Markets live chat transcript for the chat ending at 11:47 on 28 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: Give you some breaking news….
PM: Bank of England meeting suspended — there’s been a fire alert
PM: Earlier members of the MPC having a v v serious discussion about inflation prospect here
PM: Tone v hawkish — but now interrupted by a fire alert
NH: that’s enough eco stuff
NH: lets get down to some stock specific stuff
PM: Right — you’ve got a good speculative one to kick us off with this morning, Neil
NH: and I stress it is still speculative
PM: RAW
NH: yep
NH: involves Smiths Group
PM: Ok 
NH: heavy volume yesterday
PM: How heavy?
NH: 11m traded vs a daily average 4.83m
NH: were rumours around of a £12.75 bid approach
NH: and the speculation has continued this morning
NH: one broker putting round a story that GE and Honeywell are interested
NH: but I have heard something different
PM: Really ?
NH: and its much more interesting
PM: Do tell
NH: it is these stake building rumours again
PM: Ah, we have written about that before
NH: we have
NH: but I think
NH: a) its true
NH: b) I know who it is
PM: Excellent
NH: it comes from 
NH: and he says it comes from someone good
PM: So who is it — the stake building that is?
NH: someone who built a big stake in the London Stock Exchange
NH: a 10% stake that’s proved to be very profitable
PM: That would have to be Samuel Heyman
NH: that’s what is saying
PM: Now that is v interesting
PM: This man is a serious player
NH: a real corporate raider
PM: Here’s some background on the man
PM: Became a billionaire in the 1980s by mounting attacks on undervalued companies with junk bond king Michael Milken
PM: Started his career as a lawyer working for the Kennedy administration but moved into property and then the chemical industry
PM: So what would his angle be on Smiths Group?
NH: i reckon he would probably try and push for a break up
NH: and he could be pushing at an open door
NH: remember earlier this year Smiths sold its aerospace business to GE
PM: Yep and it has just returned the cash to shareholders
NH: this week in fact
NH: it also put its detection business into a JV with GE
NH: basically this was an admission from the company that its structure did not make sense and a break-up was on the cards
PM: So what’s left of Smiths now?
NH: well, there’s a medical business
NH: and Speciality Engineering
NH: this has three main segments:
NH: John Crane seals business (mainly
used in petrochemical plants)
NH: Interconnect (sophisticated electronic plugs
used by many industries)
NH: Flextech (tubing for residential and industrial
applications).
PM: Ok
PM: So you think Heyman will push for this to be broken up
NH: yes
NH: these businesses would be v attractive to trade buyers
NH: but management might beat Heyman to it
PM: What makes you say that?
NH: well, Citigroup published a note a couple of weeks ago
NH: it followed a meeting with the company
NH: and they concluded that a break-up was definitely possible
NH: here’s some of the note
NH: Management comments: We discussed the issue of a break-up with SG
management at last month’s investor day. We must state that management
has not overtly said its plan is a full break-up.
NH: However, we still infer there is a highly probability of this. Chairman Donald Brydon said he believes there is significant “optionality value” in an immature business like Detection
NH: In our view, this suggests SG believes the market is not currently valuing this
‘optionality’. Finance Director John Langston also said that SG would consider
offers for any of its businesses if the offer was above what SG believed to be
fair value for the business.
NH: Tax is no longer an obstacle: Ahead of the Aerospace disposal SG has led
investors to believe that it would incur significant tax liabilities if it sold any of
its business. This proved not to be the case with the Aerospace transaction
and we believe the remaining businesses could be sold without significant tax
implications.
NH: Attractive assets remain: SG’s remaining businesses all have good margins
and cash flow and could be attractive to both trade buyers and private equity.
NH: Break-up would be the best way to reverse share price underperformance:
SG’s CEO, Keith Butler-Wheelhouse, was appointed in November 1996 and
he is due to retire in July 2008. Since November 1996 SG’s share price has
risen 40% in absolute terms but has underperformed the FTSE by 21%, as
shown in Figure 1 below. We believe that a full break-up would be the best
way to crystallize value for shareholders.
PM: Ok, thanks for that
PM: What are Smiths shares doing this morning?
