Merrill Lynch has downgraded trans-Tasman insurer Tower to a “sell” from “hold”, saying a demerger will reduce the earnings of Tower’s Australian operation.

Analyst Andrew Kearnan says in a new report that the plan to split off the Australian assets into a separate listed entity provides no value to most shareholders unless it enhances takeover appeal.

He says the demerger proposal, to be put to shareholders next month, undervalues Tower Australia by about 20% and substantially overvalues the NZ operations.

“We have previously commented that in our view neither the Australian business nor the NZ business had significant takeover appeal for a rational acquirer,” he said. “As a takeover is quite unlikely in the next few years, we believe the share price will fall to reflect the demerger and dilution therein.”