Markets live chat transcript for the chat ending at 11:51 on 5 Apr 2007. Participants in this chat were: Paul Murphy (PM) Stacy-Marie Ishmael (SMI) Neil Hume (NH)
PM: Welcome to a Markets Live here on Alphaville
PM: Neil Hume should be with me shortly …
PM: Usual tech gremlins
PM: So, in the meantime, hoping to get a special guest on the show
PM: Last minute arrangement, brings us …
PM: Stacy-Marie Ishmael
SMI: Morning all
PM: 
PM: Er, Stacy — no pic!
SMI: Icon very misleading, although I do usually wear black
PM: Ok, we;ve got a quick bit of breaking news.
PM: Can you share Stacy?
SMI: Looks like KKR has pulled out of the bidding for J Sainsbury
SMI: we’re waiting for confirmation, but the story on the wires is KKR was worried about competition pressures
PM: Supposed this was inevitable, what with KKR pursuing its takeover of Alliance Boots
PM: Bound to run into competition issues
PM: Got any news on how Sainsbury stock has reacted?
SMI: Down slightly – down 6p at 554.5.
PM: Vol?
SMI: Not huge as yet – about 8m shares
PM: Not huge for such a headline takeover situation
PM: Thanks for that.
PM: Suppose this could become a new cross sector theme — PE houses running into competition issues
SMI: Natural consequence of these increasing megabids.
PM: Hmm. To date PE firms have been able to argue that cos they manage portfolio firms independently, comp issues are not relevant
SMI: But on Boots/Sainsbury’s, they’ve clearly accepted there’s an issue there
SMI: Wonder where this leaves the Celesio speculation? That German pharma
PM: Hmm. Dunno.
PM: You see this Merrill Lynch note on Morrison and Sainsbury?
SMI: You mean tweedledee-tweedledum
PM: yes
SMI: Didn’t give it a lot of thought though. That analyst, John Kershaw, seemed to knock down his own argument.
PM: That’s true.
SMI: But basically he has used a Tweedledum, Tweedledee argument
SMI: Saying that if private equity is ready to pay 550-575p for Sainsbury, then applying the same thinking to Wm Morrison implies a price of between 350p and 375p
SMI: Let me find the note
SMI: Here’s the two key pars
SMI: The speculation continues (to be exhausting) as to whether \’CVC and Co\’ will bid for JS (JSNSF, 556p, A-2-7): the recent \’we need £1bn\’ interjection by the pension trustees means that a deal that looked possible at 575p on our numbers may now be a stretch at 550p. We assume that £1bn is an \’opening salvo\’ and that negotiations are ongoing but with less 2 weeks to go to the deal deadline of 13th April, the pressure is mounting. And not just on CVC and Co: with Mr. Tchenguiz\’s R20 vehicle building a stake of 4.65% and paying as much as 550p to do so, even if the current \’interested parties\’ walk away JS may not be in the clear. It seems that \’serious money\’ sees value around this level in any event.
SMI: So if JS is worth 550-575p in a leveraged opco-propco structure (assuming a 6.5x EV/EBITDA exit multiple and a mid-to-high teens IRR), what\’s Morrison – no doubt everyone\’s idea of Tweedledee to JS\’ Tweedledum – worth? In this report we explain why we are comfortable that our 2007-10 forecasts for Morrison are 10-15% ahead of consensus. Then, using much the same assumptions as in our LBO valuation of JS, we show that based on its disclosed pension deficit of £200m, a leveraged buyer could offer c375p for Morrison. As a sensitivity case to this, we also show that assuming a deficit of c£500m that is paid-down over three years we can see 350p. In this second scenario we do not cut capex to fund this (as we do in the case of JS) which may be too aggressive as the Morrison opco runs heavily cash negative in the first 2 years but, for a cost, the bidder could always roll interest and/or construct flexible funding structures.
PM: So why is Merrill’s not a buyer of Morrisons – it’s just got a “neutral” rating on the stock?
