Markets live chat transcript for the chat ending at 11:51 on 11 Jul 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Good morning and welcome to Markets Live – FT Alphaville’s daily markets commentary.
PM: Day 12
NH: Morning all
PM: Just getting our ducks in a row at this end
PM: I’d forgotten to send Neil some stuff
NH: got it
NH: these new systems are fast
PM: 
PM: Ace IT
NH: never thought I would say that
PM: ok — Ace-ish
NH: right let’s talk about Whitbread
PM: This is a glorious example of the bid fever we’ve seen over the past year – and the accompanying re-rating we’ve seen in particular stocks
NH: what do u mean
PM: Well just looking at the chart – moved from 12 quid to 19 quid in 12 months.
PM: Think about it — the value of this business is up by more than 80 per cent – and its in the growth businesses of budget hotels, Beefeater restaurants, Costa coffee shops and David Lloyd health clubs
NH: just sold David Lloyd BTW
PM: Of couse — osrry
PM: I know Lex were recently saying that Hilton was a steel for Blackstone at 40 times 2007 earning
PM: But Please!
PM: At this price Whitbread is trading at 25 times 08 earnings estimates.
PM: Am I missing something!!!!!
NH: you are missing the Starwood Capital bid angle
PM: Ah yes — this story just refuses to die down
PM: What’s the latest?
NH: as we wrote several times last week, Starwood Capital, the US real estate investor, is said to be trying to line up funding for a bid in Europe
PM: and everyone thinks it is Whitbread
NH: yep and it makes sense
NH: Starwood own around 800 budget hotels in Europe and that portfolio would make a good fit with Whitbread’s Premier Travel Inn chain
PM: Its Premier Inn
NH: sorry I forgot Whitbread were in the middle of an expensive rebranding
PM: get it right!
NH: £13m took take down a few signs and put up some new ones
PM: £13m quid and you cant be bothered to get the name right
NH: boom time for shop fitters
PM: Blokes with ladders raking it in
NH: anyway back to the story
NH: Earlier this year Starwood hired the guy in charge of property at Whitbread
NH: can’t remember his name but it was considered a big blow at the time
PM: yes, can see that
PM: And what about these large trades last night — that i read about somewhere this morning
PM: Might have been CityAm
NH: what this mystery buyer of 500,000 shares 18p above the prevailing price?
NH: not printed yet, but could be a delayed trade so we will have to wait
PM: Think it got pulled — done at wrong price??
NH: its possible
NH: anyway the more interesting trades in Whitbread have been in the derivatives market
PM: Really?
NH: yep
NH: seems punters were selling put options and using the proceeds to buy out of the money call options
PM: Yyou’re right, that it bullish and only something you would do if you were convinced a bid was on the way
PM: Seriously geared takeover punting
NH: if that punt goes wrong, the downside would be enormous
PM: 
squared
PM: So what would Starwood have to pay to land Whibread?
NH: well, assuming they can raise the finance, you would think somewhere in the region of £22 a share
NH: it’s not as if Whitbread is a badly run company anymore
NH: have been very active managing their portfolio over the past year or so
NH: sold off a load of businesses like Pizza Hut, pubs and most recently David Lloyd, its health and fitness club business
NH: in fact the proceeds from that sale should be coming back to shareholders later this year
NH: and along with a promise to gear up that means there could be a big windfall on the cards for Whitbread shareholders
PM: Presumably that puts the pressure on a bidder to make a move
NH: yep, I reckon a bidder has a two month window of opportunity
PM: OK, let’s get back to price
PM: reckon a bidder would have to pay above £22
NH: yep
NH: hang on, here’s a recent note from Merrill Lynch that explains why Whitbread is worth that much
NH: basically most of the value is in Premier Inn
NH: We believe that Whitbread’s recent revaluation of its pub restaurant and hotel
assets to £3.6bn, coupled with the £925m sale of David Lloyd puts an 1850p to
1900p base on the share price. This gives investors a free option, in our view, on
further asset sales, complete company break-up or takeover. Consequently we
are reiterating our Buy recommendation with a price objective of 2400p, potential
upside of over 30%. This is inline with our break-up sum of the parts valuation of
c2400p as well as our 2400p OPCO/PROPCO valuation.
