Markets live chat transcript for the chat ending at 12:03 on 14 May 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, FT Alphaville’s daily markets chat.
PM: Neil Hume is with me today.
NH: sorry we are late been rushing around trying to get hold of this Pearson note
PM: yes — Pearson heading the leader board on Monday morning
NH: shares up 15p at 905.5p
PM: Remember they did go as high as 917p after Murdoch moved on Dow Jones a couple of weeks back
PM: But still very strong — explain the reason for today’s move Neil
NH: well its not anything to do with Pearson selling the FT for once
PM: 
NH: its a UBS note that considers the valuation read across from Thomson’s sale of its education buisness on Friday
PM: Right — that $7.7bn — much higher than expected. At the time the disposal was first mooted last Oct people put a tag of $5bn on the business
NH: and the other interesting thing about this deal is that private equity were the buyers
PM: Right
PM: have you got the note there — worth pasting….
NH: yes
NH: Time to re-evaluate
NH: Recent M&A benchmarks not factored into Pearson share price
Significant M&A in recent weeks has set new valuation benchmarks for almost all
of Pearson’s assets. The most important is the sale of Thomson Corp’s College
business for 19x 2008E consensus EBITA. However, Pearson’s share price has
barely moved.
NH: Est. 14% pa underlying EPS growth over the next three years
NH: We estimate Pearson to deliver 14% pa underlying EPS growth over the next three
years driven by solid top-line growth in Education, cost savings and margin
improvement across a number of businesses. A US economic slowdown remains a
risk, but political sensitivities mean US education budgets are likely to remain
fully funded ahead of the US presidential election in 2008.
NH: Raising target price to 1050p from 875p
NH: Our 2009E EPS increases by 4% due to the recent Harcourt acquisition. Our
SOTP/DCF-derived PT increases to 1050p from 875p with the increase coming
from a re-evaluation of the Education assets, the IDC share price rise and tax
benefits. If we valued Pearson’s Education assets at 19x 2008E EBITA (vs 14.5x
currently), this would imply a valuation of 1230p.
NH: Valuation: Undemanding after adjusting for cash tax
Pearson trades at a 6.6% FCF yield and 3.7% dividend yield in 2008E. The 2008E
PE is 18x, but this falls to 15x after adjusting for the cash tax rate. At 1050p,
Pearson would trade at a tax adjusted PE of 18x. We upgrade the stock from
Neutral 1 to Buy 1.
PM: Goodness — tha’s a punchy valuation
NH: what the £12.30 one???
PM: 10.50 good enough for me
PM: And my saye stock
NH: anyway enough navel gazing
PM: OK, let’s turn to the wider market
NH: FTSE 100 down 27.3 points at 6,538.4
PM: Come back heavily over the past 20 mins or so
NH: looks like the futures market is pointint to a bit of profit taking on Wall Street
NH: the weakness has been compounded by some of the FROTH stocks taking a bit of whack
PM: Can you go thru a few of them?
NH: yes
NH: So, we have Rio Tinto down 82p to £35.71, despite reports they have hired Morgan Stanley to defend themselves against a bid
PM: That’s a fall of 2.2%
NH: Standard Chartered off 18p at £15.89 as bid hopes fade with news that its chairman has lobbed out £15m worth of stock last week
PM: Mervyn Davies — swerved out of the stock
NH: yep and not the short of thing one would do if a £21 a share offer was on the table
PM: Er, no — and that was friday’s rumour…
NH: there has been some fun and games in William Morrison this morning
NH: Shares hit 340.5p in early trading
NH: on the back of weekend press reports that claimed private equity group CVC was studying a bid for the supermarket chain
NH: unfortunately some felt collars close to CVC have rubbished the rumour
PM: 
Yes, they have
PM: Here are some of the flashes that hit the wires earlier this morning
NH: CVC HASN’T HIRED GOLDMAN FOR MORRISON BID, PEOPLE SAY
PM: CVC ISN’T LOOKING AT MORRISON, PEOPLE FAMILIAR SAY
PM: People familiar being
NH: nuff said on that one
PM: Right, what else is on the move this morning?