SMI: Well that’s the point. Here’s what Kershaw says:
SMI: First because we are dealing with \’in-extremis\’ funding scenarios that have yet to deliver a bid on JS, let alone publicly disclose an interest in Morrison. Second because this is all based on our Morrison forecasts which, for all we can defend them, are 10-15% ahead of consensus numbers and seem very likely to be well above any sensitivity case a funding bank may choose to consider. Third because Morrison\’s current trading is weak, boding ill (in our and any bidder\’s mind) for a recovery that is less \’mature\’ than JS\’. And fourth because this weak trading may mean that Marc Bolland\’s (Morrison CEO) strategy – which if taken literally is more a \’revolution\’ than the \’evolution\’ he claimed, almost creating a \’Waitrose for the Workers\’ at Morrison – may need to be as radical as it sounds.
PM: Right. Thanks.
SMI: No, wait for the pay off line …
SMI: These all mean that although the consensus is that where Tweedledum goes, Tweedledee will follow, we doubt a bid will emerge for Morrison any time soon.
PM: Brilliant. Thank you Neil and thank you Mr Kershaw for wasting about 5 minutes of my life.
SMI: Paul, my dear
SMI: I look nothing like Neil
PM: No– thank god
SMI: Misleading icons not withstanding
PM: Neil is here in person
PM: But still got tech issues
NH: morning been caught in IT hell
PM: Stacy’s been holding the fort tho
PM: Any other thoughts Stacy — or are you jsut thinking of your hols, which start tomorrow?
SMI: dreaming of island paradises
PM: Hmm.
SMI: And it looks like the markets are as well – there’s nothing much going on
PM: Thanks for that Stacy but actually ….
NH: right let’s get down to business
PM: Belated business
PM: How’s it looking out there?
NH: everything is on hold ahead of the interest rate decision at 12.00pm
NH: FTSE 100 currently 4.5 points lower at 6,360.2
NH: actually I reckon the market is likely to remain quiet whatever the Bank of England decides
PM: What, because of the long easter holiday weekend?
NH: Partly but no one wants to be long ahead of the US pay roll figures, which are being released tomorrow even though Wall Street is shut
PM: That’s rather odd?
NH: it is. Mind you that is only half the story
NH: The London market is shut on Monday, but Wall Street is open
NH: So US investors will have a chance to react to the job figures a full day before UK investors
PM: Hmm. No wonder people are trimming long positions
NH: indeed
PM: Ok, so what has caught your eye?
NH: BP and Royal Dutch Shell
NH: among the best performers in the FTSE 100 at the moment
PM: Benefiting from the strong oil price? — despite the dip that came with the hostage release from Iran …
NH: certainly playing a part
NH: but a note from ABN Amro has also stirred interest in the BP and Shell
PM: BP currently up 6.5 at 554.5p and Royal Dutch Shell up 10p at £16.85
NH: It’s a very interesting note, though I am not sure you will like it
PM: Why every not?
NH: well it is one of these fantasy M&A pieces
PM: ZZZZzzzzzzzzzzzzzzzzzzzzzzzzzzzz
PM: Fantasy
PM: That’s a fantasy corporate financier
NH: well it focuses on whether the European super majors – BP, Shell and Total – should do the splits
PM: What, split their downstream and upstream businesses?
NH: yep
PM: Haven’t we been here before?
PM: Like many many times
NH: .I think Cazenove suggested BP should demerge its downstream biz last year
PM: So what’s the conclusion on this occasion?
NH: refreshingly ABN reckons break-ups woul destroy value unless the demerged upstream business was considered a takover target
NH: however, it reckons mergers would create value
PM: Interesting. And we know this is something BP considered
PM: But ive jsut got to say I am SOOOOO sceptical of this
NH: what you think the Americans would got bananas and block it??
PM: I certainly do — if you look back at al the big US mergers that BP did — Amoco etc
PM: Every one cost them months and months and months with the US authorities
PM: Such a politically sensitive issue in the US
PM: But i will suspend my scepticism for now ….
NH: Good. ABN reckons investors looking for exposure to the possibility of a mega merger in the oil sector would be well advised to buy Shell
NH: in the event of a merger with BP or Total it reckons the shares could hit £30 – almost double their current price.
PM: Can you paste some highlights?
