With the recent takeover bid from Vero, a subsidiary of Suncorp Group Ltd (ASX: SUN) blocked by the NZ regulator, New Zealand insurer Tower Limited (Australia) (ASX: TWR) may find itself in the unenviable position of having to raise capital at low prices.
The New Zealand Commerce Commission (NZCC) blocked Vero's takeover bid for Tower because it would lessen competition in the New Zealand market, which is dominated by Suncorp and Insurance Australia Group Ltd (ASX: IAG). They believe that:
"The merger would eliminate Tower as the competitor best placed to disrupt coordination, and leave two reasonably symmetric insurers with incentives to coordinate."
Tower and Vero are appealing the decision, but based on this sentence alone I think there is no way the merger goes ahead – which places Tower in a tough position. It either needs previous bidder Fairfax (of Canada) to return to the fray, or Tower will undoubtedly have to raise capital. This is because the company's Canterbury earthquake liabilities have placed its solvency under stress:
Increases in provisions forced Tower to borrow $30 million in debt to maintain its solvency position. The Canterbury liabilities could conceivably increase again, requiring Tower to take on more debt, or raise capital.
In addition to this, Tower is stuck with an antiquated IT system and labour-intensive insurance sales system (online sales are just 24% of sales) that is at least partly responsible for the group's high costs.
If Tower doesn't raise capital, it will still face the expense of upgrading its IT systems, which will likely be unaffordable. The IT upgrade is currently on hold while the bidding process has been taking place, but as I see it Tower has two options:
- It gets taken over, or
- It has to raise capital, potentially quite a lot of capital, if it stays listed and also wants to fund its IT system upgrade
It probably doesn't make sense for Tower to stay listed as it is quite small and expenses chew up a significant chunk of its earnings. However, with its NZ competitors (the natural buyers) likely unable to acquire it, Tower either needs a foreign bidder or a capital raising. I would prefer the latter, as I think Tower is a well-run company with a lot of potential, and I have owned shares previously. I'd like to buy shares again, and would likely participate in a capital raising. However for now, I'm waiting for more clarity before making a decision.
