Markets live chat transcript for the chat ending at 11:54 on 21 Jun 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, FT Alphaville’s daily markets commentary
PM: Neil Hume is with me today
PM: Such a rush this morning
PM: You in Neil??
PM: Bob Bobson — below — good point — we will return to Segro later in the chat!
NH: yes
PM: Whole prop sector being destroyed this morning.
PM: But first ….
PM: Let’s talk about the market itself first.
NH: The London Stock Exchange itself
PM: Yes – late flurry yesterday with news that it is in takeover talks with Borsa Italiana.
PM: Suggestions that the LSE will have to pay upwards of £1bn to get control of this business – it is seventh largest stock market in Europe in terms of the capitalisation of listed firms. €779bn according to Citigroup.
NH: Important thing is that BI also owns the MTS bond trading platform – top platform for trading euro government debt. Was a joint venture with Euronext, but BI had an option for full control, which they have just exercised.
PM: So what’s the idea here – Linking London with Milan is not exactly a major milestone in global exchange consolidation.
NH: No, it’s called a poison pill – they want to dilute Nasdaq.
PM: Which has a 30% stake in the LSE, after its abortive bid. – which was at 12.43 I believe.
PM: What are LSE shares doing today?
NH: down 20p at £13.46
PM: So while the stock still a quid above the Nasdaq offer…
PM: the market sees this as reducing the chances of Nasdaq coming back with a new bid at some stage. It takes some of the bid heat off the LSE.
NH: Yes, that’s the view.
PM: But hang on, with 30% presumably Nasdaq can just stop the LSE doing the deal – vote against it.
NH: Well, it depends whether the deal qualifies for shareholder approval or not.
NH: dending on the class tests, etc.
PM: Yeah. Also, it could be put as an ordinary resolution – rather than special resolution – to shareholders, meaning the LSE board would only need 50%.
PM: Would they get that?
NH: Well, Citigroup are not so sure. I will paste some of their note on the subject.
NH: LSE management is
likely to present the merits of the deal as increased exposure to continental cash
equities and diversification to Borsa Italiana’s derivatives and fixed income
operations. However, we believe the market is likely to be more cynical and view
it as an effort to bulk up and make it harder for Nasdaq to acquire it.
NH: A transaction of this relative size is
likely to require shareholder approval. Nasdaq with 30% can block any special
resolution and so an ordinary resolution appears more probable. Even then, it is
not guaranteed LSE management would attain the 50% necessary approval.
NH: Oh and they are also worried about how the LSE might finance this.
NH: No details of equity vs debt funding split have yet
been specified. LSE is 1.7x debt to EBITDA levered. Assuming a €1.7bn price
tag split 80% debt, 20% equity, implies leverage could go to 3x-3.5x. If fully
funded by debt, this could rise to ~4x. This is high but probably attainable.
NH: Shorter-term LSE shareholders likely to be displeased – A large proportion of the
LSE shareholder base, ex-Nasdaq, are likely to have been looking for a takeover
offer at a higher multiple. They are not likely to be pleased by the medium- to
long-term merits of this new acquisitions policy, we believe. The LSE share price
may well therefore weaken. We reiterate our Hold/Medium Risk (2M) rating,
target price 1370p.
PM: Here’s some stuff from Man on the subject
PM: This news creates uncertainty around the LSE’s share price; and a deal, if successful, could
undermine NASDAQ’s takeover of the LSE. We will maintain our sell recommendation and 1100p share price
target until we get more details on the deal. We remain concerned about the long-term prospects of the LSE
from intensifying competition in the cash equity market
PM: Capital issuance: The LSE is also indebted due the large one of dividends and the ongoing buyback. We
estimate LSE’s net debt to be some £500m by end of FY08, representing some 2.1x to 2.5x EBITDA
(depending on the year), which leaves very little room for further debt issuance. Consequently, the LSE’s
consideration for BI could require a large equity component.
PM: Valuation: the press is talking about a bid at €1.5bn, putting BI on 21x 07 earnings, which is not very
demanding. (2006 net profit of €59m and assuming a 20% growth in earnings). The deal would be cheaper
should cost saving amount to a sizeable proportion of BI’s cost base. However, we believe the €1.5bn could be
a starting point and a deal closer to 25x earning (as seen recently with Nasdaq-OMX) could be closer to our
PM: Clearing and settlement: the LSE favors a horizontal structure. BI owns its own clearing and settlement. What
the LSE do would with these assets is anyones guess. A fire sale could mean a suboptimal sales price.
PM: Conclusion: we reiterate our Sell recommendation on the LSE. The shares already trade above fair value of 1150p
(also trading on 22x our 07 EPS estimate), without accounting for the impact of Turquoise. Turquoise could affect
the LSE’s businesses in several ways: loss of market share in trading, lower fees in trading, lower income from
information services from lower number of terminals and lower fees per terminal.