NH: We believe that demerging a European super-major would destroy economic
value but might benefit shareholders indirectly if the upstream part were
seen as a takeover target. Merging super-majors appears a better strategy.
NH: Despite its greater complexity, we believe that merging super-majors is a better
strategy. Key is that it rests upon a foundation of solid industrial logic, whereas the
alternative of demerging does not, in and of itself.
NH: In a mega-merger, shareholders would benefit because economic value would be
created by the merger, in and of itself, in our view. In a demerger, by contrast,
shareholders may benefit despite the fact that the transaction itself would destroy
economic value, with our estimates suggesting that the loss could be up to US$6bn.
We see no paradox in this. A demerger would add shareholder value if it raises
expectations that an acquisition of the upstream business, which would add economic
value, will occur subsequently.
NH: Royal Dutch Shell offers the best exposure to our mega-major scenarios
We have updated our analysis in \’Mega-major\’ to take account of recent movements
in share prices and earnings forecasts. We believe that shareholders seeking share
price exposure to the possibility of a mega-major should buy Royal Dutch Shell (Buy,
standalone price target of £21.50/share), for which the probability-weighted value of
our merger scenarios is highest. In the event of a merger with BP or Total, we believe
its shares could be worth more than £30 after possible reratings.
PM: Some interesting stuff to chew over
NH: even if you are sceptical
PM:
PM: What else is moving?
NH: Intercontinental Hotels Group
PM: Hmm, shares up 13p at £12.91
NH: there was a bit of buzz around for the company late yesterday
PM: The story being?
NH: that the Barclay Brothers, who have built up a 7% stake, and a well know private equity financier had got together to run the numbers on a possible bid
NH: the story has got a bit further this morning
PM: Details, please..
NH: well this is what one broker told me earlier
NH: that the Barclay Bros could fund a bid on their own
NH: that they could sell the Telegraph group to help finance it
PM: Ah, this broker friend of yours has been reading the Independent
NH: i don’t so think
PM: He has — there was a column by Stephen Glover in the media section on Monday say precisely this
PM: That the Barclays were going to sell the Telegraph and use the proceeds to bid for IHG
NH: so my source must be a closet Indie reader
PM: Yes, not many of those around
NH: and according story they would try rebrand some of the IHG portfolio in an attempt to raise margins and improve occupancy
PM: Ok …
NH: actually a broker has issued a positive note on IHG this morning
NH: JPMorgan has increased its target price to £14.20
NH: they reckon the hotels IHG have put up for sale could fetch £1.8bn – that’s around 40 per cent of its market cap
NH: and remember these are some of the upmarket hotels
PM: Properties the Barclays would know well through their ownership of the Ritz, etc
NH: Hang on a mo, will paste some highlights from the note
NH: We are raising our January 2008 SOTP-based price target to 1420p
from 1073p and reiterating our OW. InterContinental’s highly
attractive operating model, valuation discount to peers, strong
pipeline and value release potential from the final tranche of asset
sales should continue to drive outperformance in 2007, in our view.
NH: Poor performance of owned and leased assets inflates group
multiples. In 06 the remaining owned/leased assets generated a
pre-tax ROIC of only 3%. Following confirmation that the
company is looking to exit these hotels, we believe they should
trade at market value, implying £1.8bn (consensus £1.2-1.5bn).
NH: New supply pipeline represents significant value creation. We
estimate that the current pipeline alone (assuming no new
signings) implies an annual EBIT CAGR of 9% to 2010E. In our
view the market has yet to fully factor this into valuations.
NH: Valuation discount to US peers remains: stripping out the
owned assets at £1.8bn, the managed and franchised business is
trading on 9.8x 08E EV/EBITDA versus Marriot on 11.9x (13.5x
ex Timeshare business) and Choice on 11x.
PM: Hmm. Can see the argument behind the Barclays building 7& holding now
PM: Did you mention what the stock was doing this morning?
NH: yeah we have already mentioned it but for those joining us now stock up 12 at £12.90
PM: moving on, I see Scottish & Newcastle are weak this morning
NH: yep been hit by a flurry of profit taking
NH: before this morning’s pull back stock had risen 16% in five trading sessions
PM: OK, price currently down 9p at 597p
NH: Dresdner Kleinwort has downgraded its rating this morning
PM: What are they saying?
