Markets live chat transcript for the chat ending at 11:58 on 12 Jun 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.
PM: Neil Hume is with me – raring to go.
PM: Actually, he’s sulking a bit — cos we haven’t got new kit
PM: It was due to arrive yesterday, but now we are told it will be tomorrow, Wednesday
PM: Tech paradise, postponed
NH: right I am up and running
PM: 
PM: What shall we go for first?
NH: How about Debs?
PM: Yes, let’s do — Debenhams – pariah stock in the retailing sector.
NH: Certainly is – refloated by private equity in May last year at the princely sum of 195p and shares.
PM: Been downhill ever since PE – CVC, TPG and Merrill Lynch sold down their stakes.
NH: Yep, provided some serious reputational damage for Merrill Lynch who, with Sports Direct, have become known as the stock shop you wouldn’t want buy a shop stock from.
PM: Until today, that is.
NH: That’s right.
NH: Before the market opened today we had news that Unity Investments, which is the vehicle run by Iceland’s Baugur and Kevin Stanford, has built a stake of 4.87 per cent in Debs.
PM: Yes through total return swaps.
NH: Cfds by another name. – derivatives that give them a call on the stock through to next February.
PM: So how’s the price reacted?
NH: Up 5.25p currently at 146.5p.
PM: We haven’t seen that level for more than a month.
NH: No – Debs has had a torrid six weeks – shares went to a low of 129p.
PM: At which point Baugur et al began buying.
PM: So are they going to bid?
NH: Well we just don’t know.
NH: 
on this one is keeping his mouth firmly shut.
PM: Hmm. But my guy says there have been no talks between Baugur and the company. It came as a shock to them this morning – well, not a shock – the stock had fallen so low someone was bound to start stake building.
PM: But the news of Baugur’s interest was fresh news to Debs and its advisers.
NH: Yes.
NH: You know 1. We cant assume a bid from Baugur, just because they own House of Fraser
NH: And 2. Not all their investments prove to be shrewd.
PM: Yes, what’s a good illustration of that?
NH: Well, look no further than Woolworths.
PM: Oh, yes
NH: Built 10 per cent – at the wrong price.
PM: And there hasn’t been a bid.
NH: But you know I sense Debenhams might be different.
NH: There’s just an air of something happening.
PM: Well the management team – led by Rob Templeman – have been promising something “strategic.”
NH: Hmm. And someone else might be plotting something “strategic” to land on Debs.
PM: Such as a bid from elsewhere?Such as a bid from elsewhere?
PM: Yes – I know its been mooted and mooted and mooted – and still nothing has happened. But this business is now in play.
NH: I think you are right – but I suspect the market will proceed very cautiously.
NH: Note the price – it’s up – a short 4%
NH: But it’s not headed to the moon.
PM: Sure. So we will just listen carefully to the market on this one.
NH: That’s right – we are waiting action at Debs but not quite sure what it is and when it might arrive.
PM: And don’t bank on Baugur bidding.
PM: Let’s move on.
PM: 
PM: Greenback wants to know about Rolls-Royce — I think you have some thoughts on that Neil
NH: yep, biggest riser in the FTSE 100 this morning
NH: shares up 16.25p to 525.25p
NH: that move follows trade press reports that negotiations between Airbus and General Electric to supply a competitor to the Rolls-Royce Trent engine on the A350 XWB have stalled
PM: Ok — dangerous when engines stall, when they are on planes
PM: I am not up to speed on the world of aircraft engines, but I imagine that is good news for RR
NH: yep
NH: Airbus are planning to make 13 of these planes a month
NH: Which is quite a lot
NH: and if RR is the exclusive supplier then that’s a big money spinner
PM: Right
PM: Any figures?
NH: No, but I do have a note from Merrill Lynch
NH: they are pushing RR hard this morning and have a 620p target price
PM: Paste away
NH: The trade press have reported that talks to offer an alternative GE engine on the
Airbus A350XWB have stalled, although they are not completely dead. If GE do
not offer an alternative engine, this would hand Rolls-Royce an exclusive position
on the aircraft without having to pay the higher participation fees typical for an
exclusive contract.