NH: up 11p at £11.63
PM: 
PM: We are going to move to the wider market — but quick one for fitzsimons below…
PM: Apols - we have no further intelligence as yet
PM: Just think Sir Tom is sitting in a very pretty position
PM: Neil — the wider market
NH: finally there is a bit of blue on the screens
NH: FTSE 100 up 37.7 points at 6,565.3
NH: that follows a decent performance on Wall Street overnight, where the Dow ended 90 points higher
NH: strength in Vodafone and the heavyweight oil sector helping too
PM: On vodafone
PM: Thought the stuff you wrote this morning about the 1bn share buy order was interesting
NH: apparently you were not the only one
NH: traders believe something is going on
NH: on Monday and Tuesday night, blocks of 200m shares were traded
NH: some people think they were simple fund to fund transfers
NH: some people think the opposite
NH: real debate raging out there
NH: and it all comes at a very delicate time for Vodafone
PM: Hmmm
NH: what with Mayo keeping up the pressure for the company to sell or demerge its holding in Verizon wireless
PM: Yes — lots of noise from Mayo — but I wonder whether a serious actiivist is at work
NH: it has to be possible
NH: equally it could be money from China or the middle east going into Vodafone
NH: Its already happened with HBSC, Anglo American
NH: Why not Voda?
PM: What are Voda shares doing?
NH: up 4.8p at 168.6p
PM: Well — the market seems to suspect something is going on
NH: but there is also continued speculation that Voda has won the European iPhone contract
PM: Sure
PM:
PM: What about the oils?
NH: they are being supported by the firm oil price
NH: holding above $70 a barrel
NH: mind you there is also talk of Russian stake building in BP
PM: BP shares are up 9.5p at 597p
PM: Royal Dutch Shell are ahead 40p at £20.47
NH: actually Shell has also been helped by a note from Morgan Stanley
NH: the broker has moved to an overweight recommendation
NH: reckons Shell is undervalued by $120bn
PM: Er, is that a typo?
NH: no
NH: $120bn
PM: I think we need to see this note
NH: hang on will just get it
NH: pasting
NH: Shell is undervalued by $120 billion: We have
revisited our disaggregation case for Shell and
conducted a more detailed sum-of-the-parts exercise.
We argue that there is a massive gap between the
market value and the underlying value of the company.
Our valuation suggests a disaggregated value of $384
billion or £32.1/share.
NH: The non-upstream is the key: Shell is the biggest
company in Europe outside the upstream. We attribute
some $174 billion to its refining, marketing, gas and
power and chemicals businesses. That is before we
value any of the barrels in the upstream.
NH: It’s a Supermajor thing: The de-rating of the
supermajors has been relentless for four years. The
conglomerate presentation belies what are more
valuable businesses. The large cap now represents the
cheapest access to energy in the world in our view. The
upside is probably greatest at Shell, but the theory
applies to BP and Total as well.
PM: Goodness — this is an intersesting note!
PM:
NH: What would close the value gap?
Waiting for the catalyst in the oil sector is a pretty sure way of
missing the party. No-one forecast that BP was going to take
over Amoco, or that a construction company was going to take
a stake in Repsol. Most scoffed at the idea of a merger
between BP and Shell last year, but it has now become broadly
accepted (although unconfirmed) that the two companies
talked to each other about the idea. We don’t know what the
catalyst might be, but there are a number of risks:
management want to make.
NH: A bid — BP would seem to be the natural bidder and
the suggestion has appeared in the press at various
times over the last year, most recently in the Financial
Times in May. If indeed, the deal was considered then
it appears to have gone onto the back-burner. It does
not seem that plausible at the moment — but not out
of the question and in time, we think very logical.
of the question.
NH: Private equity — The private equity industry is
waking up the small cap and the mid cap world, as
undergeared and underappreciated assets are being
snapped up by ever braver private equity players. The
trend is driving greater focus on private equity style
valuation techniques in the market and break-up
values. We do not think a private equity move is
particularly likely given the size and political
sensitivity, but the prize of $120 billion must be
tempting.