NH: Britvic
NH: shares are the biggest riser in the FTSE 100 at the moment
PM: Yes, up 18p or 5% at 372.5p
NH: Now reports over the weekend claimed Permira, the PE group, was considering making another takeover proposal to BVic
NH: the story goes that Permira held talks erlier this year with BVIC about gaining access to the company’s books to do due diligence but was rebuffed.
NH: and apparently PepsiCo is backing management and has rejected Permira’s overtures
PM: And that’s important — that Pepsi are backing the management
NH: It is. Britvic has a very lucrative bottling contract with Pepsi that can be terminated if the company is acquired
PM: A real poison pill
NH: Yep
PM: And what about Permira, it still owns a 14% stake in Britvic doesn’t it??
NH: yes
NH: and you can bet they are hopping mad this morning
PM: Why’s that
NH: because Britvic have announced plans to buy C&C’s soft drinks and distribution business for 250m euro
PM: A sensible move?
NH: it could be
NH: the deal will give Britvic the Irish rights to Pepsi and 7UP
NH: : however it does look expensive
NH: analysts at Davy’s in Dublin expected the business to fetch around 200m euro
PM: Hmm
PM: Can Permira block the deal?
NH: Don’t think shareholders will get to vote on the deal
NH: anyway, Permira may regard it as a positive move
NH: hang on, Paul is on the phone
NH: sounds like an admin call
PM: Actually it was Matthew Engel — told him id get back to him
NH: you media-types
PM:
PM: Where were we
NH: britvic
NH: I was just saying that Permira probably won’t be too happy with this deal if Bvic have overpaid
PM: Ok , any analysts comment?
NH: not yet
NH: but any mention of Brtivic makes me laugh
PM: Why’s that
NH: well you know our Scottish friend
PM: 
NH: he can’t pronounce it properly
PM: Ah, dont be mean!
NH: calls it BRITAVIC
PM: Leave him alone!
NH: right lets move on
NH: had loads of calls about Abbot Group this morning
NH: just responding to OJ. I am not nearly as media as Paul. he goes to Soho house not me.
PM: Abbott group — that’s the oilfield services company, no?
NH: it is
NH: been a real punters favourite for a while
NH: : Every other week there seems to be a new takeover rumour
NH: the last was that institutional shareholders had been sounded out to see if they would back a 375p a share offer
PM: So, the shares are up 8.5p to 276.25p this morning. More takeover rumours?
NH: Sort of
NH: The rise is down to a Cazenove note that was actually published on Friday
PM: What does it say?
NH: well, the first thing to note is that Caz is Abbot’s house broker
PM: ok
NH: so its unusual for a house broker to upgrade on the basis that a company it might be bid for
PM: Certainly is
NH: Caz reckons Abbot could be acquired by a US company called Nabors
PM: nabors — what do they do?
NH: its an oilfield services company, with a market cap of nearly $10bn. Apparently it’s the world’s largest land based drilling company
PM: Oh, right, serious player then
PM: and it is on the lookout for acquisitions?
NH: very much so
NH: earlier this month, Nabors CEO, Gene Isenberg, said he was looking at a “pretty good-sized” acquisition that would provide entry to a new market.
NH: “We’re looking at one pretty carefully now,” he said
PM: Intriguing
NH: : yep and Caz reckons Abbot would be a good fit for Nabors
PM: Why’s that?
NH: allow me to paste some stuff from the note
NH: Nabors has stated that it is looking at acquisitions. We
believe Abbot is one of the few companies that would give it
the increased international footprint it desires. Abbot’s
premium valuation may be considered a barrier to M&A. In
our view this is wrong: we show that an acquisition of Abbot
at a 30% cash premium to the current share price could still
be EPS accretive to Nabors.
NH: Given a free option to M&A
risk and significant underperformance this year, we
upgrade to OUTPERFORM. We drop our fair value from
373p to 293p. However, incorporating a risked bid
premium our revised fair value is 320p, upside of 20% to
the current share price.