NH: Although Airbus would certainly prefer to have two engine offerings on the
A350XWB, we do not believe that investors can jump to the conclusion that GE’s
reluctance means that this is not a good aircraft.
NH: Despite bear comments that Rolls-Royce is losing market share in wide bodies, its
order book in the next generation wide bodies is running at about 45% (although
GE is clearly doing better with its huge 777 order backlog – but we believe that
Boeing will need to re-engine this aircraft to remain competitive post-2015).
NH: This compares with the 32% market share of current deliveries that Rolls-Royce
currently enjoys in wide-bodies – ie its market share looks likely to grow over the
next decade or so.
PM: Thanks for that. Sums things up nicely
PM:
PM: OK, time for a quick look at the wider market
NH: FTSE 100 currently 6.2 points lower at 6,562.7
NH: Index has been dragged down by a poor performance from the banking sector
PM: Was up earlier — drifted over the past hour or so
PM: What specifically amongst the banks?
NH: half-year trading update from HBOS
NH: it shares have fallen 50p to £10.20 after warning that its share of the mortgage market is likely to drop below 10% in the second half of the year
NH: To put that figure in perspective, HBOS’s target is for 15-20% market share
PM: That’s quite a miss, then
PM: I’m one of those people who shifted their mortgage from HBOS last year
NH: who did you go with??
NH: Kensington Group? Paragon???
PM: 
PM: Woolwich, actually
PM: Well, BarCap dressed up in a Woolwich wrapper — if you can imagine that
PM: They were giving money away at the time.
PM: Anyway back to HBOS
NH: there are a couple of other negatives in the statement
NH: There has been a rise in customer requests for refunds of overdraft charges
NH: and this is where it gets interesting
NH: HBOS are guiding for earnings per share of 111p
NH: However, that figure excludes refunds related to overcharging customers penalty fees (ie £30 bank charges you for sending you an unauthorised overdraft letter).
NH: now, traders are telling me that HBOS is the only bank claiming this an exceptional item
PM: That’s a bit naughty — the profits on stinking letters were real enough when they booked them
NH: indeed
PM: Just picking up an ABN note on HBOS
PM: Looks rather aggressive 
NH: can you paste???
PM: I can’t copy out of my email….
PM: Waiting for IT to upgrade Lotus notes — now on Wednesday ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ
PM: Neil will put it up for me..
NH: Trading Sell – we see it going down
NH: HBOS trading update 1H07: “On track to meet consensus
110.8p FY07F.” But we see four clear negatives that could put
shares under pressure today even though valuation multiple is
low (on ’08F 130p, trades on 8.2x PE, 1.8x PB for 24% cash
ROE and 4.7% div yield.)
NH: 1) Mortgage market share 1Q07 is < 10% vs stock of 22% and
below previous guidance of < normal range of 15-20% and an
admission that the end-06 retention strategy hasn't worked =
good for rest of mkt.
NH: 2) Group earnings are being driven by
strong contribution from corporate division investment book,
low quality/multiple in the eyes of most investors.
NH: 3) The drag
from rising customer fee refund requests will be taken outside
of core earnings, unlike the other banks and therefore
undermining the power of being “on track to meet consensus”.
NH: 4) BoE Governor speech overnight made a clear case for further
interest rate rises. HBOS is most negatively geared of big UK
banks to rising rate expectations.
PM: How’s the rest of the banking sector reacting to all this??
NH: badly
NH: Northern Rock down 34p at 992p
NH: Alliance & Leicester down 22p at £11.05
NH: Bradford & Bingley down 8p at 398p
PM: Ok thanks for that
PM:
PM: How about something a bit cheerier?
NH: ICI shares are up 11p at 529p
NH: third biggest riser in the FTSE 100
PM: More bid rumours?
NH: Yep, talk of interest from Akzo Nobel
PM: Renewed talk
NH: and also reports that a three way bid battle could break out for ICI between Dow Chemical, BASF and Akzo
PM: Exciting — but that’s seems it a bit premature
PM: There hasn’t even been one offer on the table for ICI as yet
NH: I know
NH: of course, there could be a more fundamental reason for the move this morning
NH: and that of Johnson Matthey
PM: Johnson Matthey stock up 35p at £17.00
PM: What’s that then??
