Markets live chat transcript for the chat ending at 11:31 on 2 Feb 2007. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Welcome to Markets Live – Alphaville’s daily commentary on market movers.
PM: Robert Orr is with me today
PM: And it is ALL GO, since if you’ve missed it this morning I can tell you that we have a potential bid for J Sainsbury
RO: Yep. A statement at 9 o’clock this morning confirmed that CVC Capital Partners, Kohlberg Kravis Roberts and The Blackstone Group are “at the preliminary stages of preliminary stages assessing Sainsbury”
RO: Step forward Steve Davies at Numis Securities who predicted exactly this earlier in the week!
PM: We talked about it on Tuesday didn’t we.
RO: We did. Hats off to him. His basic point was that as well as a supermarket that is getting its act together, Sainsbury also has a massive property portfolio put at £7.5bn.
PM: yes, that’s what Numis reckon – it’s actually in Sainsbury’s books at £5bn. Numis have looked at the partial revaluation Sainsbury did last year as part of £2bn debt refinancing, where some of the properties were used as collateral.
RO: Yes – so they have subsequently decided to apply a 50 % uplift to the portfolio’s value.
PM: And how does that compare with Sainsbury’s market cap??
RO: £8.3bn – until today.
PM: So on this basis the supermarket business was being valued by the market at less than £1bn.
RO: Exactly.
RO: And as such Davies said bidders could afford to pay 600p a share.
PM: Yes, but it’s important to note that that price relies on a private equity ownership model, separating the property from the operating business.
RO: Yes, and that’s where the numbers get controversial
PM: Hmm — looking through the numbers
PM: Numis have made some brave assumptions about the profitability of the operating company going forward – ebitda of £726m in year one, rising to £1.4bn in year five.
PM: That allows them to model PE type returns that grow to over £8bn after five years.
RO: And I guess CVC et al are going to say those numbers are FAR too aggressive.
PM: Bound to — Numis assuming such a big uplift in sales
RO: That’s right – and that why, while the shares have performed well this morning, they are still a very long way from the 600p target Numis has placed on the stock
PM: Price was the stock shot as high as 526p initially on the news, currently up 67p at 513p — gain of 15%
RO: Of course it is worth remembering this is ONLY a proposal. This would be a complicated deal and no guarantee that it will happen.
PM: And not everyone is saying “buy” this morning.
RO: Indeed, I’ve just got a note from Richard Ratner at Seymour Pierce and he’s saying SELL
PM: Sell?? – Ratty Ratner says sell
PM: He loves to buck the trend.
RO: His basic argument is that Justin King is halfway through a restructuring of the business and is doing a great job.
RO: So its a bit like Marks & Spencer two years ago. And look what’s happened to their share price!
PM: Hmm. Sainsbury stock stock has all but doubled since King came on board — theier defence argument is bound to be that King is only half way through his recovery job
PM: Go on paste a bit of Ratty if you can find anything insightful
RO: Our view remains that any offer based on a sale and leaseback of the
property portfolio is unlikely, as it would lumber the purchaser with a large
retail bill.
• One must remember that Sainsbury has been ‘buying its business’, in our
opinion, compared to the other food retailers.
• Thus, although like-for-like sales were ahead of plan, this has been
accompanied by failure of this to come through to the bottom line, leaving
some estimates having to be reduced.
• In our opinion, the VCs may look at it, but we do not believe that they will
necessarily bid. The risk/reward ratio must be heavily on the downside
now, with our price target of 390p if nothing happens. We therefore move
from ‘underperform’ (at ‘underperform’ since 23 February 2005) to
SELL.
PM: seems that Lord Sainsbury – or at least those running his blind trust – have been listening to Mr Ratner. They must be kicking themselves
RO: He might be. Although that 40m shares were sold via a blind family trust to settle a forward sale derivative contract with Credit Suisse.
PM: So the private equity boys didn’t pick them up?
RO: No – that’s quite important.