NH: that Diageo and SAB are unlikely to bid for the company
PM: Oh! Why’s that?
NH: because they both have no desire to buy into the mature, competitive western european drinks market
PM: But hang on a minute, the market rumours is that S&N gets carved up like Allied Domecq, with Diageo taking the UK biz and SAB the stuff in Russia and Eastern Europe
NH: I know. I fear Dresdner analyst Matthew Jordan may not be a regular reader of Alphaville
PM: Well I dont think we want him as a reader
NH: anyway shall I paste a few pars?
PM: If you must
NH: On a takeover basis our sum-of-the-parts valuation is 675p, but we ascribea low probability to a predator taking over S&N. We do not believe that
Diageo or SABMiller would have any desire to increase their exposure to
Western Europe; Heineken would face unacceptable regulatory hurdles;
and Carlsberg\’s management still has too much to prove. That leaves
private equity as the only realistic bidder – but would it see S&N\’s zero
cash tax rate as sustainable?
NH: We do not believe Diageo would bid for S&N. The regulatory environment would
not prove problematic, but Diageo has avoided acquisitions of brewers in mature
markets.
NH: A more obvious target for Diageo would be Fosters due to its attractive
wine business, but Diageo is reluctant as it would lower its group sales growth
We equally disbelieve a SABMiller bid for S&N. Although SAB has made some
developed market acquisitions (Miller, USA and Peroni, Italy) these were
turn-around opportunities. S&N has already been turned-around. CFO Malcolm
Wyman last week expressed relief at SAB\’s limited exposure to Western Europe
PM: Interesting that Dresnder thinks Diageo is interested in Fosters
NH: it is. beer is obviously attractive to the Diageo guys
NH: Hang on a minute don’t S&N own the rights to Fosters in Europe
PM: Er, yeah theydo
NH: ummmmmmm
PM: They bought it last year for £310m
PM: While we are on the subject of beer I heard you chatting about Mitchells & Butlers earlier
NH: yes I was
PM: This is the pub company being stalked by the ubiquitous Robert Tchenguiz
NH: it is. He is reckoned to have a 12% stake
PM: So what’s happening
NH: well the shares have fallen12.5p to 781p this morning on the back of a Merrill Lynch downgrade
PM: which says….
NH: there is no more upside in the share price unless they company adopts a prop/op co structure as Mr Tchenguiz wants them to
PM: And presumably Merrill thinks this won’t happen
NH: indeed. Merrill says M&B should go on the offensive and explain to shareholders why it would not be in their interest to mortgage their property assets
PM: Mr Tchenguiz will not be a happy fellow
NH: yep. If he does not get his way you imagine him calling a EGM and trying to oust management
PM: Yeah, there’s said to be plenty of bad blood between the two of them
NH: I think Mr Tchenguiz was really angered by the way M&B rejected his offer for the company last year
PM: Yes I remember that. Aggressive stuff
PM: I will paste some of the note??
PM: We are downgrading M&B from Buy to Neutral. It has exceeded our former 750p
price objective and we would require 10% upside from current levels to maintain a
Buy. We cannot get to 880p per share on a 12 month view on any valuation
metric except propco/opco and we believe the stock should trade at a material
discount to our 909p propco/opco value due to execution risk.
PM: We confirm our view that we doubt M&B will convert to a REIT. But, we think it is
mulling a partial sale and leaseback to take short-term advantage of current pub
property values and to appease a vocal minority of its shareholder base. We see
this halfway house as pleasing no-one though – this vocal minority would like to
see M&B unlock the entire property value, whilst we believe a significant
proportion of investors, with a more long-term outlook on the shares, would prefer
M&B management to maintain the existing model of commonly owned property
and operations.
PM: On May 22nd, when it has promised the market it will announce its strategy on
REITs/property etc, we believe management should reaffirm the long-term benefits
of its existing business model and turn down the opportunity to sell assets.
