GPG set to profit from Tower split

Tower's cornerstone shareholder Guinness Peat Group stands to make a killing on the rights issue that follows the company's proposed split into separate Australian and New Zealand businesses the Shareholders Association says.

Investment bank Merrill Lynch has raised concerns that the deal "seems to be a clear conflict of interests".

Details of the demerger plan which Tower released on Wednesday showed the 234 million shares that will be created in the new Tower Australia were valued at A$2 ($2.30) each.

GPG, which currently owns 19.8 per cent of Tower, will fully underwrite the issue of a further 100 million shares at A$1.60 each. Shareholders will be entitled to buy 0.4269 of the new shares for every Tower Australia share they own following the split, or they may trade the entitlements. Those entitlements not exercised or traded will be taken up by GPG which will also be paid a A$2.8 million underwriting fee.

Under a similar arrangement, GPG lifted its stake in Tower subsidiary Australian Wealth Management from 19.8 per cent to over 30 per cent when AWM was spun off last year.

"You've got a discounted rights issue fully underwritten for a fee and that is a transference of wealth to the underwriters," said Shareholders Association chairman Bruce Sheppard yesterday.

"They will always pick up some of the shares because there will always be some shareholders who fail to exercise their rights or sell them.

"For every share that GPG picks up it books a 40c gain. Why would you pay them an inordinately large sum of money to give them the opportunity to profit in that manner?"

A report on Tower's proposed separation prepared by valuation specialists Lonergan Edwards found that the fee being paid to GPG was effectively 2.18 per cent of the capital to be raised and as such was at the lower end of the range of fees paid in similar recent transactions.

But Sheppard said that as the rights issue was at such a discount, "the underwrite fee should have been below one per cent, possibly as low as half a per cent".

Tower chief executive Jim Minto said yesterday that the board did not seek bids from other potential underwriters but nevertheless felt that GPG's proposal was "a very competitive one", a view that was endorsed by Lonergan Edwards.

GPG's directors on Tower's board, Tony Gibbs and Gary Weiss, were excluded from the meetings that considered the underwriting.

Tower's shareholders will vote on the capital raising and the proposed demerger at a special meeting next month. The demerger requires the approval of 75 per cent of votes cast, and the capital raising plan, which GPG cannot vote on, needs 50 per cent.

However, GPG is in a win-win situation; should it be rejected by shareholders, it stands to receive up to A$1.52 million in various fees and expenses anyway.

Merrill Lynch also believed the rights issue was planned for the Australian entity because "prospects for that business look fundamentally better than for the New Zealand operations".

"As underwriter, GPG would effectively get to increase its stake at a discounted price in the better of the two entities."

GPG's Gibbs said that Sheppard's criticisms were "cheap shots" fired by someone who sold their Tower shares "when the going got rough".

Tower shares closed up 4c at $3.18 yesterday.