RO: Although they could get their hands on the rest of the Sainsbury family holding. Lock up expires later this month and the former Science Minister is free to sell his shares.
PM: Do we know if he will?
RO: We have absolutely no idea if he will. His family founded the company and am sure it is dear to his heart.
RO: But he’s not involved in the day-to-day running of the company so he’s just a shareholder like anyone else.
PM: Who else do they have on the register?
RO: Biggest shareholder in Axa with about 14 per cent. The remainder of the Sainsbury blind trust is about 13 per cent. Then Brandes – who always seem to get these deals right – with 10 per cent.
PM: Ok — that’s enough on Sainsbury specifically. — but what’s the rest of the retail sector doing?
RO: Flying.
RO: Wm Morrison up 20p to 304p and Tesco up 15p to 435p. B&Q owner Kingfisher is up 12p to 256p.
RO: Not just that. Any company with big property assets are higher today. That includes the pub companies like Enterprise Inns, up 19p at 667p this morning, and Greene King, up 55p to £11.40
RO: And housebuilders –Bellway is up 55p to £14.80.
PM: This story is going to dominate things for weeks. What fun
RO: It certainly is.
PM: But tell me — waht has been the impact on the London equity market generally?
RO: Well, unsurprisingly it is higher. As I sit here the FTSE 100 index is up 39.1 points at 6321.3.
RO: FTSE 250 is up about 90 points at 11,309.5.
PM: After that remarkable session yesterday when not a single blue-chip stock ended lower we must be getting close to a six-year high again?
RO: We are. Our intra-day six-year high is 6,335.1.
RO: But the more important figures is the closing six-year high of 6,319.0 set at the start of the month – that really strong day on January 3, remember?
RO: We could easily beat that today if we get a boost from Wall Street.
RO: Even without Sainsbury it was going to be a strong day because Wall Street hit another high overnight.
PM: What was was the move?
RO: Dow Jones Industrial Average rose 52 points to 12,6730.7 – a record close. And the S&P 500 gained 7.7 points to 1,445.95 – its highest level since 2000.
RO: We have jobs data later- that should set the tone for Wall Street today.
RO: Nikkei 225 in Japan hit a nine-month high overnight. Closed up 27.6 points at 17,547.1
RO: European markets are also stronger today. CAC 40 up 13.15 points at 5,675.40 and DAX was up 16.81 points at 6,868.09 last time I looked.
PM: Alright then. Away from Sainsbury, what else is going on?
RO: Something close to your heart. And your lungs. Imps.
PM: Imperial Tobacco.
RO: The maker of Davidoff and Lambert & Butler.
PM: What’s going on there then?
RO: JP Morgan has set a hare running this morning. Their analyst Mike Smith – among the best in the sector – says it will be the next to be bought. He thinks by Philip Morris International.
PM: We’ve got Japan Tobacco bidding for Gallaher already of course. So another round of consolidation is one the way.
RO: So it would seem. Interestingly, using the same metrics as the Gallaher deal, Mr Smith says bidders like PMI can afford to pay £28 for Imps.
PM: And the shares currently are . . . .
RO: Up 117p to £22.10. That’s a rise of 5.6 per cent!
PM: Goodness me that’s a big move
PM: Deal fever — but ahve you got the note?
RO: M&A Likely to continue to be the Primary Stock Price Driver in 2007. Three major industry deals happened within 10 months in 1999. Following the announced $19bn take-over by Japan Tobacco of Gallaher, we expect 1 or 2 more significant deals to take place over the next 6-12 months (see our report Focus on Deals, 19 January 2007).
