Markets live chat transcript for the chat ending at 11:43 on 24 Apr 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, Alphaville’s daily discussion of what’s moving and why.
PM: Neil Hume is with me
PM: In person, but not pixels
PM: While we are waiting for him I can tell you that the london market is not looking a pretty sight this morning
NH: ok. finally logged in. having real IT probs at the FT at the moment
PM: I know
PM: My hands are shaking
PM: Blackberry server has been down since early yesterday
PM: Crackberry withdrawal symptons
PM: Worse than nicotine
PM: Anyway — let’s got on with it!
NH: Very strong smell of burnt fingers wafting round the market this morning
PM: 
?
PM: Really?
NH: Yep. Some punters are nursing some badly charred digits today
PM: In what?
NH: Yell
PM: Ah, Yelp!
NH: the word went round on Friday that the company had asked its financial adviser, Goldman Sachs, to draw up a defence document to see off a possible private equity bid
NH: we checked out the story and it was played down by sources close to the company
PM: 
PM: A good
NH: Anyway, that did not stop the rumours from swirling round the market yesterday
NH: I think the stock closed up 1% on the day
NH: and this morning the company has stunned the market with a HUGE profits warning
PM: 
PM: What’s the stock doing??
NH: Down nearly 20% - off 119.5p at 493.5p
NH: Needless to say that is the biggest faller in the FTSE 100
PM: Ouch - -that is a big fall
PM: What’s gone wrong?
NH: the company has warned that it expects just 3% organic growth from its US operations in 2007/08
NH: The US operations account for around 50% of Yell’s turnover and the US biz was supposed to deliver organic growth of 8 to 9% this year
PM: So a big miss
NH: yep
PM: What’s caused it? Migration of classified advertising onto the internet?
NH: I think that must have played apart, although the company is blaming increased competition.
PM: So what are the scale of the downgrades
NH: large
NH: Numis Securities has cut its year to March 2008 forecast from PBT of £480m, or EPS of 39p, to £440m/36p – that’s an 8% EPS downgrade
PM: Obviously that’s large but is that enough to justify a 20% fall in the share price?
NH: it is because the US had been Yell’s main engine of growth.
PM: I see
PM: Any analyst comment?
NH: yeah, got a really aggressive note from Goldman Sachs, which will make uncomfortable reading for Yell shareholders
NH: it is forecasting no growth in the US from 2009
NH: and has lowered its target price to 454p
PM: Jeepers
PM: Can you paste?
NH: yes
NH: We have limited visibility on the future development of the US competitive environment including the potential impact of: (1) companion book launches, (2) selective price discounting by the incumbents, (3) newly launched independent books, and (4) online migration. Thus, we are downgrading our US organic revenue forecasts to 3% in FY08 and 0% in FY09 assuming flat US revenues thereafter.
NH: We assume US margins will remain stable yoy in FY08E at c.29% before drifting down to the 25% level longer term. We leave our estimates for the UK and Spain unchanged at this point. This translates into an earnings downgrade of 8% in FY08E and 14% in FY09E. On our new estimates the stock at yesterday’s close (612.5p) trades on 17x calendar 2007E P/E and 15.5x in 2008E, in line with the sector on 15.6x 2008E.
PM: That is extremely aggressive for a Footsie stock
PM: Must be getting close to the Footsie relegation zone
NH: a billion off its market cap will take Yell to about £3.5bn. that’s uncomfortably close to the relegation zone
PM: Any chance the a private equity group might take advantage of today’s fall to launch an offer?
NH: funny you should ask that because the Goldman note touches on just that subject
NH: pasting
NH: Our LBO sensitivity implies IRRs above 20% assuming a potential bid around the level of our new price target of 454p (at 8x leverage and 7% net interest).
PM: That’s unlikely to make shareholders smile
NH: indeed
PM: OK. Let’s turn to the wider market
NH: FTSE 100 down 46.6 points at 6,433.1
NH: Obviously impacted by the poor performance of Yell
NH: others factors weighing on the index are Barclays, off a further 15p to 718p.
PM: Why?
NH: well it looks increasingly likely that it is going to win ABN Amro
PM: And that’s bad?
NH: it means Barclays won’t be bid for
PM: True
PM: Also, we should point out that he market has clearly been rattled by these comments from the monetary policy committee coming out of a treasury select committee meeting.
NH: Yes, Merv and co were up – and they’ve got everyone jittery about inflation again.
PM: Also public finances deeper in the red than expected. Biggest monthly shortfall on record – public sector net cash requirement for March.
PM: This is partly the result of a sharp fall in corporate tax receipts – apparently there were heavy repayments during the month to companies that had overpaid last year – and that’ skewed things.
