Markets live chat transcript for the chat ending at 11:42 on 19 Mar 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, the live daily market commentary from the Alphaville team.
PM: I’m joined by Neil Hume from the FT’s London equities team.
NH: morning
PM: Lots to get through this morning — another busy Monday
PM: Let’s start with Barclays
NH: Amazing statement from the bank this morning in response to speculation about a bid for ABN Amro
PM: Tell people what it says.
NH: yes its a highly informative statement
PM: Saying?
NH: must have taken hours to put together
PM: So, it says?
NH: do you want to paste?
PM: Go on
NH: RNS Number:1838T
Barclays PLC
19 March 2007
Statement re Press Comment
Barclays PLC notes the recent press speculation in relation to ABN AMRO Holding
N.V.
An announcement clarifying the position will be made before open of business
tomorrow.
PM: So it says nothing
NH: well nothing today, which isn’t much help if you want to trade in Barclays
PM: True — maybe they should have looked at suspended while they got their ducks in a row
NH: you can’t suspend a FTSE 100 company
PM: No — that’s true — investors should always have the freedom to take a view
NH: yeah but surely a false market exists in Barclays today
PM: Hmm — not necessarily false — but certainly confused
PM: Anyway — what do we read into the statement?
NH: the lack of detail suggests Barclays has been caught off guard by the rumours
NH: in fact some traders reckon the holding statement indicates that not all of the Barclays board was kept in the loop about this approach
PM: Ah
PM: So you reckon a board meeting is being convened today?
NH: that’s what some of the market pro’s I have been talking to are saying
PM: Makes sense
PM: How long has Marcus Aguis been in the chair at Barclays?
NH: around three months. one wonders if he was kept fully appraised of the situation
PM: Oh, surely!
PM: Otherwise Mr varley will be wearing a 
NH: the lack of detail in this morning’s statement is leading to a lot of speculation about what is going on inside Barclays HQ
NH: conspiracy theorists are suggesting a stand off between Bob Diamond’s and his organic growth plans for Barclays Capital and Fritz Seegers desire to dilute Diamond’s power base via an acquisition of ABN
PM: Hmm — v intersting — if speculative
PM: Well the lack of detail in this morning’s statement is bound to spark rumours of a rift at board level
NH: the city abhors a vacumn.
NH: of course today’s statement could just be an attempt to test the water see and how the City would react to a bid
PM: And how are Barclays shares faring at the moment?
NH: up 3p to 685.5p
PM: How about ABN Amro — how are they doing?
NH: they are up 7.4% at euro 29.31
PM: Right — got any analyst comment on this.
NH: as you can imagine there is quite a bit out there this morning
NH: Man Securities are very bearish on the idea of a tie-up between the two banks. apparently the synergies would be small
PM: Do paste — this is a big potential deal
NH: we believe Barclays’ interest in ABN could be defensive and symptomatic of its own precarious situation.
There is limited overlap between Barclays operations and ABN for cost savings purposes (only overlap is in Capital Markets)
NH: If true, we expect Barclays to issues shares. Considering the valuation gap (Barclays on 9.5x 07 and ABN on 12x) the cost saving would have to be large enough to compensate for the valuation gap and the potential deal premium.
NH: Barclays is low in the pecking order for banks with more business overlap and therefore potentially more interest. Such names are RBS (for US business), HSBC and Citi (for US, European and South American businesses), BBVA and SAN (for US, European and South American businesses).
PM: That’s quite bearish. Is anyone more positive on the deal?
NH: Panmure Gordon are
NH: Broadly speaking, the two groups complement each other
strategically, both in terms of geographical distribution and business mix. One of the main
challenges that ABN.s management has faced is how to integrate a far-flung global group
(with major operations in Brazil, Asia, the US and Italy, besides the original base in the
Netherlands). We think that Barclays, with a stronger track record of managing
acquisitions abroad, could do a better job of knitting the overall group together.
NH: The problem is obviously the bid price; at Friday.s closing
prices, ABN was trading at a consensus 2007E P/E of 11.8x, versus BARC at 9.5x; as
ABN.s share price trades up on bid speculation, the potential for value creation for
Barclays dwindles. Several analysts had put a breakup/sum-of-the-parts valuation of ABN
at €30 per share. If Barclays were to chase ABN up, a winning bid price significantly above
this would most likely be value-destructive for it.
