Markets live chat transcript for the chat ending at 12:12 on 8 May 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: We’re off!
PM: Welcome to Markets Live, Alphaville’s daily discussion of what’s moving and why.
NH: hi there
PM: Extraordinary times!
PM: We had Merger Thursday and then Merger Friday
NH: And then Merger Bank Holiday Monday
PM: 
NH: And it’s still going, Reuters and Thomson have come out with loads of details, we had BAE buying Armor in the US overnight
NH: And of course the Alcoa_Alcan deal in the US — foring of an aluminium powerhouse.
PM: Yep, and we can now go ahead and break news of another apparent metals merger ….
PM: Neil’s a bit annoyed with me cos we trailed this story – without naming names – in our indispensable 6am Cut email this morning.
NH: I didn’t mind you trailing … just it’s not a Mega Bid. Good story, but not a blockbuster.
PM: Look! For you youngsters who’ve grown up on a deal a day, this bid — $4bn plus – is BIG. Just not COLOSSAL.
PM: Interesting names tho …
NH: Get on with it!
PM: Ok.
PM: The name in the stainless frame is AK Steel.
NH: Who?, you might ask.
PM: US-listed steel producer – operates seven regular plants in Indiana, Kentucky, Ohio and Pennsylvania, and another two plants doing steel tubing.
NH: actually one of the oldest steel companies in the states
PM: Currently capitalised at about $3.5bn.
NH: Shares were on the move in NY last night – clearly news leaking out. Price was up just over a dollar at $32 – move of about 3.5%
PM: And the bidder? A very interesting name.
NH: Mittal.
PM: Yep, that’s what werre hearing on FT Alphaville –Arcelor-Mittal, to give Lakshmi Mittal’s group its proper name.
NH: In terms of Lakshmi Mittal’s deal-making, this is a steel bolt-on.
PM: But it’s still worth north of $4bn.
PM: Yes, we should also say here that we are being told that Mittal will pay $40 a share – capitalising AK Steel at close to $4.5bn.
PM: Sounds a big premium to the market price and we are not sure how close this deal is to being struck – but we have real confidence in the sourcing on this one.
NH: Yes, as the American press might say, “people familiar with the matter…”
PM: Hmm. “People intimately familiar with the matter..”
NH: Careful, you risk giving too much info away on the source.
NH: Actually, those who follow the steel sector won’t be hugely surprised by this.
NH: After Mittal’s $30bn hostile takeover of Arcelor last year and then Tata Steel’s $12bn purchase of Corus people have been waiting for the trickle down effect.
PM: Last week we had SSAB saying it would buy Canadian-US pipe maker Ipsco for $7.7bn.
NH: All the second/third liners going to be hovered up.
PM: So there you have it – look to Wall Street after lunch – the suitor for AK Steel is Arcelor-Mittal, which we believe is posed to offer $40 a share, valuing the group at about $4.4bn.
NH: another US stock to keep an eye on is GPS
PM: 
PM: Tell me more — global position systems — i hate them!
PM: Sat nav stock?
NH: no. no.
NH: GPS is the catchy ticker for GAP
PM: Ah gap — the clothing retailer
NH: yep. there has been a bit of a buzz around in this one for a few weeks
NH: the talk is of a private equity bid
PM: V interesting — sounds like just heard this one
NH: i have. just been flicking through the share register and seems any deal will require the backing of the founding Fisher family
NH: they own around 35% of the company and a Fisher has just been appointed interim CEO
PM: Gap hasn’t had it easy over the past few years
PM: Tried to restructure and re-juvenate, but with out much luck to date
NH: perhaps more radical surgery would be possible away from the glare of the public markets
PM: Very interesting — thanks for that — another one to watch when New York opens after lunch our time
NH: Gap shares closed at $41 last night
PM: Did we put an AK Steel price in earlier??
NH: dunno, but it ended at $32.06
PM: Was up 3.5% — mainly spurred by Alcoa deal
PM: Ok — let’s get back to London…
NH: well, it’s a bit calmer out there this morning
NH: FTSE 100 down 35 points at 6,568.7
NH: All got very, very frothy on Friday and understandably punters have decided to lock in some profits this morning
NH: That said I think this market will go again and we will see more M&A
PM: Think you are right
PM: So what’s moving this morning?
NH: Reuters is the biggest riser in the FTSE 100
NH: shares up 26.75p at 642.25p
PM: 4.3%
NH: that follows this morning’s statement, which gives further details on the talks with Thomson
PM: and they are much more advanced than we thought
NH: indeed, much, much more advanced. in fact it almost looks like a done deal
PM: 
NH: anyway, here’s quick outline of the deal for those of you who might have missed it
NH: enlarged group to be called called Thomson-Reuters and the combined Thomson Financial unit and Reuters financial and media businesses would be called Reuters.