PM: Forgot about the Turquoise stuff.
NH: Yes, that’s the impression I get as well.
PM: I was talking to someone involved in that project the other week. Stuck by just how passionate he was about it – he was so confident that it would take off – and in a big way.
NH: Yes, that’s the impression I get as well.
PM: But look, there’s some deep irony here
NH: Wot.
PM: Well, you’ve got a listed London company – trying to avoid answering to one of its big shareholders – possibly avoiding a shareholder vote on a deal. Also effectively pursuing a poison pill.
PM: This is against the spirit – if not the letter – of the listing rules in London.
NH: Guess so.
PM: But those listing rules were drawn up by the LSE in the first place – since the listings department and the administration of the Yellow Book were handled by the exchange before they were transferred to the FSA.
NH: Hmmm. We should move on.
PM: 
PM: Now — we’ve got to turn straight away to Man Group
PM: They’ve come up with pricing for their US demerger this morning
NH: they have and just issued a statement that has made all of us here laugh
NH: its the list of advisers for the MF Global float
PM: Got to give to the readers in full — the full list of banking and broking advisers
NH: you name it and they are on there
NH: we were wondering earlier this morning why no one has published any research on this spin off
PM: And now we know
PM: So, the joint book runners are:
NH: Citi, JP Morgan, Lehman, Merrill and UBS
PM: And the joint lead managers are:
NH: Credit Suisse, Deutsche, Goldman and Morgan Stanley
PM: And other co-managers include:
NH: ABN, Bank of American, BMO Capital Markets, HSBC, KBW, Sandler O’Neill, Wachovia Securities
PM: Oh and not forgetting Lazards, who are fin adviser to the float vehicle, MF Global
NH: that just sews up about all of Wall Street
PM: How many is that — count ‘em
NH: 17 including Lazard
PM: That is just comic
NH: how many people does it take to float a company???
PM: 
PM: Suppose we should jsut say what the “news” on this
PM: man is demerging its brokerage business — floating in the US
NH: indicative price range is $36-39 which values biz at between $4.6bn and $5bn
PM: That’s a bit higher than expected -
NH: expected by who?
PM: Errrrrrr, Reuters
PM: 
PM: cos there’s no research!
NH: actually Dresdner were not on the list. they follow this one. perhaps they could supply some numbers
PM: yeah, but they love Man
PM: I’ve got their note from before the last figs — but’s just too upbeat to print
NH: that bad eh
NH: why aren’t they on the IPO bandwagon???
PM: Hmm
PM: Anyway, should also mention that all the proceeds from the float are expected to be returned to sharehodlers
PM: What’s Man’s price?
NH: up 2.5p to 628p
NH: one of the few FTSE 100 stocks in positive territory this morning
PM:
PM: Ok, lets go to the wider market
NH: FTSE 100 down 33.9 points at 6,615.4
NH: fall triggered by a sharp reverse on Wall Street last night
NH: when I left, the street was flat
NH: quite surprised it finished over 100 points lower
NH: the sell off seems to have been triggered by a back up in bond yields and also the problems Bear Stearns are having liquidating that CDO portfolio
PM: So the Bear feast has rattled people
NH: yep
PM:
PM: Right — what speculative features have you got for us this morning, Neil?
NH: SABMiller
NH: shares up 11p to £12.93 this morning
PM: 
NH: vague whispers of a deal with Diageo
PM: Ah!
PM: Well, work we did a little while back seemed to indicate that they had held talks in the past about some sort of alliance
PM: We also KNOW that they discussed a joint bid for Scottish & newcastle
NH: yeah, but there was something else in the background. something much bigger.
PM: There was and we were not quite sure what it was at the time
PM: But do you think people are just reheating those stories?
NH: possibily
NH: and it is a fairly defensive company
NH: as long as the Rand remains stable that is
NH: Merrill Lynch also gave the stock a push earlier this week
NH: said it was seriously undervalued long term
PM: have a quick look for that note
PM: Any luck?
NH: yeah
NH: will paste a little
NH: Upgrade to Buy, 1400p target price
As previously highlighted, SABMiller’s first-mover advantage and strong positions
in emerging markets, where the beer profit pools are expected to grow, offer an
attractive long-term investment case. Following significant share price underperformance
YTD (-8% relative to peers), we now believe that the current price
levels offer a good entry point. Excluding FX, and therefore price volatility, we see
limited short-term risks and thus upgrade to Buy, with a 1400p price target.