NH: James Eden at Dresnder Kleinwort is also bullish and has upgraded to “add” this morning
NH: Some see upside in Barclays all the time. We don’t. We usually see just one clear opportunity to own this stock each year. For 2007, we believe that the time is now. Down 13% in one month, the market is reading the US sub-prime and M&A stories incorrectly. Its rumoured move for ABN Amro should take nobody by surprise. Barclays remains predator not prey, but now it’s cheap.
NH: Barclays is rumoured to be willing to bid for ABN – so what’s new? Surely it is no secret that Barclays is likely to
issue paper to splurge on overseas acquisitions? We revisited why such a course of action is inevitable in our note “Same scoreline: Bob Diamond 3, John Varley 0″ (10 Feb).
NH: But in our view, investors have less to fear from a possible move
for a cheap underperforming bank like ABN Amro. There is far greater opportunity for value destruction when Barclays pays top dollar for a high performing business and then runs it into the ground – look what it did to Woolwich!
PM: Do like Mr Eden — he’s a nice writer.
NH: he is.
PM: But none of these seem to pick up on one big synergy
PM: namely, back office processing on the retail bank side
PM: All the big euro banks — including all the Brits — have had this dream of being able to crunch transactions across europe.
NH: is that possible?
PM: Cultural hurdles in the past mean the idea is only just and so becoming a reality.
NH: ummm. what about this line from Eden about Barclays still being predator? Hasn’t that changed?
PM: Who knows
NH: now Barclays has lifted its skirt surely it is in play
PM: Possibly but it would be a big mouthful — even for the likes of Bank of America
NH: Well if Barclays come out and say they were approached by ABN to consider a deal but decided after further consideration not to take it any further, then the shares rise.
PM: so what happens tomorrow?
NH: well if Barclays come out and say they were approached by ABN to consider a deal but decided after further consideration not to take it any further, then the shares rise.
PM: but if they don’t?
NH: I think the stock is heading lower
PM: OK. How has the rest of the banking sector reacted to the news?
NH: Lloyds TSB has gained 14.5p to 548.5p
PM: Why so strong?
NH: the thinking seems to be that if Barclays acquires ABN Amro then Lloyds is more of a likely takeover target for a US bank .
NH: ie, it will be the only UK bank big enough to be worth buying .
PM: Hm Not sure about that. The reason why Barclays has appealed to the likes of Citigroup and Banc of America is the spread of its business – Bar Cap, Barclays Global Investors, Barclaycard
PM: Lloyds has none of that.
NH: but it would provide a bridgehead into Europe
PM: Possibly but a US bank acquiring Lloyds would still have to make an acquisition in Europe at some point
PM: Anything else moving on the back of the ABN news?
NH: Alliance & Leicester up 15p to £11.24. Some people hoping that a move on ABN will prompt Credit Agricole to return with another offer for the UK mortgage bank
NH: age old takeover target Standard Chartered is also up. Its shares have risen 35p to £14.30
NH: oddly this morning’s developments also seems to have boosted insurer Prudential
PM: Yes, I saw its shares were the best performer in the FTSE 100
PM: Stock up 20p at 701.5p
PM: Why’s that?
NH: reports over the weekend claimed the company could face shareholder pressure to break itself up
PM: Really?
NH: yes and apparently one of the shareholders that might do this is Toscafield
PM: That’s the hedge fund run by former banking analyst Martin Hughes
NH: it is and what has got traders excited is the fact that Toscafield has been one of the hedge funds agitating for change at ABN
PM: Jeepers
NH: indeed. And although Pru shares rose last week after the company announced annual results last week, some investors were disappointed that the restructuring of its UK business did not go far enough.
NH: However, I would urge one note of caution. I believe Toscafield has a had a stake in the Pru for quite a while. It may be adding to the stake now but to say it will then push for a sale of the UK ops may be a step to far
PM: I agree. But the fact that Toscafield is involved is fascinating
NH: It is. In fact in recent days I have heard whispers that some Pru shareholders would be willing to back a merger with Aviva if it made another approach
PM: Ok so how has all of this affected the market
NH: Well the banking sector is a real heavyweight so it has helped the FTSE 100 rise 31.3 points to 6,161.9
NH: That said, a strong performance from Asian markets has also given London a boost this morning
PM: Now we should take a moment out here.
PM: Firstly, we are both a bit knackered, having flown back from the Maldives overnight.
NH: Nice seats tho, and good food/booze
PM: Secondly, we’ve got to apologise for our non-reappearance on Friday afternoon
NH: Yes, for those of you who are not aware, we took Markets Live to the Cheltenham Festival on Friday
PM: For the Gold Cup
NH: We did a live session at 11am – from the course, rolling up the immediate financial chatter we had picked up
PM: But we then promised we would be back later with a full bag of racing tips, including the Alphaville Accumulator
NH: We didn’t deliver – apols – we were suffering …
PM: Technical problems. That’s what it was.