NH: Merger to be effected by creation of a dual listed company; Each RTR share entitled to 352.5p cash and 0.16 TOC shares. In addition, RTR will declare a dividend of 12p for 2007, 5p interim and 7p final subject to proportionate adjustment if closing occurs before year end.
NH: The Thomson family holding company would own
approx 53% of Thomson-Reuters, other TOC shareholders 23% and RTR shareholders 24%.
NH: Thomson-Reuters will adopt the Reuters Trust Principles and Reuters Founders Share Company structure.
NH: Estimates the deal would deliver
in excess of $500m of annual synergies – expected to be achieved within three years.
PM: And Tom Glocer gets the top job — lucky chap
PM: Fitting reward for his success in rebuilding Reuters’ market position
PM: (even if some of his overworked hacks don’t agree)
PM: what does the deal value Reuters at?
NH: based on Thomson’s closing price last night, 697p a share
PM: Hmm
PM: Any idea why Reuters is trading at such a large discount to the offer price?
NH: From what I am picking up, investors are worried that the regulators could block the deal
NH: after all, what is being proposed here is a merger of the second and third biggest players in the financial data market
PM: Yes, this will overtake Bloomberg
PM: Who are bound to complain to the regulators
NH: so will some of the large investment banks
NH: also, there seems to be a view that a counter bid is unlikely
PM: Why’s that?
NH: a lot of the potential counter bidders have their hands full with other stuff at the moment
NH: Murdoch is bidding for Dow Jones and our very own Pearson is splashing out just short of $1bn on some education assets from Reed
PM:
PM: Yeah, otherwise we’d be in there
NH: like a flash!
PM: Also the synergies — this deal really works for Thomson
NH: Yeah. They are talking about $500m, which few other people will be able to match
PM: What about Private Equity — surely they must be running the nos???
NH: they probably are but there is one big roadbloack
PM: Yes, the Reuters Trust and Founder Share structure
NH: they would have to convince the Trust that they were fit and proper owners of Reuters and I can’t see that happening
PM: Any analyst comment?
NH: This is from Lorna Tilbian at Numis Securities
NH: We believe that negotiations are well advanced, although Reuters cautions that ‘much has still to be resolved and there can be no assurance that agreement will be reached.’ We would be surprised if the deal fell apart this stage.
NH: Although a rival bid cannot be ruled out, given the scale of synergies on offer (and therefore healthy premium offered) and also the obstacles raised by the Founders Share, we view Thomson as the bidder best placed to secure Reuters. We believe the deal will be investigated, and would expect it to close in Q1.
PM: Neil’s on the phone
PM: He said: “this could be lively..” as he picked up his mobile …
PM: 
PM: Muzak
PM: Muzak
PM: Stock-muzak
PM: 
PM: Just reading taht Tilbian stuff above
PM: Might have to wait almost a year for the deal to close!
PM: What a boringly long wait
NH: right off the phone
NH: just been bombarded with calls about our AK Steel stuff
NH: seems to have been picked up by a couple of wires
NH: anyway back to Reuters
NH: yes Q1 2008 is a long time to wait and that’s another reason why the shares are trading at such a chunky discount
PM: Ah yes, time value of money
PM: Just before we move on — nice to have you back |Daine
PM: That an irish name?
PM: And are you a keen musician?? By chance??
PM: And good at maths?
PM: While you are wondering how we know that, what else is moving Neil?
NH: OK. Morrison is the other big blue chip riser this morning
NH: which is not surprising after the Sunday Times splashed its business section with the following story
NH: Morrison’s is next buyout target
NH: PRIVATE-EQUITY GROUPS are circling the supermarket giant Wm Morrison, triggering speculation that it could soon receive a Pounds 9billion takeover approach.
NH: Senior City sources said several of Britain’s biggest private-equity houses as well as property specialists have begun sounding out banks on their appetite to provide debt financing for a deal.
No approach has yet been made to the company, which is advised by Citigroup and NM Rothschild.
PM: what are the shares doing?
NH: currently up 11.75p to a record high of 341p
NH: volume also heavy. 17m traded this morning
NH: and I for one would not rule out the possibility of a LBO of Morrison
PM: Why’s that?