NH: A big research report from Merrill Lynch
NH: retaining overweight recommendation in both stocks
NH: In coatings (ICI’s market), Merrill is forecasting M&A
NH: While, it reckons JMat will continue to benefit from new regulations on vehicle emissions
NH: hang on, got a bit of the ML note that relates to ICI
NH: pasting
NH: European players to play an active role in global industry
consolidation
NH: Post disposals both Akzo and ICI are sitting on significant cash piles. Due to the
fragmented nature of the industry opportunities are plentiful, although
conglomerate ownership reduces the possible options.
NH: Akzo has the most significant balance sheet flexibility based on our forecast
year end net cash position of €8.8bn. With this firepower Akzo is in a position
where it can comfortably afford to purchase any of its major competitors,
including ICI.
NH: Management strategy dictates that Akzo Nobel needs to better align its
growth profile in line with that of global GDP trends. In other words
acquisitions outside of Europe with priority directed towards developing
economies or the right US assets. In this regard SigmaKalon (Bain Capital
possibly considering an exit) is unlikely.
NH: All of the major US players fit this definition with possibly a premium coatings
brand such as Sherwin Williams representing the ideal fit (although litigation may
prove unattractive). Due to its LATAM and in particularly Asian assets ICI could
prove attractive (some European deco disposals would be required). A smaller
player such as Kemira would deliver attractive Eastern European assets although
non-core Chemicals businesses would also be acquired.
PM: Thanks for all that
PM:
PM: What else?
NH: Cable & Wireless have broken the 200p barrier for the first time 2002
PM: Whoa
NH: shares up 3.4p to 204.5p
PM: Why’s that — more bid rumours?
NH: afraid so
PM: Ok — what’s the story this time???
NH: talk that France Telecom is weighing a bid
PM: Hmm — that does sound spurious
NH: Well, I can’t see FT wanting the whole of C&W
NH: if C&W demerges its international business then, yes, it might bid. But until that happens I can’t see FT or Telefonica for that matter making a move.
NH: They would also want C&W’s pension liabilities capped before considering a bid
NH: that said it is worth remembering that that huge incentive scheme C&W has put in place for its senior management does vest in the event of a bid
PM: Yes, but equally it worth remembering that C&W have hinted that they will break the company up before considering offers
NH: true
PM: So what’s the attraction of C&W?
NH: well, its not cheap. that’s for sure
NH: but is does have a reasonable network and corporate client base in the UK
NH: So there could be some synergies with a mobile player who wants to do broadband, but who also wants to increase exposure to the UK corporate telecoms business
PM:
PM: Sticking with the telecoms sector, isn’t there a bid rumour around in Vodafone this morning
NH: There is and strangely it is coming out of Spain
PM: Spain, eh?
NH: yep
NH: on a newswire
PM: So what’s the tittle-tattle
NH: That Blackstone, the private equity group, and Verizon, Vodafone’s US joint venture partner, are working on a bid
PM: This is JUST A REHEAT!
PM: This deal was genuinely cooked up — but that was TWO years ago
PM: Blackstone were supposed to bid jointly with Telefonica — bu tthen Telefonica went for O2 instead
NH: anyway the shares are up 0.8p at 158.8p
PM: Still a way to go before John Mayo and his supposed activist raiding party see their options move into the money
NH: yeah they need the price up to 220p
PM: Some hope!
PM:
PM: Any other interesting bits of speculation out there?
NH: some interest in the water sector this morning
PM: Why’s that?
NH: Comments from Veolia, the French utility company
NH: it has said that it is looking at more takeovers, “particularly in water”.
PM: Interesting…
NH: and what’s more interesting is that those comments were made after the company announced a $3.5bn rights issue
NH: and unveiled plans to invest between euro15-20bn over the next two years
PM: Who could they be looking at?
NH: Some traders in London reckon Kelda could be the name in the frame
PM: Kelda shares were up earlier — but they’ve come back over the past half hour or so -
PM: Price down 4.5p at 969p — so the talk is not reflected in the price
PM:
PM: Neil just taking a call…..