NH: Activist investment / private equity — Taking over
an oil major might be a bite too far, but taking 10% of
the company and then applying relentless pressure
on the board is another matter. There are plenty of
groups that could invest enough to force change on a
major oil company board. The rise of activist
investment itself should be enough to inspire action at
board level of companies that are aware they are
PM: Thanks for that — v interesting
PM:
PM: I know you’re relentlessly up-beat and my warnings of doom are becoming really boring, see this China stuff this morning?
NH: Well, yes – the Shanghai Composite was off 3% overnight – this was on the back of news that the government is issuing $200m of bonds for a new overseas investment agency.
NH: Thought that was a sensible thing by the Chinese – they’re mopping up cash locally and looking to ship it out of the country so it doesn’t end up in the stock market there.
NH: The authorities are managing the market lower – rather sensible.
PM: Sure – that looks sensible
PM: But what caught my eye was the story in the paper this morning that the Chinese authorities have “punished” 10 international banks for “assisting speculative foreign capital to enter the country disguised as trade or investment.”
PM: Names include Standard Chartered and Citi.
NH: Hmm – interesting – but what’s your point?
PM: Well, it read to me as tho the Chinese are now blaming those dirty foreigners for pumping up their stock market to unrealistic levels.
PM: That’s kinda of scary – also there’s no detail as to what this “punishment” is or was.
PM: Remember – this is a communist country. Much of it – outside the cities – is volatile. The gov are basically moving 50 million people a year to work in cities on the western seaboard so they don’t starve in the interior and turn to rioting.
PM: I know im boring on this but while China might be the engine of world growth and the reason why we still have relatively low inflation – it is also intrinsically unstable.
PM: And now it’s blaming Johnny foreigner for its over blown stock market.
PM: That’s a danger sign.
NH: eh. thanks for that
PM:
PM: what else is moving this morning?
NH: a bit of weakness in the ICI share price
PM: Shares are down 5.5 at 612
PM: Why’s that?
NH: been spooked by a story in the Business
NH: have not checked it yet but it is interesting
NH: they claim Atticus, the activist hedge fund, has built a stake of between 1 and 5% in Akzo Nobel
PM: That’s the Dutch company that had a 600p a share offer for ICI rebuffed
NH: and has told the board of Akzo that it should not raise its offer
NH: of course, readers will be aware the atticus has done exactly the same thing with Barclays
NH: told the company not to overpay for ABN Amro
PM: Do we have a copy of the article??
NH: yep
PM: Ah, its ok — ive found it
PM: ATTICUS Capital, the American hedge fund pressuring Barclays to drop its
bid for ABN Amro, has built a stake in Akzo Nobel, the world’s
largest maker of paints and coatings, which made an abortive £7.2bn
bid for ICI earlier this month.
PM: Three sources, one in London and two in America, say it bought the
stake, which accounts for between 1% and 5% of Akzo’s free float, within the last
eight weeks. One of the sources said that Atticus is preparing to publicly
pressure Akzo’s management not to make an increased offer for ICI. Akzo’s
executive board has spent the past week rallying support from investors on both sides
of the Atlantic
PM: America’s Paulson, another hedge fund, also bought a stake in Akzo
within the last two months, and London-based Centaurus Capital, which recently
appointed Ken Clarke, the former chancellor of the exchequer, and Jose Maria
Aznar, a former Spanish prime-minister, to its advisory board, has been an
investor for 18 months
PM: Both own stakes of up to 5% but are reserving judgement on whether to
fall in line with Atticus until after meetings with Hans Weijers, the Akzo chief
executive.
PM:
PM: Has there been any recovery in the Northern Rock share price?
NH: a little
NH: up 3.5p at 837.5p
PM: that’s not much of a 
PM: Small dead cat
NH: very small dead cat
NH: dead kitten bounce
PM: Actually, could be a heavy cat, which doesnt bounce
NH: anyway its a pretty pathetic rally
NH: and it is not as if bid spec will save the share price here
PM: backstory here is that Northern Rock came out with a shaker of a profits warning yesterday
NH: NRK has a poison which allows a charitable foundation to issue loads of shares in the event of a takeover
PM: Hadnt seen rise in interest rates coming — and everyone is looking at the bank and saying “this bank is built on financial engineering — what happens if the credit markets get seriously wobbly’
PM: So, investors still steering clear of Crock
NH: yep
NH: and given some of the analyst comment around this morning I am not surprised
NH: Deutsche Bank have cut their target price to 790p
PM: Ouch!