NH: because of the property
NH: remember that note from ABN Amro a couple of months ago
PM: I do
NH: claimed Morrison’s property portfolio could be worth 300p a share
PM: My problem with this story is that I can’t see Sir Ken Morrison and the Morrison family selling out
PM: And we saw with Sainsbury what happens if you fail to get the family on board
NH: true and I suppose we saw with Alliance Boots what happens if you have a 15% shareholder on side
PM: Yep and the Morrison family own 15%
NH: they do
NH: actually Nick Bubb, the veteran retail analyst at Pali International, shares your scepticism on this story
PM: Really — that’s Neil’s shopping pal at Pali
NH: yep, this is what he sent out to clients this morning
NH: It is difficult to see how private equity will get past Ken Morrison and his family stake (just as the family blocked the CVC-led bid for Sainsbury) and on a freehold-adjusted PE of 10 three years out at 330p Morrisons seems to be pricing in all the good news, but we shall see…
NH: We are sceptical about the Morrisons rumours, but we wouldn’t rule out a bid for Kingfisher (274p) from PAI, given its property backing and signs of DIY revival in the UK.
PM: Kingfisher. That’s an interesting one
NH: it is
NH: company has much more property than people think
NH: it was recently revalued at around £3bn, which is around half the company’s market cap
NH: Kingfisher also lends itself to a break up
NH: It has two French businesses, Castorama and Brico Depot, that could be sold off
NH: and the LBO team could concentrate on the UK biz
PM: Interesting…
PM: and what of Kingfisher shares this morning?
NH: off 1p at 273.25p
NH: but I reckon there could be something in this PAI rumour
PM: Fair enough
PM: Moving swiftly on
PM: Let’s talk about mining stocks
NH: ok
NH: another research report out today that predicts further deals in the sector
NH: Last week, it was Merrill putting around the idea that one of the major mining stocks could be a LBO target
NH: and today we have Citigroup saying that Rio Tinto could be in the crosshairs of either private equity or BHP Billiton
PM: ok, let’s see the note
NH: RIO a Target
NH: RIO Tinto’s strong cash flow and nominal
gearing may bring it into the crosshairs of private equity, but we think BHP Billiton
is a much more likely bidder given synergies and
nationalistic control issue of Australian assets.
NH: The deal is highly earnings accretive using conservative assumptions, with the major obstacle being concentration iron ore/coking coal market share and lack of BHP CEO-elect.
NH: Compelling EPS Accretion
NH: Assuming 50% debt funding, US$500m in
synergies/cost savings and 30% bid premium we estimate 7%-plus BHP EPS
accretion in FY08 and FY09.
NH: Very strong free cash flow generation would still see BHP debt free within 5-6 years, and only ~4 years at spot prices. EPS accretion could be considerably higher using higher debt and greater synergies/cost savings.
NH: Competition Concerns — Concentration of iron ore market share is the major
stumbling block with combined production enough to move into the No. 1spot. This
is primarily a concern in key Asian markets and is not insurmountable through
disposal of non-core assets and dilution of interest through customer investment.
NH: Who Else Could Bid — Main barrier for other potential bidders like Anglo, Xstrata
and private equity is the perceived loss of Australian control of key iron ore assets.
Strategic and diversification drivers could prompt other corporates to bid, but
ultimately BHP can pay the most given it has the most synergies to extract.
PM: Obviously this has had some impact of the respective share prices of Rio and BHP
PM: we currently have Rio up 45p at £33.50 and BHP down 21p at £11.98
PM: Diare — seems that someone has discovered our key research tool ….
PM: And yes we had a look at your My Space page
NH: On RBS, Ade your quote provider has not taken into account to the 2 for 1 share split and bonus issue this morning
PM: We should pick up Ade below !!!!!
NH: RBS shares are trading up 8p at 657p
NH: hope that answers your question.
PM: Who makes your kit? Dell?
NH: actually who are you using?? sounds like it could be Datastream as Reuters is showing the correct price
PM: That’s Thomson’s Datastream
PM: BAe system — did I just see a flash on them??
NH: yep, the share placing being used to fund the acquisition of Armor Group looks to have been completed
PM: Any news on price — there’s was an accelerated block build earlier
NH: and the stock looks to have been placed between 430-435p
PM: Very tight pricing that — for a 750m placing!
NH: quite impressive
NH: done by Hoare Govett and UBS
PM: BAe market price down 10p at 436p. That’s a result
PM: Ade — 
PM: OK
PM: Shall we take a look lower down the market?