NH: Yes, er, technical problems. Meant we were not in a fit state …
PM: Not able to get back on line.
NH: So apologies for that.
PM: Blessing in disguise, tho.
NH: Yes. Having chosen Inglis Drever as the Alphaville Nap for the World Hurdle at 3.15 on Thursday.
PM: Yep, that one came in – at three to one.
NH: So, fact is if you backed that one – Inglis Drever at 3-1 – the chances are you would have done what we did.
PM: And that’s get over confident on Friday and back our list of supposed winners for Gold Cup day.
NH: All turned out to be non-winners.
PM: That right. So we re-invested all our winnings – and more!
NH: And lost the lot. So you are lucky we didn’t print our tips
PM: Hmm. State of Play in the Gold Cup was a particularly painful experience.
NH: Yes, came 4th or 5th. Not first.
PM: That was a Jeff Randall tip.
NH: Yes, it was. Which brings us back to our flight back to the |Maldives and why we are so tired this morning.
PM: Yes, basically despite Philip Green’s kind invitation to his 55th birthday, work pressures meant we were only able to fly in to the Maldives for the tail end of Lord Green’s sumptuous bash – just going out for the Saturday night extravaganza.
NH: Are we allowed to mention this, given the NDAs we had to sign?
PM: Well other guests seem to be gabbing. We’ll just keep the details tight.
NH: And where was Jeff?
PM: Well., we’d bumped into Jeff at Cheltenham, where he is a regular visitor.
PM: Assuming he was doing the same as us – flying out just for the Sat night bash – I offered him a lift to Heathrow in my green car.
NH: Green car !!! – four litre, gas guzzling retro jag!!
PM: But it is green – british racing green
PM: Anyway, Jeff simply says: “Philip’s 55 birthday do? NFI.”
PM: Jeff Randall, NFI. Can you believe that?
NH: Yes. Shocking.
PM: Jeff Randall, NFI for a PG do.
PM: Anyway, back to some stocks. The PG party is over, but the market’s still trading ….
PM: Right what else are you keeping an eye on this morning
NH: The Imperial Tobacco/Altadis situation
NH: or Al-tardis as some wags in the City has christened it
PM: Of course
NH: Altadis shares up 5.2% to euro 46.04 this morning on talk that Imps will return with a higher offer
NH: its previous bid of euro45 was knocked back by the board of Altadis on Friday
PM: What about the Imps price, how is that faring?
NH: off 24p at £23.07
PM: A pretty robust performance, considering. Clearly no one believes they will over pay
NH: no. I think Imps will walk rather than cough up too much money for Altadis
PM: And what about these rumours that Altria, the owner Philip Morris, might come in for Imps?
NH: they are very interesting and i reckon there is something to them
NH: Deutsche Bank have published a note on this today
PM: What does it say?
NH: they reckon it is finely balance situation and Altria could well make a move
PM: Can you paste some highlights?
NH: of course
NH: Imperial’s share price has risen by slightly more than that of its potential target,
Altadis, since news of a bid approach broke on Thursday. That’s because the
market now seems to be getting more excited about the prospect of Altria making
a bid for Imperial, possibly in conjunction with Altadis. Whilst we think Altria has to
consider its moves very carefully, we would still not go as far as to say a bid is
‘likely’. But we’re not saying it’s ‘unlikely’ either – all in all this seems like quite a
finely-balanced, fascinating situation.
NH: We don’t think Altria should pay more than £25 for Imperial
Above this price, even if a deal is earnings enhancing we doubt that Altria would
be able to beat its cost of capital in year three. Just because Altria could afford to
pay more than this doesn’t mean it will (as those who bought Gallaher shares
above 1,200p last December will probably remember). One issue that Altria would
need to deal with is Imperial’s loyal shareholder base, which might feel that an
Altadis acquisition could bring as much – if not more – long-term value as a sale to
Altria.
NH: also DB has some interesting things to say on anti trust issues, which some people reckon makes a Altria move for Imps a non starter
NH: We think an Altria acquisition of Imperial would almost certainly require some disposals of
brands to satisfy antitrust concerns.
