"Fawlty Tower" teeters after market savaging

By NZPA

Monday 4th November 2002

Tower Ltd, nicknamed "Fawlty Tower" after Friday's profit warning, had 44 percent of its $621 million value wiped off today in a savaging akin to market maulings overseas this year.

Stock in New Zealand's second biggest fund manager with $22 billion of assets plunged $1.57 to end on its session low of $1.98 in a frenetic unloading of the stock. It had previously traded at $3.55 before the company requested a suspension on Thursday ahead of the warning.

The company cautioned that instead of a $50 million-70 million annual profit expected by analysts, it would post a $30-40 million loss and further writedowns of its Australian unit Bridges could push that to $88 million.

The market was unforgiving and angry.

The anger stemmed from a roadshow by Tower to the professional investing community just over a month ago where Tower gave an upbeat presentation with no hint of such troubles.

"Now, blow me down and they come out with the news that is very bad with more to come," said Forsyth Barr Frater Williams executive director Don Turkington.

Nasty surprises were punished in the present environment of market weakness and accounting concerns, he said.

"We haven't had too many of these here but they have overseas and the market will cane you if you disappoint."

UBS Warburg head of research Richard Leggat said in this environment it was not uncommon overseas for stocks which announced negative surprises to have 40 percent of their value wiped off in one session.

Even after Friday's statement, the market was unhappy with the level of disclosure.

"People wonder what more might be coming, whether the company needs capital. Insurance stocks in general have struggled and it is fairly obvious that Tower's Australian operations in particular are not in a very good way," said Mr Leggat.

Analysts were still struggling to put a value on Tower because of the prospects of further writedowns.

"That (new write-down) could be quite significant. There are valuations in the market that are quite low, we understand," Dr Turkington said, adding that his firm would be downgrading the stock.

David van Schaardenburg from Funds Research said there had been talk of Tower having problems in Australia, especially in relation to its recently purchased Bridges unit.

"It's definitely got major issues it needs to address and until it addresses them then the market is going to have a lot of concerns about where the company is going," he said.

He noted that often when a company was struggling and its chief executive departed, the extent of problems became apparent.

James Boonzaier, chief executive for 12 years and driver of the push into Australia announced his retirement in July. Yesterday, it was revealed he was given a $2 million golden handshake.

ASB Securities broker Stephen Wright said he felt Tower was a takeover target at today's price.

"They've beaten would-be suitors off over the years saying they were strong enough to survive on their own, but clearly they're not."

Keith Taylor, acting chief executive of the Tower group, told NZPA the market had over-reacted. It was now talking to major shareholders to reassure them, he said.

Mr Taylor said even at a price of $3.55 he believed Tower was undervalued and a takeover prospect. He categorically denied Tower would need to raise more capital and said that at this price a share buyback was an option.

He stressed that the company expected to return to "normal" profit in the current financial year.

Mr Taylor denied that Tower, like a long list of New Zealand companies, had been sold a lemon in Australia. It bought Tower Australia in 1991 and in 2001 it generated 65 percent of profits. Even Bridges was profitable in the current year. Bridges was likely to be revalued down because the value of all insurance companies was being cut.

ABN Amro Craigs retail equities adviser Nigel Scott agreed the selling had been overdone.

He said the underlying book value was worth more than the share price indicated.

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