The Commerce Commission has turned down a potential takeover of a New Zealand company by an Australian entity after failing to agree to two previous merger proposals in the media and telecommunications areas. Business editor Dene Mackenzie backgrounds the latest decision.
Tower is waiting for the full release of the decision to assess the implications for Vero's scheme implementation agreement to assess if a takeover could be approved if the merged entity divests some assets.
Tower said there would no longer be a shareholder vote in September, given the Commerce Commission's decision.
Recently, the commission has taken a tougher line on mergers and takeovers.
It refused the NZME-Fairfax media merger and declined the Vodafone NZ-Sky Network Television merger because of perceived diminished competition in the respective markets.
Now the commission has said no to Vero, owned by Australian insurance giant Suncorp, taking over Tower.
Forsyth Barr broker Suzanne Kinnaird said Tower would potentially need to conduct capital-raising in the near term to ensure a sustainable business, replace its temporary $50million liquidity facility and help with the business transformation.
It could include separating its underlying insurance and Canterbury earthquake operations as was discussed by the company last November.
''While Tower is now more advanced in terms of understanding its remaining Canterbury exposure, we estimate it may require in excess of $75million in capital to undertake a separation.''
When Tower signed its agreement with Vero in June, Canadian insurance company Fairfax Holdings terminated its agreement with Tower.
Fairfax had offered $1.17 a share for all of Tower's shares and the agreement was signed in February.
Since then, Tower had released its first-half result, which highlighted evidence of underlying operational improvements and a further large round of earthquake provisioning, Ms Kinnaird said.
With the removal of a potential buyer by the commission, it would be interesting to see if Fairfax could be tempted back and at what share price level.
Fairfax received strong initial institutional shareholder support and Tower board support, until the higher Vero offer.
The challenge for Fairfax was the current 19.99% blocking stake Vero had accumulated. The commission was reviewing the stake, Ms Kinnaird said.
There appeared to be two definitive options for Vero, given the failure of its takeover offer.
It could hold the 19.99% blocking stake for any further takeover. A larger, potentially better-capitalised player could be put off entering the New Zealand insurance market by that strategy.
Forsyth Barr expected that would play a role in the commission's decision to investigate the stake.
Secondly, Vero could look to sell the stake at the best possible price. That might provide Fairfax, or other potential buyers, with an incentive to reconsider new negotiations with Tower. At current pricing, it appeared challenging for Vero to recoup its costs on the attempted takeover, she said.
Restructuring of Tower could be back in play.
In November last year, and before takeover activity, Tower highlighted its intention to separate its core general insurance business and its Canterbury earthquake-related operations.
It proposed the creation of new entities ''New Tower'' and ''RunOff Co''.
New Tower would run the underlying general insurance business, including the roll-out of a new IT system. RunOff Co would operate the Canterbury earthquake-related assets and liabilities, including Peak Reinsurance and EQC receivables of $100million and any further provisioning risk/releases relating to the 2010-11 Canterbury earthquakes.
''We still believe this only truly benefits Tower shareholders if there is a no-recourse solution from any potential further provisioning. We believe RunOff Co will likely be sold or a demerger will occur.''
Tower was now more advanced in terms of understanding its remaining Canterbury exposure, but Forsyth Barr estimated the company might require more than $75million in capital to undertake a separation, Ms Kinnaird said.
With no clear takeover bid remaining, and Vero holding a 19.99% blocking stake, Forsyth Barr's weighting towards a potential takeover had gone down to 10%.
It was also assumed any further bid would be at a reduced price, given further provisioning since the last Fairfax offer.
Forsyth Barr had updated its valuation of Tower to 95c a share and retained a neutral rating given the pullback in share price.
Investors should wait for more information from Tower on the status of the takeover situation and restructuring and capital-raising proposals, she said.