NH: Hmm – skewed the market as well – Footsie was up strongly at the opening. Turned on its heals since.
PM: What other Footsie movers are souring sentiment
NH: Astrazeneca under pressure again
NH: stock off another 62p to £27.70
NH: loads of research out this morning and it all says the same thing
PM: What, that AZN has grossly overpaid for that US biotech they bought yesterday?
NH: MeddImune you mean.
PM: yes, that’s the one
PM: In case you missed it AZN are paying $15bn for this thing and it only made $70m of profits last year
NH: here’s a flavour of the comments that are being made on the acquisition
NH: this is from JP Morgan
NH: We believe many investors have been attracted to AstraZeneca by
the possibility of near-term cash generation being returned to
shareholders. In our view the purchase of MedImmune makes that
outcome highly unlikely.
NH: Although the buy back program looks secure for 2007, we expect
a significant reduction in 2008 and beyond, with very little scope
for increased dividend.
NH: We expect AZN to generate $6.2bn of
cash in 2008, but assuming a modest repayment of the debt and
maintaining the dividend cover, leaves the share buy back
program halved to $2bn going forward.
NH: On our numbers the acquisition is 2% accretive in 2010 assuming
$500m in synergies. Given the high reliance on cost avoidance we
believe this assumption carries significant risk. Synergies of just
$300m would leave the deal 1% dilutive.
NH: In our view the MedImmune pipeline looks highly speculative.
Out of the 45 projects in development, two are follow-ons to
marketed assets and three have entered Phase 2. The rest are still
in early phase development.
PM: That’s quite bearish
NH: BUT the main reason for this morning’s weakness is that fact that the Spanish market is being crushed
PM: Goodness
PM: Can we get the IBEX up on our screen?
NH: yep, index down 2.7% this morning
PM: That’s a big drop — what’s triggered it?
NH: construction stocks. They are being hammered.
NH: for example Sacyr are off 6.5%, Ferrovial are down 3.2%, Acciona has taken a 2.5% hit and Acs has also lost 2.5%
PM: Eh? Why are they being picked on?
NH: to because of a company called Astroc, which specialises in holiday apartments, hotels and retirement properties.
NH: it shares have plunged 60% in the past week as fears have grown about its financial position
NH: Now this fall has triggered concerns that the Spanish real estate bublle could be about to burst
NH: and that would be really bad news for European markets
PM: This is v v interesting
NH: traders have long suspected that Spain is the weakest link among all the European markets
NH: and that its banking sector could get into trouble if the real estate sector takes a wobble
PM:
PM: Why exactly?
NH: the Spanish banks have extended big loans to these constructions companies, which have in turn embarked on a domestic and international buying spree
PM: Of course. Ferrovial bought BAA
NH: that’s right, and remember the bid battle for utility company Endesa. It ended up being scuppered by acciona buying a stake.
NH: what’s a construction company doing building a stake in a utility company???
PM: Absolutely!
PM: Neil’s generally had it in for Spain for months now
NH: I have. been staggered by the way the Spanish govt blocks foreign takeover and changes the rules governing the market
PM: 
NH: anyway this all very worrying
NH: this is not an emerging markets wobble, but one very much closer to home.
PM: Does this all go back to Spain joining the Euro?
NH: i think it does.
NH: overnight, Spanish interest rates plunged to that of the Euroland level
PM: Any everyone in Spain thought money had become FREE
NH: and surprise, surprise they took advantage and went on a huge spending spree
PM: on borrowed money….
PM: So which stocks in London have big Spanish exposure
PM: Where’s the contagion?
NH: Barclays has a big banking network in the country
NH: First Choice Holidays has a large Spanish division
NH: but perhaps the most interesting one is Taylor Woodrow
NH: has a large housebuilding operation in Spain
NH: and if the economy does wobble it may make a counter bid for Woodrow unlikely
PM: By way of background, we should explain that Woodrow has agreed to merge with George Wimpey but everyone thinks Persimmon is going to gatecrash the party with a higher offer
NH: yep. but people are starting to hav doubts. for one Woodrow has a US exposure. and we all know what shape the housing market is in north america
PM: So what are Woodrow shares doing??
NH: down 14p at 494.5p
NH: Wimpey also under pressure, off 14.5p at 604.5p
PM: Hmm — as I say, that’s all very interesting — the Pain in Spain
NH: just got some interestinng stuff from Spain
PM: Do share
NH: this appeared in Expansion this morning
NH: 30% of Spanish estate agents will be wiped out by downturn
An article in the Spanish financial daily `Expansión’ quotes ?scar Martínez -
president of the Association of Property Experts (Asociación de Expertos
Inmobiliarios - APEI) - as saying that some 30% of the 60,000 estate agencies
estimated to exist in Spain could go out of business in the coming property
market slowdown. According to Martínez, the fall in demand for property, and an
expected increase in regulation by both national and regional authorities mean
that we can “expect a radical change in the Spanish estate agency business in
the coming months.”