PM: Sounds interesting….
NH: share price of Sports Direct being smashed as we speak
PM: Ah — how’s it moving?
NH: down a further 8.25p at 188p
PM: Gooness — 4.5% fall
PM: Perhaps gormless clients of Merrill Lynch are switching out of Sports Direct and into Debenhams
NH: seriously if anyone has heard anything please get in touch
NH: volume is not that heavy at the moment
NH: 1.8m traded
PM:
PM: Okay — we should chat about property — big recovery in the sector this morning, no?
NH: which will be a relief to the punters
NH: many of which are nursing 
after the recent rout
PM: Actually — jsut looked at the prices now — the rally has run out of steam
NH: it has
NH: it was triggered by news that Westfield, an Australian shopping centre operator, was planning a $2.5bn equity fund raising to finance “future growth opportunities
PM: And that got everyone speculating on what it might buy over here
NH: and then everyone concluded that Liberty International was probably the only logical fit and the excitement died down
PM: Liberty currently up just 2p at 11.50, but had been up to 11.68 earlier today
NH: Land Securities are still fairly strong
PM: up 7p at 18.03
NH: that follows a push from Citigroup
NH: hang on, will paste a quick highlight from the note
NH: Land Securities Group PLC (LAND.L)
One in a Trillium — Focusing on Revenues
NH: We initiate coverage of Land Securities with a Buy — Land Securities has a
high-quality portfolio and its outsourcing subsidiary, LS Trillium, differentiates it
from its peers. At a time when yield compression is stalling and possibly
reversing, we are attracted by the shift in strategy towards the cash-generating
NH: For the record, Citi have set a £21 target price
PM:
NH: I have a bit of fantasy M&A for you
PM: Excellent — do tell
NH: That BG should merger with Woodside, the $24bn Australian gas company
PM: Oh, that’s fresh
NH: it is.
PM: makes a change from the usual stale stories been served up
PM: So who is peddling this line??
NH: Cazenove
NH: they have published a note today examining the merits and risks of BG/Woodside tie-up
PM: And the conclusion?
NH: that a merger based around a dual-listed company structure could work
NH: hang on here’s a bit of the note
NH: a share exchange involving a separate entity dual listed corporate structure could permit such a merger whilst preserving the local identity, country of incorporation and tax domicile of both BG Group and Woodside. This is an absolute imperative to secure the support of the Australian government.
NH: In our view, the merged entity would be a bigger, better spread and more advantaged entity than either of its constituent parts. Specifically, it could realistically aspire to take the role of global LNG leadership with a prized LNG portfolio positioned in the Atlantic Basin and Australia (Asia Pacific).
NH: Royal Dutch Shell owns 33.5% of Woodside and, second to the Australian government, holds the key to permit this very special combination. We believe that it could be in the interests of Royal Dutch Shell to encourage such a merger – not only could it increase the value of its investment, it could also help to dispel fears that it might one day bid for BG Group.
PM: V interesting — thanks for that
PM: What are BG shares doing?
NH: up 2p at 773.5p
PM: And Shell??
NH: off 4p at £19.73
PM: Thanks for that
NH: no problem
PM:
NH: actually there is another piece of M&A related research around this morning and it concerns one of your favourite stocks
PM: Which one
NH: Scottish & Newcastle
PM: Ah
NH: how is that bet between you and Dom Walsh at the Times going?
PM: Counting down the days… painfully counting
NH: quick recap: the bet is that if S&N is not bid for by mid-July then Paul has to buy lunch for Dom with wine at the Wolseley
PM: yeah, none of that S&N stuff
NH: and I am not even sure Paul can secure at table at the Wolseley
PM: Oh, well if we can’t get a table there’s alway Pizza Express
NH: but I am sure Dom can given his connections in the leisure industry
PM: Hmmmmmmmmmmmmmmmm
NH: probably can secure the best table – the one overlooking the main floor
PM: 
NH: I hear the wine list is quite extensive
PM: 
PM: Anyway — what does this note say??