PM: yes please
NH: wanna see the note
NH: pasting
NH: Even after taking into account profits on disposal and a share repurchase from the
proceeds of £3.1bn of unsecured and commercial loans in 2008, we have downgraded
2008 EPS by 11% to 97.3p. This is primarily driven by margin pressure in the
underlying mortgage business and the dilutive spread impact of the disposal of higher
margin books.
NH: Northern Rock currently trades on 8.7x 2008e compared to a European
banks sector on 11.0x, but we believe this significant discount is deserved as Northern
Rock has limited potential to offset the industry margin decline and credit cost
deterioration as it already has the lowest cost:income and highest level of gearing
(assets:equity) in the European banking sector. We retain our Sell recommendation
and have reduced our target price from 980p to 790p.
PM: Enoyed that, thanks
PM:
PM: Let’s have a look a bit lower down the market
NH: Wood Group is strong again
PM: Ah, yes, remind me of the story here
NH: shares up 14p at 334p
PM: Goodnes — impressive move
NH: that’s a rise of 4.4%
NH: the latest story here is that Amec might be looking at the company
PM: Amec — that’s the construction company
NH: don’t say that
NH: i wrote that the other day and got told off
PM: Er, so what are they called these days? if not a construction co
NH: oil and gas services company
PM: 
NH: nothing more, nothing less
PM: Right…..
PM: So tehre could be some logic in this Wood group story
NH: well there could be
NH: but there is one problem
NH: Wood just looks to big.
NH: valued at over £1.7bn now
NH: Amec is valued at £1.87bn
NH: Co will have £400m of net cash by the end of the year though
PM: Amec v strong i see — up 22p at 584
PM:
PM: Why is Sports Direct down — it cant go down every day
NH: it seems to
NH: off a further 3p at 184.5p
PM: Float was at 300p
PM: What’s hitting it this morning, other than the usual
NH: fears of weak trading
NH: does take a genius to figure out that the recent wet weather will have affected sales
PM: Sure — but is there anything underpinning this thinking
NH: Philip Dorgan, the veteran retail analyst at Panmure, has lowered his forecasts this morning
NH: Rain stopped play
We expect Sports Direct’s sales will have suffered further from the poor June
weather and are therefore reducing our forecasts (again) and our target price
(again).
NH: We believe that Sports Direct will have been affected by the same negative dynamics as
the clothing retailers, hence we are reducing our already low forecasts by 8% for the
current year and by 1% for the next.
NH: With no property backing and growing unease about the dynamics of future growth, given
the collapse in like-for-like sales in response to the gross margin hike and the promise of a
never-seen-before-store opening programme, it is difficult to have any visibility as to when
forecasts will bottom out.
NH: While it is always dangerous to write retailers off, with the darkest hour being just before
dawn, we believe that the shares have further to fall.
PM: Ok — thanks for that — 8% forecast cut.
PM: No wonder the price is down again
PM: One thing I was thinking – not market related – is whether you knew when the final series of the Sopranos was coming on the box here?
NH: Fraid I don’t know. Why do you ask?
PM: Oh, I don’t know.
PM:
PM: Anything else to mention before we wind up today?
NH: Fun and games in Italy — Impregilo, country’s largest construction company, has been banned from bidding for public waste management contracts for a year.
NH: The move follows a fraud investigation. While the company denies any wrong doing, a payment of €750m to the company related to work on an incinerator has been blocked.
PM: Sounds a rum deal.
NH: Shares in Impregilo have fallen 16%. – were suspended earlier.
PM: The company is based in Naples. And its in construction and waste management.
NH: Steady!
NH: I can sense some national stereotyping coming on here.
PM: Er, yes you are right!
PM: That’s it from us today. Thanks for joining us. Do come back for the next session of Markets Live tomorrow at 11am
PM: Neil says bye..
