Big banks frozen out of potential Tower deal

Tower’s decision to opt for a float of its wealth management arm instead of a trade sale was driven in part by a legacy agreement between its dealer group, Bridges Financial Planning, and former owner the Credit Union Services Corporation (CUSCAL), which precludes the dealer firm being sold to any of the four major banks.

According to Tower head of wealth management Andrew Barnes, the board of the trans-Tasman financial services group supported a public listing for a number of reasons, including the exclusion of the “big four” from any proposed trade sale.

“In the context of an organisation whereby the four major banks are effectively precluded from bidding for this business because of restrictions from the sale by CUSCAL, you are only going to get a restrictive number of bidders for the business,” Barnes said.

Another issue he said was that a trade sale would have capped the return to shareholders, whereas a spin-off left it to the market to decide the valuation of the business.

On the question of market valuation, however, Barnes was highly critical of a number of market commentators that he claimed had undervalued the business.

“The reason that we are spinning it off is that it doesn’t get enough airplay and most people look at it [Tower’s wealth management division] very superficially,” he said.

According to Barnes, who is touted to head up the new firm, Australian Wealth Management, Bridges has $3.9 billion in funds under administration in its Portfolio Services master trust and another $1.5 billion in funds under advice through its planners, while Tower Trust has combined funds under administration and advice of $4.78 billion — totalling $10.18 billion.

Therefore, on a funds under advice measurement basis, the $250 million valuation being placed on the wealth management division would not be excessive when compared to other players in the market, Barnes said.

Meanwhile, Tower chairman Olaf O’Duill has indicated the remaining Tower business, subject to shareholder approval of the spin-off, would seek to grow by acquisition using the $130 million cash payment it receives next year from the sale.

O’Duill told Money Management that Tower, which last week reported a jump in operating earnings to NZ$27.9 million for the year ending September 30, would look to use the proceeds of the sale to focus on acquiring businesses in its core areas of operation — life and general insurance.

“The issue for Tower is that it wants to have the power to acquire other businesses, as we’d like to be bigger than we are and carry more weight in terms of being attractive to institutional investors,” he said.

“The life and general insurance industry is rife for further rationalisation and Tower finds itself in the position of being too big to be a tiny niche player and too small to be up there with the big guys, and it can’t just grow organically — it has to be acquired or be acquired.”