RO: Imperial Tobacco is an Attractive Potential Consolidation Target, in our view. If acquired Imperial would achieve at least a 10-20% take-out premium to Gallaher, on our estimates, implying 13-14x 2008E EV/EBITDA equivalent to £26-28 a share. We base this premium on Imperial having significantly higher stand-alone organic growth than Gallaher
RO: No Limitations on Altria Capacity to do Large Deal. CEO Louis Camilleri noted in public remarks at the Q4 results presentation on Wednesday 31st January, that there were no limitations on PMI\\’s capacity to do a large-scale debt-financed tobacco deal prior to completing the spin-off of Kraft. We estimate that PMI is already essentially debt free with 07E EBITDA $9.5bn, and could debt finance deals in excess of $30bn.
RO: Market Share-Overlaps Would Require Junior Bidding Partners. If either of the two industry leaders PMI or BAT were to make any large-scale acquisitions, joint bidders would almost certainly be needed to take asset disposals required by competition authorities. We do not see this as a significant challenge given the M&A fire-power remaining in the industry and the acquisition strategy of most companies.
PM: Of course this all hinges on the spin-off of Kraft from Altria. Is that a certainty?
RO: Seems so. The board voted in favour of the spin-off of Kraft this week. Scheduled for the end of March.
PM: Fascinating stuff. Anything else in the big-caps?
RO: I am really struck by the downgrades for Royal Dutch Shell today. Dresdner and JP Morgan have slashed their ratings. Dresdner from “buy” to “hold” and JPM from “overwight” to “neutral”.
PM: I thought the news on reserves yesterday was good. What’s the logic there?
RO: So did I. But Shell shares are off 19p to 17.20p and one of the leading fallers even though the oil price is higher.
RO: Here is some of the JP Morgan note.
RO: In our view, the company has amongst the best long term E&P
prospects in the sector. However, the medium term is set to see
weak volume growth and high capex. 2007 volume guidance of
3.3-3.5mbd is flat-to-down vs. 2006, and management points to 1-
2%pa growth for 2006-09. Our own forecasts show 1%pa growth.
RO: With underlying capex of $24-25bn pa, we see free cash flow
yields below Shell’s European peers. We still see the flexibility
for buybacks, but total cash returns should be below these peers.
We have lowered our 2007-09 EPS estimates by 4-5% (see p5) to
reflect the weaker production outlook, and lowered our 12-month
multiples-based price targets from 2000p to 1850p (see p7).
RO: We think Shell offers good, low-risk exposure to the sector for
longer term investors. However, with a medium term outlook of
limited growth and high capex, we think the shares will struggle
to outperform. We have lowered our recommendation from
Overweight to Neutral.
PM: Ok, lets have a look around lower down the corporate ladder
RO: Shall we see if there is a profit warning from another tiny Aim company more like.
PM: What do you mean?
RO: You’re obsessed. Every day you seek out some tidler with some bad news.
PM: That’s not true. I am just keen to see an orderly market that’s all.
RO: Well I can’t find any warnings today. We have a takeover talks terminated but no profit warnings that I can see.
RO: We have a possible offer for Cashbox – the pay cash machine people.
PM: Hmm — price up 3.25p to 29.75
RO: One interesting thing today is Chariot.
PM: Those people. Thought they’d sold their assets after the thing imploded
RO: They did. But remember a while ago this bunch called Astinway built a big stake and we spent ages tracking them down?
PM: To an industrial estate in Sussex as I remember.
RO: That’s right.
RO: Well Astinway has sold its entire holding to a company called FBI Media.
PM: FBI? Sounds ominous or ludicrous . Who are they?
RO: I don’t know but they seem to have a website.
RO: http://www.fbimedia.co.uk/
PM: Well lets navigate there
PM: Ah
PM: 
PM: “A socially responsible way of connecting with young people”.
RO: 
PM: What does that mean?
RO: I have no idea. “A unique media platform that communicates with the 12-19 year old consumer market”.
PM: Well it wont be unique. Someone should tell them about Myspace
RO: Good tluck to them tho.
PM: Whoever or whatever they are
RO: 
PM: Ok — that’s it for today. Thanks for joining us. We will be back with the next edition of Markets Live on Monday at 11am.
RO: Good luck to Scotland in the rugby tomorrow!