PM: 30% of Spanish estate agents to go to way !?!?!
PM: Shouldn’t
PM: Neil’s on the phone …
PM: Bear with us a mo….
PM: Sounds VVVV interesting
PM: 
NH: OK. off the phone
PM: All ears (and eyes)
NH: Slough Estates
NH: sticking out like a sore thumb
PM: THis is RAW info i assume
NH: it is
NH: everything else in the property sector is down because of events in Spain
PM: Just getting the price up….
NH: but Slough is up 18p at 774p
PM: 2.4% higher
NH: volume is 3.8m shares
PM:
PM: Bear with us for mo — this is a breaking market story
NH: just checked and 3.9m is the usual daily turnover in Slough
PM: Er, so what’s the story ????????????????
NH: rumours of a 800p a share bid
PM: right — that’s RAW infor
NH: it is and the name in the frame is British Land
PM: Ok — British Land
NH: not sure if that makes sense
NH: for what its worth our property correspondent Jim Pickard points out that there has been a flurry of deals in the industrial property space in recent months
NH: however, most of these have been private deals and involving companies worth around £500m
PM: This would be a lot lot bigger ….
PM: Slough has a market cap of just over 3.5 billion
NH: it would be
NH: just to get back to the recent deals
NH: macquarie bank acquired Akeler and before that bought arlington
NH: another active buyer has been Prologis, which develops huge industrial warehouses
NH: you may have seen one of its developments on the M1 near Northampton
PM: Crawling past…
PM: So what do we think on this. How RAW is it??
NH: its raw but it can’t be ruled out
PM: Can you put it on the bandit scale?
NH: i can.
NH: 
PM: Hmm — ok
PM: Let’s get back to some of the live situations
NH: I think we should have a look at AllianceBoots
PM: yes, lot of action in that since we last spoke online
NH: it looks like it is game, set and match to KKR and Stefano Pessina
NH: after picking up 49m shares last night, they have swooped for a further 40m shares at the new offer price of £11.39 this morning.
PM: So what stake do they have now?
NH: well, the takeover vehicle, AB Acquisitions, now has 10.5%
NH: added to the stake of Pessina that gives that 25.5%
PM: And that’s enough to block any bid tabled via a scheme of arrangement
NH: it is.
PM: can’t rearrange a company if you dont have 75%
PM: Tax implications etc etc
NH: so that practically rules out a counter bid from Terra Firma
PM: So — the Alliance Boots bid battle really does appear to be over
NH: unless Hands offers so much that KKR and Pessina have to accept
PM: Yeah — but fact is — this was fun while it was running…
PM: What are the shares doing?
NH: up 2p at £11.28.5p
PM: Below the offer price then
NH: indeed. i think that tells us all we need to know
PM: ok. Anything more speculative?
NH: there has been some “educated” buying of Greene King this morning
NH: its shares are the second biggest riser in the FTSE 250 at the moment, up 17p at £10.76
PM: Why?
NH: rumour is that the pub operator is looking to spin-off its brewing division
PM: And is that likely?
NH: Not sure. I always thought GK was wedded to its vertically integrated structure
NH: But you never know. The company announced last month a spilt of its pub busineses, into local and destination pubs. So perhaps something with the brewing biz could follow.
PM: Ok thanks for that
NH: just to get back to the Slough stuff. that lastest rumour, and i stress this is very RAW, is that B Land will use the proceeds from the sale of Meadowhall to bid for Slough
PM: Just looking at the BL statement
PM: They haven’t actually raised any money on this — as yet
NH: that’s right. they have just appointed agents to find partners to invest in the gian shopping centre
PM: Valued at £1.7bn
PM: Right — we are going to finish off now.
PM: But before we go Neil has a request — rather than a tip
NH: been looking at this thing called accident exchange. was very strong on Monday and is up a further 28.75p, or 26.5%, at 135.5p
PM: Big unexplained move
NH: i want to know whether this is anything more than a dead cat bounce
PM: Is it a 
PM: The stock has come all the way beck from 400p at the start of the year
PM: Went to a low of 85p
PM: Now suddenly recovering — uup 26% this morning
PM: or something else??
NH: it has issued two profits warnings since Xmas
PM: Let us know
PM: paul.murphy@ft.com
PM: or
PM: neil.hume@ft.com
PM: Send the spam to him
NH: thanks. see you tomorrow
PM: Thanks for joining us!
PM: Next edition of Markets Live at 11am Wednesday