Solid
NH: Solid long-term investment case
Our investment case is supported by: A better than expected Bavaria turn-around
on a strong Colombian economy and currency; a stable ZAR; lower EBIT impact
on the loss of the Amstel license in SA; assumption that Miller has bottomed and
that Miller Chill could surprise on the upside; continued momentum in Central
Europe, especially Russia and Poland; and lastly, the very long-term potential
from its #1 position in China (15% share) and #2 position in India (30% share).
NH: the note also touched on M&A options for the company
NH: wanna see it?
PM: yes, definitely!
NH: SABMiller is spoilt for choice within the brewing M&A playground, and we are
certain that they will have done the analysis on each and every scenario. The
following minority interest in subsidiaries & associates could present attractive
opportunities to SABMiller:
$5bn: 80% interest in Castel/BGI that SABMiller does not own
$1.5bn: 28% minority in Poland and 49% minority in Canary Islands
$1.3bn: Combined value of various minority interests in Africa
SABMiller have clearly communicated that it plans to use the $1-1.5bn FCF, post
the payment of dividends, to make further bolt-on acquisitions.
NH: Altria & BevCo can accept take-over offers
Altria currently has a 28% interest in SABMiller (following the Miller transaction in
2002), and the Santo Domingo family has 15% interest in SABMiller (following the
Bavaria transaction in 2005). A large scale merger or acquisition using a rights
issue may be limited due to the current shareholder structure.
NH: SABMiller acquiring the Molson Coors group (TAP, B-2-7, $90 covered by
Christine Farkas) would be >10% earnings accretive. We however do not believe
such a deal is likely, as it would increase SABMiller’s exposure to the slower
growth Canadian and UK markets (70% of Molson Coors EBIT).
NH: Combining with Heineken also presents a decent business case, with upside in
the US, returning to a near-monopoly situation in South Africa, dominating the
rest of Africa, increase regional scale in Central & Eastern Europe, and also
presents the potential to leverage the Heineken brand across the SABMiller
platform. Four significant markets could present regulatory problems (Poland,
Italy, Hungary & Slovakia), and the deal would also have to involve equity.
PM: V V interesting — ta for that — tho nothing about Diageo
NH: which makes me wonder if the current rumours relate to the two companies combining their UK beer businesses
PM: Hmm. May be right. One to watch tho
PM:
PM: We should don our tin hats and discuss Segro
PM: 
PM:
NH: not sure I like to tone of Bob’s comments
PM: Well he’s got a point!
NH: its not our fault the sector has sold off on the back of rising bond yields
PM: We said we believe the stories that it is going to get taken out!
NH: every time they tick up at the moment, investors exit the sector double quick
PM: if you are a potential bidder, then why play your hand when all this is giong on
NH: exactly
NH: clearly the current enviroment of rising bond yields and interest rates the property sector is only one for the brave
PM: Hmm — should say that Segro is currently down 23.5p at 648p.
PM: that’s down 3.5% today and off 5% since yesterday’s high
PM:
PM: Not taken Bob!
PM: Neil’s just a bit bad tempered this morning
PM: OJ — thanks for that
NH: we are not sure if that figure inlcudes the over allotment – if indeed there is one
PM: Right –w hat else is going on Neil?
NH: Centrica
PM: zzzzzzzzzzzzzzzzzzzzzzz
NH: Come on wake up
NH: it’s not that bad
PM: OK, what’s this morning’s story?
NH: Gazprom again
PM: I though they had denied it
NH: that was last week
PM: Hmmmm
NH: shares up 4p to 380.75p
PM: So why do you think there could be something in this story?
NH: well, Gazprom recently said they would make a big announcement on the UK gas market in Wimbledon week
PM: is that it????????
NH: no, of course not. just joking
NH: company has a trading update next week
NH: on Monday i think.
NH: half-year round up
NH: now its poss that we could get some news on cash being returned to shareholders with that
PM: Neil’s on the phone…
PM: Just some 
PM: Felt collar
NH: actually it was our PR people
NH: want me to go on TV
PM: Ooooh
NH: multi media jorno you see
PM:
NH: web, print, tv, blog
NH: anyway back to Centrica
NH: I think people underestimate just how valuable Centrica is
PM: Or how broad
NH: it owns British Gas
NH: has big gas fields in Morecambe Bay
NH: but its real worth is infrastructure
NH: it supplies most of Britain with gas
NH: how valuable and strategic is that?
NH: surely its possible that an infrastructure fund could team up with a gas supplier like Gazprom and make an offer for the company
NH: and if that fund was domiciled in this country that might get around the national security implications
PM: Is that what you think is happening?
NH: no
NH: but that’s the way some of the shrewdies look at Centrica
PM: ok
PM:
PM: what else is on the move?