NH: well, it reckons there is 20% upside in the share price in the event of a break-up
PM: Who is this coming from — this shrewd piece of research??
NH: Credit Suisse
NH: reckon S&N is attractive to other industry players
PM: Like SAB Miller and Diageo
NH: CS also thinks a private equity deal stacks up as assets could easily be sold on to other people in the industry
PM: Right I think we should paste some of this wonderful note!
NH: OK
NH: Attractive to other industry players in our view S&N represents a complex collection of businesses and brands that in their own right are worth more in strategic and financial terms to other players in the industry. We have looked at a detailed sum of the parts of S&N separating out the key geographies, brands, and business types (manufacturing versus wholesale) and applied average takeout multiples for each business portion. A sum of the parts valuation suggests a fair value of 740p for the group and 780p assuming 100% of potential synergies are captured.
NH: We believe that a private equity deal would stack up If a private equity
player were to buy S&N, we believe that it could sell on key assets within the
S&N portfolio at average multiples of 12x EBITDA based on the recent
history of brewing deals and the growing scarcity of quality growth and
market positions in a consolidating industry. We estimate that a private
equity player could make a 15% to 20% IRR through buying the business,
selling off the high value strategic assets, and running the remaining 20% of
the business for cash.
NH: and here’s the really interesting stuff
NH: Recent press articles have also supported the theory that S&N offers some attractive assets for a wide range of industry players. On the 23rd April 2007, the Financial Times cited a source “familiar with the situation” in suggesting that SABMilller would break up the S&N business were S&N to accept an offer of 710p per share. The article suggested that SABMiller would retain S&N’s international assets, that Diageo would buy the UK business interests and that the French assets would be sold to a third party.
NH: Indeed, we believe that S&N offers something to many players in the industry. We believe AB, Carlsberg, and SABMiller would all be interested in getting bigger in Russia and taking S&N’s 50% stake in BBH. We believe Diageo and Molson Coors could both extract significant cost and revenue synergy value out of buying S&N’s UK branded beer and cider brands business (Fosters, Strongbow, and John Smiths), while the leading national brands in France (Kronenbourg) and Portugal (Sagres) would probably be of interest to any of the majors looking to expand into strong number 1 market positions in these
markets.
PM: Fascinating — let’s hope someone pulls the trigger
NH: the clock is ticking
NH: if you lose I want a copy of the bill
PM: Hmm.
PM: What are S&N’s shares doing?
PM: 4.5p higher at 625.5p Clearly time for a bidder to move before the price runs ahead of them
NH: 710p could look quite attractive
PM: 
PM:
PM: Bit on Interlink foods — what’s the new Neil?
NH: it is very bad
PM: U surpirse me!
NH: shares been suspended this morning pending clarification of the company’s financial position
PM: Oh. dear. me
PM: Confirmation that it has run out of cash — that usually means
NH: and that’s not all
NH: takeover talks with McCambridge group have ended
PM: Irish baker — close shave for McCambridge
PM: What a mess — v odd statement
PM: Let me jsut dig out and paste — wont be a mo
PM: LSE website v slow
PM: Clunk clunk clunk
PM: Got it!!!!!!!!!!!!!!!!
PM: Last Wednesday McCambridge Group Plc (“McCambridge”) formally submitted an
amended indicative offer with a further pre-condition that the Company’s bankers
(the “Bank”) would have to compromise their position. The Bank formally advised
the Company on Friday evening that it would not agree to this pre-condition. As
a result McCambridge have informed the Company that they cannot proceed with
their revised indicative offer.
PM: Following completion of the strategic review the Company has received no other
proposals that allow shareholder value to be achieved without a similar
precondition. However discussions continue with a number of parties for the sale
of the business as a whole and the Bank continues to support the Company’s
trading requirements while these opportunities are explored.
PM: The Company met its sales budget in May and is optimistic about finding a
solution which retains jobs and provides supply and sales continuity for the
longer term.
NH: I wonder what this pre-condition was????
PM: V V V strange.
NH: never heard anything like that before
PM:
PM: Right — that’s it from us today. Thanks for joining us.
PM: Do come back for the next session of Markets Live tomorrow at 11am
NH: bye