Why Tower Insurance Limited needs to raise capital

With its recent takeover bid blocked, Tower Limited (Australia) (ASX:TWR) may need to raise capital from investors.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With the recent takeover bid from Vero, a subsidiary of Suncorp Group Ltd (ASX: SUN) blocked by the NZ regulator, New Zealand insurer Tower Limited (Australia) (ASX: TWR) may find itself in the unenviable position of having to raise capital at low prices.

The New Zealand Commerce Commission (NZCC) blocked Vero's takeover bid for Tower because it would lessen competition in the New Zealand market, which is dominated by Suncorp and Insurance Australia Group Ltd (ASX: IAG). They believe that:

"The merger would eliminate Tower as the competitor best placed to disrupt coordination, and leave two reasonably symmetric insurers with incentives to coordinate."

Tower and Vero are appealing the decision, but based on this sentence alone I think there is no way the merger goes ahead – which places Tower in a tough position. It either needs previous bidder Fairfax (of Canada) to return to the fray, or Tower will undoubtedly have to raise capital. This is because the company's Canterbury earthquake liabilities have placed its solvency under stress:

source: Company presentation

Increases in provisions forced Tower to borrow $30 million in debt to maintain its solvency position. The Canterbury liabilities could conceivably increase again, requiring Tower to take on more debt, or raise capital.

In addition to this, Tower is stuck with an antiquated IT system and labour-intensive insurance sales system (online sales are just 24% of sales) that is at least partly responsible for the group's high costs.

source: Company presentation

If Tower doesn't raise capital, it will still face the expense of upgrading its IT systems, which will likely be unaffordable. The IT upgrade is currently on hold while the bidding process has been taking place, but as I see it Tower has two options:

  • It gets taken over, or
  • It has to raise capital, potentially quite a lot of capital, if it stays listed and also wants to fund its IT system upgrade

It probably doesn't make sense for Tower to stay listed as it is quite small and expenses chew up a significant chunk of its earnings. However, with its NZ competitors (the natural buyers) likely unable to acquire it, Tower either needs a foreign bidder or a capital raising. I would prefer the latter, as I think Tower is a well-run company with a lot of potential, and I have owned shares previously. I'd like to buy shares again, and would likely participate in a capital raising. However for now, I'm waiting for more clarity before making a decision.

Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »