got proper information systems."
Tower's Mr Taylor described the share price plunge as an overreaction, insisting the group had already returned to profitability. The Australian operations had delivered good returns, he said.
These claims also drew a sceptical response.
Deutsche Bank described the announcement as "an insurance horror story."
Deutsche analyst Mark Kellogg said the writedowns of capitalised expenditure revealed aggressive accounting practices. Deutsche cut its recommendation from "buy" to "hold" (brokerspeak for "sell"), noting expense over-runs in Australia and problems with the disability book.
Mr Kellogg said the expected loss would put the company's overall capital position under pressure.
Mr Botherway said it was very difficult on the information given in the press release to know whether Tower's operations were profitable or not. "You've probably got a question of whether they've got a business in Australia at all," he said.
"The best outcome for shareholders from this point is probably a break-up and exit from the Australian operations."
Tower's board also drew fire for its steadfast refusal to consider takeover offers in multiples of than this week's share price levels.
GPG had a tilt as the group prepared to demutualise and both Westpac and National Bank have done so since. A cap limiting any one holder to 10% of the shares expires next year.
Tower signalled it may yet have to write down the value of the Bridges financial planning business, bought in 2000 for $A168 million.
It has signalled $88 million of writeoffs. These include $34 million from capitalised expenditure on IT and other items which, Mr Sheppard said, should never have been capitalised anyway $36 million from capitalised losses and "experience losses," and $15 million from investment losses on assets backing an annuity fund.
Redundancy, termination, and restructuring took $9 million, prompting anger that former managing director James Boonzaier, who left in July, took with him a $2 million termination payment.
It will also expense the $4 million cost of due diligence on "an acquisition," believed to be New Zealand trustee corporation Guardian Trust.
New Zealand Stock Exchange spokeswoman Elaine Campbell said the exchange was not concerned with Tower's disclosure record.
"We're comfortable that they have met their obligations as regards the listing rules."
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