By Jenée Tibshraeny
The future of New Zealand’s third largest domestic general insurer is up in the air.
Only just keeping its head above water in the wake of the 2010/11 Canterbury earthquakes, Tower has had a potential lifeline ripped away from it for the greater good of the health of the insurance market.
The Commerce Commission last week declined Vero’s application to get clearance to take over Tower, saying reducing the number of major domestic general insurers in the market from three to two would result in a concerning level of concentration.
Yet this doesn’t solve any of Tower’s financial woes.
The future of the company now largely hinges on what Vero chooses - or is made by the Commerce Commission - to do with the 19.99% stake it has in Tower.
Let me explain.
With a takeover from Vero off the cards (at least for now in the absence of an appeal of the ComCom’s decision), there are two ways forward for Tower:
1. Raise enough capital so it can go ahead with plans announced in November to split the company in two, ring-fencing its problematic quake-related business.
2. Sell Tower to another buyer that doesn’t already have a large presence in the New Zealand insurance market.
Forsyth Barr analysts Jeremy Simpson and James Bascand believe there’s only a 10% chance of option two eventuating.
Because no one’s queuing to buy Tower. The Canadian bidder Fairfax Financial Holdings canned its Scheme Implementation Agreement to buy all of Tower’s shares for $1.17 each at the end of June, when Vero swooped in with an offer of $1.40.
Vero’s 19.99% blocking stake
While Forsyth Barr reckons a takeover bid from Fairfax would regain its appeal among Tower shareholders, Fairfax hasn’t indicated any intention to make another offer.
“The clear challenge for Fairfax is the current 19.99% blocking stake that Vero has accumulated,” Forsyth Barr says.
This is what’s preventing any larger, potentially better capitalised player from entering the New Zealand market.
But there’s a ‘but’ - and this is where the ComCom comes in.
A document obtained by interest.co.nz under the Official Information Act reveals the Commission is undertaking a separate investigation around its concerns Vero’s 19.99% stake in Tower could contravene Section 47 of the Commerce Act.
If the Commission finds that Vero holding a 19.99% stake in Tower is potentially anti-competitive, it can take the insurer to court.
The ComCom’s full decision, released on Tuesday, doesn’t provide any details around this investigation. It does however assert the Commission’s position that Tower will be more competitive if it is bought by a third party rather than if its ownership remains as is.
Vero likely to sell up
Nonetheless, Macquarie analysts believe Vero’s parent, Suncorp, will be looking to unwind its stake in Tower on its own accord.
They don’t believe Suncorp will appeal the ComCom’s decision due to the cost of doing so and the reasons given by the competition watchdog for its decision.
Valuing its stake at $1.30 per share, they believe Suncorp will lose $10 million to $15 million if it sells its Tower shares for 95 cents each.
However they believe the ComCom’s decision will see Suncorp better off in the medium to long term, “with the additional exposure to earthquake-exposed New Zealand likely to have adversely impacted the cost of Suncorp's reinsurance program and margins”.
Forsyth Barr agrees 95 cents is a reasonable “target price” for Tower shares in light of there not being any other bidders in the market and Tower’s half year results showing a deterioration of its financial position. It previously had a target price of $1.15 per share.
Tower’s share price sat at $1.26 just before the ComCom announced its decision last week. It has now fallen to 94.5 cents.
$75m needed to pull off restructure
So with the chances of a takeover slim, Tower looks to be back to square one.
Forsyth Barr maintains it will need $75 million of capital to undertake a separation of its business.
The company in May accessed $30 million of new capital as a part of a $50 million loan from BNZ, as it came within $5 million of breaching the solvency requirements of its Reserve Bank licence.
Forsyth Barr understands "the debt facility was intended by Tower to be a temporary measure and in place only until the takeover situation was resolved".
“We expect new equity capital will be required to replace this facility in the near-term.”
Forsyth Barr goes on to say it believes splitting Tower will only really benefit shareholders if there is a “no-recourse solution from any potential further provisioning risk/failure” of the quake business, RunOff Co.
Forsyth Barr suggests investors sit tight and wait for word from Tower on the takeover situation, possible restructuring and capital raising proposals.
It notes uncertainty still remains with regard to its Canterbury quake claims liabilities.