Readers might recall that late last year I wrote about putting 2% of my portfolio in Tower Limited (Australia) (ASX: TWR), a small, New Zealand-based general insurer. The current takeover offers from a Canadian suitor and our own Suncorp Group Ltd (ASX: SUN) brought the thesis to completion much quicker than I'd anticipated, and I have now sold my shares.
Although Tower had made progress towards clearing up the last of its Canterbury earthquake liabilities, last week's report suggests that my original assumption for no further provisions being taken was wrong.
As a result, Tower is more likely to have to raise capital than I'd originally thought (if there was no takeover offer). The increase in provisions also led to continued suspension of the dividend. Although this is a good thing for shareholders, the increase in provisions and likelihood of the dividend remaining suspended for longer measurably reduces the expected returns from the investment, at least in the near term.
On the plus side, Tower continues to make pleasing progress both in growing its insurance sales and reducing costs, and I would be happy to hold the business for another couple of years to see how it played out.
But you just said you sold your shares?
I did. As it stands, I see three likely outcomes:
- The current takeover bid goes ahead at today's prices. I would have to wait until after June and for a subsequent shareholder vote to be called for that to happen. There is zero upside in this situation.
- The Suncorp bid gets approval from the regulator and is voted for by shareholders. In that case my shares would be worth ~10% more, if the bid is approved. NZ's competition regulator is not shy about saying 'No' and recently rejected Sky Network Television Ltd's (ASX: SKT) bid to merge with Vodafone NZ.
- Both takeover bids fall through for whatever reason and shares plunge
I think the company is quite clearly undervalued, given its clear strategy for improving its performance, but as things stand there appears to be little benefit in continuing to hold the shares.