NH: i sense a bear squeeze is starting in HMV
NH: shares already up 5p 120.25p
NH: HMV is the most shorted stock in the market – with around 27% of its issued share capital on loan
PM: That’s a 4% move
NH: now what I think is going to happen is that there is going to be a lot of crazy rumours doing the rounds today
NH: probably will be rumours of a PE bid
NH: and that will send the bears scrambling to cover their short positions
PM: You know Barry Riley had a cute description of private equity in the FTfm supplement yesterday …
PM: “Forced buyers”
NH: that’s as may be but in this case I think people are taking the view that things cannot get any worse at HMV and it is time to close out the shorts
NH: but because of the size of the short position this could get very messy
PM: Ok — thanks for that. The great 
squeeze is underway in HMZ, we believe
NH: and we don’t believe the PE bid story
PM: Neil — Mr Evans below is asking about ICAP. Any thoughts?
NH: think Friday’s rumours were thre results of a very frothy market
NH: can’t see Michael Spencer selling out
NH: and I can’t see a bid from Deutsche Bourse coming
PM: Fair enough.
PM: Also should remember that Deutsche Borse is busy trying to by ISE
PM: Intercont Securities Exchange — options trading platform in New York
PM: And that will cost DB a few dollars
NH: and will take up a bit of management time
PM: Ok, what else?
NH: Autonomy shares are up 29p at 794.5p
NH: a flurry of upgrades this morning
NH: Dresdner Kleinwort has placed a £10 target price on the stock
PM: Goodness
NH: Dresdner reckons the demerger of Autonomy’s consumer biz should drive a re-rating on the shares
NH: hang on, will paste a bit of the note
NH: Acceleration in OEM and licence business and cost savings from the de-merger of its consumer division should drive an upward re-rating of Autonomy shares.
Factoring in the recent developments, we have materially raised our earnings forecasts. Consensus estimates remain too low and do not fully reflect Autonomy’s growth prospects in our view. Re-iterate Buy. New target price is 1000p (was 700p).
NH: Factoring in the acceleration in its core business and cost savings from the de-merger, our EPS forecasts go up by 12% in FY 2007 and 21% in FY 2008. We expect Autonomy shares to re-rate to 34x our revised FY 2008 EPS estimates, in line with its closest peer. Our new target price of 1000p (previously 700p) provides above 30% upside potential from the current valuation.
PM: V Bullish stuff
PM: Anything else of interest
NH: Talking to a few merger/arbs guys this morning
PM: Go on
NH: they were remarking on the size of the spread in the Taylor Woodrow/George Wimpey deal
PM: Which is?
NH: currently 17%
PM: 17%?!?!
NH: yep, its huge.
NH: No thinks this deal is going to happen
PM: Why? Because of a counter bid from Persimmon for Woodrow
NH: yep and a result no one is prepared to short Woodrow and brings its share price down out of the stratosphere
PM: Where are we in the bid timetable
NH: I think this is a scheme of arrangement and shareholders get to vote in a couple of weeks
PM: So the clock is ticking for Persimmon
NH: it is and so far we have no real idea if they are going to counter bid
NH: we do know that Persimmon recently changed its advisory team, so they could be limbering up to something
NH: hang on got some more details on the bidding timetable
NH: Woodrow shareholders vote on May 29 and court meeting to sanction the scheme is on June 4
PM: OK, thanks for that
PM: Seems like one to watch
PM: Neil’s jsut had a call from someone saying there’s a PE bid on the way for HMV
PM:
NH: this won’t surprise you it was 
PM: There is no PE bid — ok
NH: right, let’s finish today’s session by looking at a few small caps
NH: told that the bid for Inter Link Foods could be around the 160p mark
PM: Ah yes — market price is up 4.5p at 138.5
NH: but apparently there are still a few hurdles to overcome before McCambridge Group tables its offer
NH: and finally Theo Fennell
PM: Oh, yeah??
PM: Who them??
NH: you don’t know??
NH: they make v expensive bling for the likes of the Beckham’s and Elton John
PM: 
PM: So what’s the story??
NH: that there are going to merge with Aspreys
NH: heard of them???
PM:
NH: shares off 4p at 130.5p this morning, but Fennell is a very illiquid stock
PM: Right — we’re wacked. Thanks for joining us on Markets Live
PM: Do come back tomorrow for the next session at 11am
NH: see you tomorrow
PM: Before we finish completely — Daine — looking for a job??
PM: We are looking for someone as it happens. May put an ad on the main Alphaville home page ….
NH: what are we looking for?????
PM: Web savy, numerate, ability to write like an irish catholic. Usual stuff
PM: And we are of course an equal opportunities employer, etc
PM: Oh, and the money’s crap
NH: and you have start v early in the morning
PM: Oh — and sorry for spelling your name wrong repeatedly! — Daire!
PM: Right we’re off….