NH: In addition to Germany, Australia and the US (not shown, but where
Altria has a 51% share and Imperial, through Commonwealth, will hold 4%) Poland and
Slovakia look to be the markets with the biggest market share issues (but these two are not
significant profit sources for either company). Belgium, Greece, the Netherlands, and the UK
are among other markets which could require some action to be taken.
NH: An Altria / Imperial bid would therefore not be without difficulties, and would likely make it
risky for Altria to try a truly hostile bid. But we think it might be possible for these issues to
be managed, particularly if buyers were lined up for assets in advance (PMI took this
approach in 1999, when bidding for RJR’s international tobacco assets – though on that
occasion Gallaher was going to take the whole of RJR’s European business).
NH: Given that we think cigarette markets operate on country-by-country – as opposed to a pan-
European – basis (ie different tax rates, brand preferences, distribution systems, etc) we
think a deal would be unlikely to be blocked on the basis that Altria’s overall EU share is too
large, although we can’t rule that risk out altogether.
PM: OK, let’s turn away from the blue chips
PM: What’s happening?
NH: the big news is First Choice
NH: shares up 27.25p to 311.25p on news of merger with Tui of Germany
PM: More like a reverse takeover of First Choice by Tui
NH: having looked at the statement again, I think you are right. It is a reverse takeover
NH: we were chasing this story hard last week. We knew there was something going on, unfortunately we were put of the scent by sources claming it was a deal with the Swiss billionaire who owns Monarch airlines
PM: But at least we alerted readers to the fact that something was happening. — and it had a continental sniff about it.
NH: indeed
PM: So, are Tui paying a fair price?
NH: well, analysts reckon Tui shareholders are getting the better of this deal
NH: here’s a note Morgan Stanley sent out to clients this morning
NH: The benefits to TUI shareholders seem clear to us.
The deal cements TUI’s position as Europe’s number 1
tour operator, generates substantial synergies, gives it
control over First Choice’s attractive specialist
businesses, benefits from First Choice’s high quality
management team, and recapitalizes its balance sheet.
TUI management is finally taking some radical action.
NH: The benefits to First Choice shareholders are less
clear to us. On the positive side, there is a small control
premium being paid (we estimate 10-15%), substantial
synergies available, and a significant margin turnaround
story in the TUI business it is merging with. However, the
investment proposition has changed materially, as First
Choice’s exposure to riskier and lower growth
mainstream tour operating increases substantially, and
the story of high organic growth with lots of bolt-on deal
is diluted. While there may be more upside from margin
recovery in TUI’s poor performing businesses, there is
little visibility or certainty in this rather binary outcome.
PM: Hmm. Aren’t Morgan Stanley acting as one of Tui’s advisers on this deal
NH: they are
NH: before we go Paul has some stuff on Wm Morrison that he thinks is interesting
PM: yeah — how they doing this morning?
NH: down 2.5p to 316p
PM: Hmm — not what i was expecting
NH: why’s that
PM: Short, but interesting note on Morrison from Alastair Johnston at JP Morgan – subtitled “Hiding the bid defence?”
NH: Like Cadbury’s
PM: It’s on the back of this strategic review announced last Thursday
NH: “The food specialist for everyone” Hmm
PM: Well Johnstone at JP Morgan is drawing attention to the fact that they are selling a big lump of real estate – up to £1bn. JPM had a meeting with the management on Friday and afterwards they have said this:
PM: They are selling a significant chunk of real estate: £0.5-1.0bn
they estimate. Apparently they are not just selling the investment
properties themselves but also the stores attached to them. We are
perplexed by the way this was communicated at yesterday’s
analyst meeting; it was as if they were trying to hide their bid
defence. We wonder if this implies that they are perfectly happy
for private equity groups to look at them: alternatively they might
not want to appear to be pandering to market pressure to sell
property.
NH: Hmm – don’t like the way it came out
PM: Yes, and Johnston adds this:
PM: We wonder if the Morrison family is increasingly viewing
their stake as a financial investment. If the mindset has
changed and they have limited operational input, having most of
one’s wealth tied up in one entity makes little sense. This could
add to private equity speculation.
PM: So they are saying “buy” and they have set a price target of 360p.
NH: Interesting – but the stock is off the boil today.
NH: Others are downgrading – Credit Suisse has cut Morrisons to “neutral” from outperform. House broker ABN Amro has cut to Hold from buy. They are both basically saying that the stock has already come a long way over the past three months.
NH: So time to take some profits.
PM: Ok — i’ll shut up
PM: Right — that’s it for today. Thanks for joining us. Do come back tomorrow at 11am for the next edition of Markets Live
NH: bye