Jenny Ruth: Tower makes ground slowly

Tower is finally getting around to cleaning up its share register through a compulsory sale of shareholdings that are less than a minimum holding, 200 shares in this case.

The company's annual report shows that of its 116,298 shareholders on November 30 last year, 44,448 owned less than A$500 ($558) worth of shares.

The Grant Samuel report on the spin-off of the Australian Wealth Management (AWM) business into a separate Australian-listed company showed that at October 30 last year, Tower had 37,263 shareholders owning fewer than 200 shares and that together they owned just 0.8 per cent of the company.

Given the cost of mailing shareholders documents, it's a wonder Tower didn't address this situation years ago and certainly before the AWM split.

Tower's 19.9 per cent shareholder, Sir Ron Brierley's Guinness Peat Group (GPG), underwrote the A$130 million rights issue associated with the AWM split.

That issue was reasonably successful, given the large number of small shareholdings, gaining 78.2 per cent acceptances from 34,997 shareholders. That was a better uptake than Tower's previous rights issue in 2003 when 35 per cent of shareholders exercised their rights.

Grant Samuel had estimated GPG might pick up about 30 per cent through its underwriting. GPG ended up with 31.5 per cent of AWM, picking up its rights to 19.9 per cent and the rest through its underwriting.

GPG paid A$54.2 million, or 80Ac each, for the shares picked up through the underwriting.

AWM had already decided before the split that it would undertake a programme to compulsorily acquire unmarketable parcels of its shares once it became listed. It kept that promise in June.

It sold 8.4 million shares, or 2.8 per cent of the company, for A$1.03 each, 23Ac more than those shareholders taking up their rights paid in February.

Effectively, those shareholders who didn't take up their AWM rights transferred A$15.59 million to GPG. GPG also got a $2.27 million underwriting fee, 1.75 per cent of the total issue. The fee was on the lighter end of recent underwriting deals.

It isn't hard to understand why the small shareholders didn't exercise their rights. Many of them gained their shares through owning policies when Tower demutualised in 1999, making them not the most natural of shareholders.

They were told then that their shares were worth $5.65 each but proceeded to watch them slide over the years towards $1. The June 2003 rights issue was priced at 90c a share. Small wonder they weren't prepared to stump up with hard cash.

Selling their rights on market was a ludicrous option for small holders. Even those with a marketable parcel of shares, 200, in Tower would have been out of pocket.

Such shareholders would have been entitled to rights to 271 AWM shares. The top of Grant Samuel's estimated range was that the rights would trade at 11c and, at that price, those 271 rights were worth $29.81. The cheapest brokerage, Direct Broking charges, is $29.90 a trade.

Tower's advice was that small shareholders might like to sell their shares ahead of the split but, again, brokerage costs would have made this a waste of energy for many.

The idea behind the AWM split was to add value for all shareholders. So far, it certainly has done so.

Tower shares peaked at $2.48 in November last year ahead of the split, giving it a $1.02 billion market capitalisation.

The shares have since slipped to $2.15, but shareholders who exercised their AWM rights are still ahead. Taking into account the 55.7 million shares Tower cancelled as part of the AWM split, its post-split market capitalisation is $770.7 million.

AWM shares are trading around A$1.11, giving it a market capitalisation of A$324 million or $361.5 million, bringing the two companies' combined worth to $1.13 billion, suggesting simply splitting them added more than $100 million in value.

For those shareholders who decide to remain Tower shareholders, it appears that the gradual recovery since GPG gained control is continuing.

In May, Tower reported a 66 per cent rise to $20.1 million in operating earnings from continuing operations, excluding investment returns for the six months ended March. Its net profit rose to $55.3 million from $20.5 million, although that included a $23 million gain from selling AWM.

The results included a four-month contribution from AWM.

Despite the improvement, chairman Olaf O'Duill said the company needed to provide "a stronger return on capital than that being generated".

It looks like the market is banking on that happening. With Tower's first-half per-share earnings being 6.7c, that's only an annualised 6.2 per cent return with the shares trading at $2.15.

The result is also a poor return on Tower's $4.88 billion in total assets at March 31.

And it looks like the dividend drought will end after the company reports its full-year results. O'Duill has promised the directors will consider a dividend policy then. The last time Tower paid a dividend was for the first half of 2002 when it paid 14c a share after the company reported a $40.7 million net profit.

Then followed chief executive James Boonzaier's sudden departure and the horror result of a $75 million loss for the full year followed by the even worse $149 million loss the following year. It recovered to post a $54.6 million profit for the year ended September 2004.

Investors should have reasonable confidence in managing director Jim Minto, who took on the top job at the beginning of March. He has spent the last couple of years sorting out the company's Australian operations, which was where its major problems lay. He had previously headed the New Zealand operations.

The latest results show Tower Australia's net profit was up 70 per cent to $17.9 million from the previous first half.

In New Zealand, while the insurance business reported a 25 per cent profit increase, the funds management business saw a drop in net profit to $700,000 from $1.2 million previously.

Minto is promising that he will be looking to improve the funds management business performance "by focusing only on core, profitable business areas and products" and that new sales and business retention will remain key areas of focus across all Tower's operations.

Who, what, where

Tower Headquarters: Level 5, 50-64 Customhouse Quay, Wellington.
Profile: Tower operates in the general, health and life insurance markets and provides superannuation and related investment products.
Market capitalisation: $770.7 million with the shares trading at $1.15.
Latest results: Net profit for the six months ended March rose to $55.3 million from $20.5 million but the result included a $23 million gain on the sale of AWM.
Management: Managing director Jim Minto and chief financial officer John de Zwart.
Major shareholder: GPG with 19.9 per cent.