PM: Punchy price target — another one
NH: yep
PM: Referring to Greenback below — are you meaning Hammerson, rather than Hanson Greenback?
PM: Seen this Futura Medical stuff??
NH: Oh, right – heeeeerreeee wee gooo
PM: Wot?
NH: Go on, do your gag
PM: There is no gag. It’s an important story.
PM: Futura Medical has suffered a crushing blow with news that GlaxoSmithKline has dropped plans to develop Futura’s MED2002 gel.
PM: This is a gel based on glyceryl trinitrate, a vasodilator that has been used for angina for decades, but which Futura Media was developing as an anti-impotence gel.
NH: Glaxo signed a deal with Futura last year – it promised to be the first over the counter remedy for erectile dysfunction.
PM: So what’s the share price reaction?
NH: Down 21p at 39p.
PM: Hanging — Neil is just searching for note on this important subject ….
NH: it’s from Canaccord Adams
NH: While disappointing, this appears to be a marketing decision rather than a
clinical one, as the Phase 3 trials had not started and this suggests to us
that there could still be value in the product. Management said that it
believes the decision is due to GSK’s internal politics (Pharma and Consumer
Health Care), compounded by a relatively new chairman and GSK’s unhappy
experience with Levitra. Whatever the reason, we consider this an
unimpressive performance all-round.
NH: Management has restarted negotiations with other potential licensees,
although commercial roll-out is obviously going to be pushed back. As
MED2002 comprised ~21% of our previous valuation, we expect the fundamental
impact to be less severe than the impact on sentiment and we believe
management needs to show tangible results in coming months. Fortunately,
unless Futura decides to run an unpartnered Phase 3 trial for MED2002, any
delay should not impact near-term revenue or cash.
NH: e value Futura using a probability-weighted DCF. We have pushed back our
expectation of MED2002′s initial launch from 2009 to 2011 and reduced its
weighted probability of success from 58% to 15%. In addition to other minor
changes, this reduces our target price from 121p to 88p. Despite the
apparent potential upside our target price offers from current levels, we
are reducing our rating from Buy to HOLD until our confidence in the
company’s ability to roll out a commercial product is restored by clarity on
MED’s clinical efficacy and hard data on CSD500′s launch.
PM: Andy Slade has just been over from the main FT news desk ….
PM: Just getting some flashes out on Virgin Media
PM: Neil’s got the flashes ….
NH: *DJ Virgin Media 9.4% Hldr Franklin Mutual May Seek Talks With Co
NH: this is being picked up from a SEC filing in the US
NH: this is from Dow Jones
NH: In the filing, posted on the Web site of the U.S. Securities and Exchange Commission Thursday, U.S. investment fund Franklin Mutual said its concerns about Virgin were prompted by the company’s first-quarter results. “In view of the results for the first quarter 2007 announced by the issuer May 9, FMA may initiate discussions with the issuer (Virgin Media) regarding, among other things, the issuer’s strategic direction, corporate governance and management, and to communicate from time to time with the issuer’s executive management and board of directors and with other holders of the common stock regarding such matters.”
PM: Virgin Media is Nasdaq listed, of course
PM: So no price reaction as yet
PM: There will be one from the bearded wonder, no doubt
NH: you can bet on that
NH: BSkyB will be chuckling
PM: Hmm — Branson under US investor pressure
NH: makes you wonder why he bothered to get in bed with another listed company
PM: Ok, lets move on
PM: Greenback repeating below — yes he meant Hanson as in wider construction / property sector …
PM: Notice British Land’s up, but we’re pretty much in the dark on that one at the moment — sorry!
NH: Right, we have got a FROTH watch going on lower down the market
NH: On Friday we were talking about the new Jonanthan Rowland shell company
PM: 
NH: and today we have news of a new vehicle backed by Andrew Regan coming to market
PM: Really, I didn’t know the Was Kid had expertise in the area
NH: nor did i
PM: So what is it??
NH: company called DiamondTech Inc.
NH: shares start trading tomorrow on Aim.
NH: has raised £4.25m through a placing of new shares. Will be valued at £22m
PM: so what does this thing do??
