‘Snatching defeat from the jaws of victory’
Analysts cool on Tower’s capital raising
Tower’s plans to raise more capital alongside its acquisition of rival insurer Youi’s New Zealand business has not gone down well with investors.
Since announcing the $13 million bolt-on acquisition and $34m equity raising on Tuesday Tower’s share price has dropped 7c to 70.5c.
Analyst Jarden downgraded its rating from outperform to neutral on the news dropping its target price to 68c and labelling the move “snatching defeat from the jaws of victory”.
The firm noted that by itself Tower’s profit upgrade from $26m to $28m and the acquisition would have been good news.
But the extra capital raising could leave the insurer getting ahead of itself, the analysts warned.
“We appreciate that capital requirements in New Zealand will likely increase in the coming years; however, getting ahead of the curve is not a favourable move for a small insurer still earning well below peers in terms of profit margin.”
The capital raising has come on the back of discussions with the Reserve Bank over an EQC receivable.
Tower has said it will pursue the receivable but it is likely to end up in litigation.
The Reserve Bank will exclude an EQC receivable from Tower’s solvency capital by the end of October.
Jarden analysts said they were aware of the receivable but believed Tower already had enough capital to cover it should the receivable not come in.
“Post the acquisition and removal of the EQC recovery, Tower now sits on $37m of excess capital, on our calculation, which should raise questions as to why it just raised the additional $35m.”
Costly conduct law
Commerce minister Kris Faafoi’s announcement of a new conduct licensing regime for the banks and insurers will have come as little surprise to the industry this week given the strong signalling by the minister and regulators.
But one of the big unknown factors from the move is exactly how much it is going to cost the sector and how much funding the Government will give the Financial Markets Authority to police it.
A regulatory impact statement released as part of the policy announcement states: “There will be a moderate-to-high increase in compliance costs for regulated entities, depending on their existing levels of compliance, IT systems and organisational controls, as well as whether the entity is required to be licensed.”
However the report also notes it is likely that the regulated entities will “ultimately pass these costs through to their customers”.
The government is less worried about this though as the costs to the consumer will be spread over a large number of people which use banking and insurance services.
A Cabinet paper prepared by Faafoi states that implementation of the proposals “will have significant funding and resourcing implications” for the FMA due to the new remit of licensing, monitoring and enforcing the new conduct obligations, including through litigation activity.
But it seems the government will be looking to the industry to fund a large part of that.
“Licensing costs would be directly recoverable through fees and wider monitoring costs may be indirectly recoverable through industry levies.”
A spokesman for Faafoi said it was his intention that the FMA have the necessary resourcing to police the conduct of the finance sector.
But the specifics would be “subject to Budget bid conversations”.
The legislative changes to enable licensing are expected to be pushed through by the end of this year.
Fonterra’s $62m debt to Beingmate
When Fonterra unwound a joint venture with Chinese infant formula manufacturer Beingmate it said the transaction was done at no cost to the New Zealand co-operative.
However, it still has a commercial exposure relating to an arrangement that is not clearly understood.
According to Fonterra’s annual report, the co-op regained full ownership of the Darnum manufacturing plant in Australia in January, while at the same time it renegotiated commercial terms of product purchases by Beingmate.
The transaction price was $126 million, representing the 51 per cent share of Darnum and associated working capital balances. It was treated as an asset purchase as no processes were acquired.
The amount owed to Fonterra by Beingmate was $64m, which was settled against the transaction price — resulting in a net amount owed to Beingmate of $62m.
At the July 31 balance date, this $62m was still payable by Fonterra in four equal annual instalments. The amount payable is unsecured and accrues interest at a market rate, Fonterra noted.
The “no cost” comment reported earlier in the year appears to relate to an “offsetting supply agreement” of the same timeframe that commits Beingmate to purchase minimum volumes of product from the Darnum plant.
One potential issue to this is that Fonterra no longer has significant influence over its Beingmate investment, due to one of two Fonterra-appointed directors resigning from the Beingmate board, and the fact that the broader strategic relationship has materially reduced. (Fonterra has also terminated Beingmate’s rights to distribute its Anmum brand in China).
Fonterra has now also implemented a “heightened information barrier” between the cooperative and its remaining director on the Beingmate board due to the fact it intends selling down its 18.8 per cent stake in the Chinese company.
As the old saying goes, watch this space.