Few fans for Tower's move across the Tasman

By RICHARD BRADDELL banking writer

Tower's move across the Tasman may be less than the foregone conclusion suggested by chief executive James Boonzaier.

At last week's profit announcement, Mr Boonzaier reaffirmed that the move was inevitable, and was likely to take place next year. He was also optimistic that New Zealand's shareholders, who control 60 per cent of the company, would deliver him the 75 per cent majority vote required for the move.

But analysts and investment managers see strong reasons for Tower to remain in New Zealand, not least because it would lose its position in the global Morgan Stanley Capital International index, its mantle as one of the few quality companies in the top 10 and because it may have implications for the issue of Tower's China licence.

Tower has all but moved its corporate office to Sydney.

"Instead of changing domicile," Credit Suisse First Boston said in a note, "we consider that Tower will look to restructure its capital mix, with a reset preference share type issue which utilises the franking [imputation tax credits] credits generated in Australia."

Such "hybrid" issues, which look like debt but can be treated as equity in company balance sheets, have become increasingly popular.

But although ratings agency Standard & Poor's noted this week that hybrids appeal to investors seeking higher returns and greater diversity, it also cautioned that they were a factor in the marked deterioration of core capital in Australia's banking and insurance sectors in the past four years and could lead to ratings downgrades.

At the profit announcement last week, Mr Boonzaier poured cold water on a Business Herald report that Tower was looking to make a capital notes issue, possibly to pay for a buyback of partly paid shares with outstanding instalment due in October. But chief financial officer Keith Taylor said that work on reorganising Tower bank debt due in September was in train.

As Tower weighs a move to Australia, it may also need to take account of increasing disillusionment with its performance. After the share price reached a record $5.90 high on heavy buying before the result last week, it dived to $5.50.

A disappointing result and frustration that there was no news on capital structure are theories for the retreat, although CSFB was concerned at unexpectedly weak operating margins and downgraded Tower's target price from $6.15 to $5.50.

It said the stock would trade below its fundamental value of $5.55 until performance improved.

Market sources suggest that a takeover will be the only thing to restore the spark to Tower's price in the medium-term. But that has been resisted by Tower management.

But a takeover may be a dim possibility because of the position of Tower's board. National Bank is rumoured to have approached Tower a year ago and backed off after being told the price it would have to pay before any due diligence.