NH: standard chartered up 13p to £16.71
NH: that’s on the back of a JP Morgan upgrade
NH: ABN have also upgraded
NH: JP have also put an interesting note out on ICI
PM: ICI currently down 9.5p at 624
NH: they are saying the chances of a bidding war are slim
NH: Higher Akzo bid/bidding war unlikely; yet higher bid in ICI price
NH: Akzo’s rejected offer of 600p unlikely to be raised in our view; JPMe
current price assumes €8 value destruction, justified only by offer >700p
NH: JPMe current 600p offer=€3 value destruction. Reiterate OW.
Bidding war unlikely; Dow: ICI competes against its acrylic resins
customers; DuPont is focused on RoI and trimming EU coatings; BASF
regeared early 07; Valspar: focused on bolt-ons and incr distr through
Chinese acqsn; Reliance has acqd at lower multiples.
NH: At c639p, ICI already disc. higher offer (applying annual 6% time value
disc over 6mths implies 660p bid price; 12.1 08e EBITDA), we downgrade
to Neutral. DCF-based Dec 07 TP remains 450p.
PM: Thanks for that
PM:
PM: Greenback — asking about Clarins below
NH: the reason for the rise is a story which appeared in Challenges magazine today
PM: Challenges Magazine? Who are they?
NH: no, some Euro publication I think
NH: its says the company could be a takeover target for LVMH, PPR, L’Oreal
PM: trying to get their hands on the infamous Beauty Flash Balm — im told by a nearby expert
PM: Not Neil, i hasten to add
NH: greenback will try and get a copy of the article for you
PM:
PM: Now — tell me about Jessops
NH: shares up 1.75p to 19.5p in the middle
NH: and I can’t see why
PM: What do you mean???
NH: Well, the company had announced its results and its rescue plans today
NH: and I just can’t see why anyone would be positive
NH: or buying the stock unless they have a large bear position to close
PM: So what are the details?
NH: well current trading is dire
NH: lfl sales down 12.9% for 12 weeks to 17th June
NH: posted H1 loss of £8.5m
NH: planning to close 81 stores (25%) and focus on a core of 234 cash positive units
NH: The stock profile is to be ‘cleansed’ via outsourced clearance specialists
PM: Clearance specialistst!!!!!!!!
PM:
NH: central overheads to be cut by 20%
PM: Big job losses at HQ then
NH: Restructuring costs will be £25m in total, of which £6.9m are cash costs of closing the stores and re-organising the support centre, for which funding is in place.
NH: A new debt facility of £66.5m has been put in place with HSBC, but at 525bps over LIBOR and with a 10% warrant attached
NH: this new debt facility is costing the company £7m on a deferred basis
PM: Hang on, rewind
PM: this new debt facility is costing 5.25% over Libor
PM: What — are they using a credit card or something?
NH: no
NH: and they have not gone to Cattles either
NH: this is HSBC
PM: Conrad Black could borrow money cheaper
PM: So they are going to be paying over 10% for this new facility
PM: How much debt have they got?
NH: according to this morning’s interims it looks like net debt of £61.5m as of April 1
PM: Jeepers — at more than 10%
NH: so you can understand why I am so puzzled by the rise this morning
PM: certainly can
NH: if you ask me this is basically a bridging loan to give the company time to put the rescue plan to work and then hit shareholders with a huge rights issue
PM: Think you are probably right
NH: in fairness the resuce plan does look sensible, according to the analysts I have talked to this morning
NH: this is from Kaupthing
NH: This action plan looks looks capable of getting Jessops back into profit, helped by supplier support, but clearly in the short term it remains vulnerable to market conditions. Yesterday, though, DSG cited the digital SLR market building up a head of steam, and this is a core area of strength for Jessops
NH: Panmure Gordon are more bullish
NH: they have set a 30p price target
PM: 30p — that sounds a tad heroic
PM: Ive got the note
PM: A reduction of overhead cost by over £15m, a refinancing of debt, an issue of warrants, and a reconfiguration of the store base have given Jessops a
breathing space. We continue to believe there is value in the stock and
reiterate our Buy recommendation and 30p target price
PM: Current trading has been dire with lfl sales down 12.9% for 12 weeks to 17th June, however availability of key product lines is now said to be much improved ahead of the key summer selling season.
PM: This is a high risk investment given the structural pressures in
the industry. product price deflation is rampant, mobile phone camera specifications have substantially improved, Jessops reliance on a very narrow product market leaves its sales volatile, and it.s added capacity rapidly over the past few years.
PM: However, as we have maintained previously, we believe there is value to be salvaged from the wreckage and we retain our Buy recommendation and 30p target price.
NH: I don’t understand, if current trading has been so dire, how can this stock be a buy???
PM: Pass
PM:
PM: Right — thanks for joining us today. Do come back for the next session of Markets Live tomorrow at 11am.
NH: see you then