Splitting Tower in hope of a big bang

Tony Gibbs believes analysts' separation anxiety over the deal is misplaced. Picture / Glenn Jeffrey

Guinness Peat Group's Tony Gibbs is hoping to create a bigger bang for the bucks he and other shareholders have invested in Tower by splitting it into New Zealand and Australian operations.

"It's a little bit like splitting the atom," Gibbs says, somewhat immodestly. "When Rutherford did it, he knew he was going to get a bang, but he didn't know if it was going to be a big one or a small one. I expect something to happen but I'm not quite sure yet how big or small it's going to be."

Gibbs, who will be Tower NZ's chairman should the split go ahead, insists GPG's interest is likely to be a long-term proposition - but analysts believe much of the split's value will come from the demerged companies' takeover appeal.

With its reputation for jumping into companies with undervalued assets and forcing the sale of those assets for a profit, GPG's involvement in Tower has been regarded warily over the last three years.

But to be fair, the $210 million capital raising it underwrote for the financial services group was just what the doctor ordered in 2003 when Tower was teetering on the edge of the abyss.

While some may have grumbled about the way Sir Ron Brierley's investment vehicle conducted the capital raising, with Gibbs and Gary Weiss on Tower's board, GPG has undoubtedly played a huge part in turning the company around, to the benefit of all shareholders.

The spin-off of the Australian Wealth Management business last year, which saw GPG raise its stake to 31.5 per cent of the company in an issue of new shares and AWM's subsequent merger with Select, had been "very good for all Tower shareholders that participated", Gibbs points out.

More recently Tower Australia's GPG-endorsed purchase of rival PrefSure had given the company scale in the Australian life risk market.

And Tower shareholders, who saw their investments fall to 97c a share in 2002, are a lot better off now with the company's shares trading at $3.20.

"It has been quite a journey," says Gibbs, who is "excited" about the two companies' prospects.

"The general idea of doing this is to release wealth. Often you will find wealth trapped within a company [but] because it's not visible people can't measure it."

He points to how Turners Auctions car division was worth about $10 million on Turners and Growers' books before GPG oversaw the 2002 spin-off of the division into a standalone company. Within 18 months, the company had a sharemarket capitalisation of $120 million "and the profits went through the roof".

The line from Tower's management and board, including Gibbs, has been that the Tower separation will allow the two companies to concentrate more on their own operations, give investors an opportunity to "invest more cleanly" into either the Australian life business or the diversified financial services business in New Zealand as well as simplify the business structure.

But analysts such as Goldman Sachs' Rodney Deacon say there are other benefits for Tower's management and biggest stakeholders. They include the chance for GPG to increase its stake in Tower Australia, which perhaps has the brighter prospects, an opportunity for the company to raise new capital, a rerating of the reportedly resurgent Tower NZ's earnings and a better position from which to participate in further industry consolidation.

Big as it is now, analysts say Tower Australia is not too big a mouthful for rivals, especially cut free from the less attractive New Zealand operations.

Forsyth Barr's John Cairns and ABN Amro's Nick Caley have also said increased takeover or acquisition interest in at least some of Tower NZ's operations after the split is likely.

However, Tower and GPG have been keen to hose down that kind of speculation with Tower chief executive Jim Minto last week telling some New Zealand staff the business isn't being readied for sale.

Gibbs, while acknowledging the company had been subject to takeover speculation for some time, also downplayed the prospects of any kind of post-separation sale of the New Zealand businesses.

"There are no offers that I'm aware of for anything at this point."

But Cairns points out: "It's unusual in this day and age for a fire and general fund to be linked in with a health and life risk business. There's a tendency to specialise in one or the other."

Another analyst said some companies would be interested in the local company in its present form "but I still think there's potential that some of the assets could get cherry picked".

However, Gibbs maintains there is no intention to split the local operations, "a nice cohesive company of some size", and the geographical separation did not make such a prospect any likelier.

Gibbs was keen to underline GPG's commitment to Tower, referring to the prospectus for his company's recent $350 million notes issue in which it talked about its pride "in rejuvenating a company that is very much a New Zealand icon".

"I'm excited about Tower New Zealand and I can assure you that Gary is excited about Tower Australia, he thinks it's got great prospects too.

"Tower New Zealand's got great growth potential. It dominates the Pacific Islands and we can expand up there. We need to be more aggressive in the New Zealand market and I think we can."

Nevertheless, Cairns says GPG is "a trader of assets ... That's their end game. What they do with their stake is anyone's guess, but once they perceive that it's at full value they would look to exit it and look for the next one."

Other commentators have said GPG, which sprang from corporate raider Brierley Investments, appears to be mutating into a manager of assets. But Gibbs isn't happy with either description. "We're not a trader of assets and we're not a manager. We're a strategic holder and that's quite a different process. We don't buy a company on Monday and sell it on Tuesday.

"We look to enhance value on all the companies we're in. That's not to say at some stage we won't exit. We don't manage the businesses we run, the managers do, but we look at our investments in a strategic sense and how can we help the managers."

So how long will GPG be in Tower?

"Well, I can't answer that," said Gibbs. "It's a bit like 12 years ago when we went into Turners and Growers. It had $38 million in shareholders' funds and everybody said within two years we'll have split it up and sold it. Well, today we've got 60 per cent of it, we've merged it with Enza and we've piled money back into the company. It's now got shareholders' funds of $200 million.

"Would I sell Turners and Growers tomorrow? I suppose it's possible, you never say never, but on the other hand I don't say things like we've just said in a registered prospectus if we don't believe in what we're doing."

Yet GPG and its intentions are often still regarded with suspicion by many. Indeed Gary Weiss, who will represent GPG on Tower Australia's board, appears to acknowledge that. His occasional musical sideline is called the Asset Strippers.

"That goes back years ago to Brierley's," chuckles Gibbs. "And even GPG at some time were called asset strippers. I don't think we've ever stripped an asset in our life. It's something the papers give to us.

"Good business in my view is just one good idea piled one upon the other.

"If we can keep doing this and making good returns for our shareholders and for all stakeholders I'll be very happy."


Extra-value fission

* Tower's board recommends splitting the New Zealand and Australian operations.

* Shareholders would be left with shares in the ASX-listed Tower Australia and the dual- listed Tower NZ companies.

* It is expected the split will result in 55 to 65 per cent of Tower's value winding up in the Australian company.

* With Tower's market capitalisation at $1.14 billion, the split could see a business worth $740 million leaving the NZX.

* The split would be followed by a A$150 million to A$180 million rights issue for the Australian company, underwritten by 19.9 per cent shareholder Guinness Peat Group.

* GPG expects its stake in the Australian entity to increase "a tad" through the underwriting.

* Under a similar spin-off and capital raising last year, GPG's stake in former Tower subsidiary AWM increased from 19.9 per cent to more than 30 per cent.

* Tower says the split will allow greater recognition of the value of its various operations.

* Analysts say the split will increase chances of Tower being involved in corporate activity in a sector that is consolidating.

* Some say Tower NZ is being readied for at least a partial sale.

* Shareholders are to vote on the plan in November and, if they approve, it will be effected before the end of the month.

* Tower's top management, including chief executive John Minto and chief financial officer John de Zwart, will head the Australian business.

* A new CEO for Tower NZ will be announced next week.