The Tower Group (TWGP) follow-up: Are you feeling lucky?

- Bill Feingold & Jeffrey Alton, CFA

As we wrote in our May 7, 2014 piece “This Tower Is Toppling”, all the signals from the market indicated that the ACP Re Ltd acquisition was in trouble. The deal was re-struck at $2.50, Tower’s stock price was falling and the converts were down as well.
 
Now Tower is attempting to draw a line in the sand. It requested a formal, public letter from ACP Re that the merger was still on. Tower further asked that the response be made by 5:00 pm yesterday. ACP Re did not respond formally, but said it was keeping its all courses of action under the merger agreement open.
 
Despite the lack of response, Tower shares opened up sharply today, reaching $2/share from yesterday’s close at $1.80. With option volume muted and a higher bid for the $2 July puts versus the July $2 calls, we think speculators and covering shorts are running the market for the shares today.
 
ACP Re has the right to walk away from the deal if Tower experiences a material adverse effect in its business. In fact, the Massachusetts Insurance Department requested a plan from Tower to shore up its reserves on May 20. While we were unable to confirm the contents of the plan with the Massachusetts Insurance Department and our calls to Tower went unanswered, Tower reported that it contributed $3 million to its Massachusetts insurance operations to bring its reserves above required minimums.
 
Still, Tower’s continued difficulties have opened the door for ACP Re to walk away from the deal. For now, we would consider any investment in the Tower convertible or equity shares to be speculative until ACP Re clarifies its position. Anyone considering a purchase of Tower equity or debt securities has to ask themselves, “Are you feeling lucky?”