NH: well, it is a holding company of a group of companies that own the intellectual property rights to the laser recovery unit (”LRU”),
PM: laser recovery unit — wot’s that???
PM: Where do the diamonds come in?
NH: bear with me
NH: LRU is a diamond sorting machine which DiamondTech recokons can process diamond bearing gravel, known as run of mine, significantly faster, more accurately and more cost-effectively than currently available diamond sorting technologies permit
PM: So it’s a sieve!
NH: a technologically advanced sieve with flashing lights
PM: ok
NH: Hang on I’ll paste a bit of the blurb. Its quite funny
NH: The LRU uses an innovative technology based on the use of red lasers and a computerised optical recognition technique which automatically detects diamonds from run of mine material by identifying the wavelength shift, known as the Raman shift, when the laser passes through a diamond. Diamonds identified by the laser detection system are then automatically extracted by pneumatic jets into a safe which can only be accessed by authorised personnel.
PM:
PM: So what’s the money being raised for??
NH: I think some of it being used to pay the company that owns the intellectual property rights to the sieve
PM: I see
NH: Given Regan’s fan club this will be one to watch when its lists tomorrow
PM: Certainly will — how much does he own??
NH: through his Corvus Capital vehicle it will be around 17% on admission
PM: I think that warrants further investigation — or may be a lunch at Cipriani in Mayfair
NH: that’s one of Mr Regan’s favourite eateries
PM: And Nancy (Sven’s friend) and Tom Ford
PM: Anyway, this chat all feels a bit out of control this morning
PM: Greenback below is asking whether we can discuss Euro stocks more often?
NH: quite happy to do that, when there is a good story
NH: do you have anything in mind
NH: I have had quite a few calls on Atos this morning and also a company called Voulerec
PM: While Neil is getting some detail on that I can tell you that Daimler ex-Chrysler up 5.25% at 63.8
PM: Top mover across Europe
PM: Volvo also in demand
PM: As is Renault
NH: and Scania
PM: Right that’s enough cont Europe!
NH: before we go we need to discuss Mice Group
PM: That’s the marketing services company you mentioned on Friday
NH: it is
PM: The one looking at de-leveraging options
NH: they have put out a trading update this morning
NH: and they have actually been marked up on it
PM: Why’s that?
NH: beats me
NH: the statement makes some positive noises about things like trading at the international bis, wichh in line with expectations
NH: and that the writedown in its UK division will be no more than £15m
NH: but the bottom line here is that Mice is company with a market cap of £15m and net debt of £55m
PM: yet it’s shares have been marked up a quarter to 9p in the middle!!!!
NH: amazing isn’t it.
NH: I am not sure what the market makers are thinking
NH: this debt is not going to simply disappear
NH: Mice says its looking at other strategic options to reduce its debt
NH: and that the actions that are underway will create a stronger, more cash generative business
NH: but short of a huge rights issue or a debt for equity swap I can’t see what that will be
PM: Sounds like an interesting little market tussle is developing here
NH: it is and you would have thought on an important statement like this that the company would have put some contact details on there
PM:
NH: all we get is some PR company I have never heard of
PM: headland consultancy — who they
PM: This has got you quite wound up, Neil
NH: No, I just think its odd
NH: its like Biofuels. It has warned a debt for equity swap is likely yet its shares are still trading at 15p – a fraction of what they will be worth if it goes through
PM: Hmmm
PM: Right ….
NH: before we go can we just mention Sheffield United
NH: shares have plunged 33% this morning following the club’s relegation from the Premiership yesterday
PM: They are going to appeal against that, no?
NH: they are
NH: They will appeal on the grounds that West Ham should have been deducted points for fielding an ineligable player
PM: Clearly the market doesnt think Sheffield stand much chance
NH: problem is they only have until the start of the next season to launch their legal action
NH: given that’s August, i can’t see it happening
PM: Legal system just doesnt work that quickly…
PM: Right — that’s it. Thanks for joining us today. Do come back tomorrow for the next edition of Markets Live at 11am.
NH: bye