Tower Group International: Take the Money and Run

- Jeffrey Alton, CFA and Bill Feingold

If you listen closely to what the market is saying, time seems to be running out for Tower Group International.  Despite an agreement to be acquired by ACP Re, Ltd. at $2.50 per share by November 15, 2014, Tower’s stock limped to a $2 close today, down over 5% for the session. Clearly the equity market has significant doubts about whether the deal will actually close under the current terms. We have expressed our own reservations about the merger, first in a May 7, 2014 piece entitled, “This Tower is Toppling” and again on July 1 in our note, “The Tower Group (TWGP) Follow-up: Are You Feeling Lucky?”.

Why is the market losing faith now? Tower Group’s $150 million 5% senior convertible notes are due on September 15, 2014 and Tower stated in its recent 10Q that the company does not have the liquidity to pay bondholders unless the merger is completed. With an additional two months to close the deal after the bond is due, there seems little incentive for ACP Re to execute the merger before November 15. That’s the type of uncertainty that gets the market squirming.

Problems have surrounded the proposed merger since its inception. The merger agreement was already renegotiated once last May, dropping the price of the deal from $3.00 to $2.50. Even after that, Tower Group executives were compelled to write an open letter to ACP Re to confirm that ACP Re would not invoke an Insolvency Event clause in the agreement to abandon the deal.  ACP responded with a tepid one sentence letter from its attorney saying it will meet all its obligations and reserves all its rights under the agreement.

As time passes, there seems little doubt that Tower Group shareholders should be amenable to a further drop in the price of the deal when early September roles around even if the convertible notes are restructured or the maturity is extended beyond November 15. ACP Re may even walk away from the deal if it thinks it can make in-roads without a formal merger to take over Tower Group’s existing customer base.

Ironically, the convertible bonds are quoted at a healthy 96.5, but the market is thin and there have been no significant trades recently. We do not think that price reflects reality.

To sum up our thoughts, we paraphrase the Steve Miller Band – when you know just exactly what the facts is, go on take the money and run.