Continued capital investment and strong management should drive long-term
growth in profit per pub, leading to long-term property value creation and so allowing
management to return significant cash to shareholders over time
PM: Looks like May 22nd will be a date to put in the diary
NH: ok. off the phone. justhad 
on.
PM: 
PM: 
NH: he is looking at Jessops
PM: 
NH: reckons it could be a good recovery play
PM: Well it was a recovery play if you were in first thing this morning!
NH: i reckon it is more of a binary play
NH: 0 or 1
PM: Option money
NH: no other outcome
NH: its either going under or it will be bid for
NH: the status quo will not remain
PM: For what it’s worth, the shares are trading 4p higher at 23p in the middle at the moment
PM: Okay — any other speculative situations you want to draw to our readers’ attention?
NH: Ladbrokes
NH: the old CVC Capital buyout rumour has been dusted down and given a fresh airing this morning
PM: Oh, not that one again
NH: afraid so
NH: nonetheless shares up 14.25p at 420.5p – biggest riser in the FTSE 250
NH: actually the stock was probably due a bounce
NH: trading over 450p a share in Feb and fell all the way back to 400p
PM: So a few bargain hunters coming in
NH: yep
PM: Right, before we close up for Easter ….
NH: See you put Bristol & London on the list for today.
PM: Yeah, it did catch my eye.
NH: I’m not surprised, with that bearish eye of yours.
NH: Shares are down 5p at 27.5p.
PM: So, go on what’s the tale?
NH: Well it’s come out with prelims – this is from the UK’s “leading specialist provider of prestige motor cars to drivers following non-fault accidents.
PM: So you r Square Mile boyo who’s rapped yer Porsche round a tree and it really wasn’t your fault, then you might get a fitting courtesy car from this lot?
NH: Yeah, basically
NH: Except that there doesn’t seem to be much of a market in City boyos wrapping their porsches round trees WITHOUT it being their fault.
PM: Go on
NH: Well the chairman, Bob Woods, is trying to be upbeat. Here’s an extract from the statement:
NH: “The difficult trading conditions highlighted within my September interim report continued through much of the second half of the year. However we are encouraged by the initial success of the fleet management opportunities, which we believe will provide the opportunity of business initiatives away from our more traditional sources. In acknowledging a difficult and challenging period in what can only be described as a very competitive marketplace, we look to the future with optimism.”
PM: Eh, so they are looking to change their business model and “look to the future with optimism.” ??
PM: What makes me think the word “delusional” should be somewhere near this statement?
NH: Well, yes. Apparently during 2006 Bristol & London’s “fleet utilisation level fell short of its predicted target.”
NH: Basically it took delivery of 100 mercs and BMW’s before it had any customers and when the customers failed to materialise it had to sell these cars at below book value.
NH: genius
PM: 
NH: Then it got into an insurance deal to provide Aston Martin, Rolls Royce, Bentley, Ferrari, Lamborghini and Porsche replacement vehicles.
PM: Let me guess the next bit – costs were higher than expected and there weren’t enough customers.
PM: More genius
NH:
NH: I should add that they say this arrangement is bearing fruit and its now moving into high end fleet and accident management. So there’s hope.
PM: Sounds like one to avoid
NH: Well, a lot of this is in the price – come all the way down from 100p in about may last year. Now 27.5p. At some point there’s going to be value here.
PM: Hmmm. Car crash, stock crash
PM: Right — that’s it. Thanks for joining us today. And thanks to Stacy for covering for Neil earlier.
SMI: My pleasure
NH: i have now discovered what the problem was
NH: some email mistakenly sent to everyone in the pearson group clogged up the whole system
PM: great
NH: we had people replying to say the mail was not for them and it snowballed out of control
PM: Amazing how many people just don’t know the very basics of how emails work
NH: it amazes me how people have time to respond to them
PM: Oh, our great new digital world…
PM: Anyway, systems permitting we will be back on Tuesday for the next edition of Markets Live. Do join us.
NH: well, do join Paul and Rob Orr as i am holidaying next week
PM: Hmm — where you off to?
NH: exoctic norfolk
PM: Have a good time
NH: see you a week monday