Tower's plan to split its business along geographic lines could leave the New Zealand operation vulnerable to a takeover by a rival, analysts say.
On Tuesday, Tower revealed its intention to demerge its New Zealand and Australian operations. The Australian specialist life insurance business would be listed on the ASX
while the smaller New Zealand diversified financial services business would continue to be dual-listed
Analysts generally welcomed the plan, which has the backing of Tower's board.
"We believe the proposed demerger will increase the transparency of the respective businesses resulting in wider investment appeal including corporate interest," said Forsyth Barr's John Cairns.
Forsyth Barr had upgraded its recommendation on the company from "accumulate" to "buy" and set a target share price of $4.15.
"We believe this valuation could have potential upside in the event there is corporate interest in the component parts, which we consider to be likely."
ABN Amro analyst Nick Caley did not rate Tower's takeover appeal in its current form, but "once they separate, the New Zealand business to us looks like it has some reasonable takeover appeal", possibly from banks operating in New Zealand.
Another analyst said the demerger probably signalled that Tower NZ was being readied for sale.
"If you're trying to sell the New Zealand business, if you think potential bidders are underbidding, one way of ensuring you get a good price is to list the thing and let the market determine a price. Then obviously the bidder has to pay a higher price than what the market ascribes to it."
Potential buyers could include Promina, which like Tower ran both life and general insurance businesses in New Zealand.
"One would imagine that IAG and QBE would also be interested in Tower NZ's general insurance businesses."
Life insurers such as AXA, AMP and even Commonwealth Bank of Australia, through its Sovereign brand - all with fairly sizeable New Zealand life insurance businesses - would potentially be interested in Tower's non-general insurance business.
Tower shares yesterday gave up 8c of their 13c gain after Tuesday's announcement, to close at $3.40.