NH: Possible £1bn capital return
We have adjusted our forecasts to reflect the Q1 trading update and David Lloyd
disposal. Simply paying down debt with the proceeds leads to a marginal increase
in EPS this year and small decrease in the following two years as the interest
saved does not fully offset the lost profits at David Lloyd. Moving to a debt to
EBITDAR ratio of 4.5x would allow Whitbread to return c£1bn to shareholders,
which would be EPS neutral at today’s share price.
NH: Value will out
In the medium term we believe it is unlikely that the company will continue to exist
in its current state and believe it is inevitable that the significant value locked in
Whitbread’s property portfolio and business structure will be released.
Management’s strategy is ensuring that any value created is ending up with
shareholders rather than a private equity bidder. In our view, the increasing
valuations of deals in the hotel, pub restaurant and coffee sectors give support to
our 2400p sum-of-the-parts valuation.
PM: that is aggressively bullish stuff
PM: Believe it is inevitable that the significant value locked in
Whitbread’s property portfolio and business structure will be released.
PM: ive got to say tho — I just dont understand it
PM: Im not saying some PE buyer wont appear with a case full of cash
PM: But please — Brewers Fayre restaurants
PM: Might be better than Harvester — but not that much
PM: And Beefeater?!?!?
PM: Have you got any numbers on what Premier Inns might be worth
NH: we believe that the increasing prices being paid for hotel
assets continue to underpin our valuation of Premier Travel Inn. The recent sale
of Jury’s Inn for a reported €1.165bn or 18.6x 2006 EBITDA shows there is still a
strong market for 3 star hotels. We estimate this is a price of c£160,000 per room.
This compares favourably with the £88,000 per room that our SOTP model
implies for PTI, the £32,000 – £34,000 Whitbread can build rooms at on its pub
restaurant sites and c£50,000 per room it has made bolt-on acquisitions at.
PM: Ok — thanks for all that
PM: 
PM: I think it is about time we had a look at the wider market
NH: not faring to badly given the carnage on Wall Street overnight
NH: FTSE 100 currently down 21.7 points at 6,609.2
NH: dropped as low as 6,583 earlier
PM: People fretting once again about the subprime issues in the states
PM: Moody’s and S&P are in the process of downgrading hundreds of subprime related debt issues
PM: The big unknown here is whether there is a crycstalisation of investors losses on the subprime side
PM: And we are talking scores of BILLIONS of dollars here
PM: Potentially
PM: Richard Gerrard below notes that we said markets were getting over subprime yesterday!
PM: Which is true — but we couldnt understand why…
PM: Still think the equity markets are underplaying the potential contagion here — personally
NH: the point to remember about the recent strong performance of the London market is that it has been driven mainly by two sectors
NH: oil and mining. these are real heavyweights and when they move, the index moves regardless of the underlying fundamentals
NH: arguably the rise in the oil price, which has sent the likes of BP and Shell higher, is not good for the economy, but the FTSE 100 is not an economic barometer for the UK economy
NH: it is a punt on global oil and mining with a few banks thrown in for good measure
PM: hmm
PM:
PM: Still individual stocks are certainly on the move
NH: well, we have BSkyB up 37p at 709p
NH: that’s a rise of 5.5%
PM: Goodness
NH: the last time the shares were trading at this level was back back in April 2004
NH: Sky shares have risen by around 30% this year
PM: that much. I hadn’t realised
PM: So what’s driven this morning’s move?
NH: a very positive trading Q4 statement
PM: Which says?
NH: the highlight, and the reason the stock is moving, is that customer adds are slightly higher than expected – 349,000 vs expectations of 330,000
NH: churn is also lower than expected – 12.1% against forecasts of 12.5%
PM: Churn v v important for Sky — indicator to watch
NH: the only slight negative in the statement is that number of broadband customer which at 716,000 is a bit below top end estimates
PM: Any analyst comments?
NH: this is from Lorna Tilbian at Numis
NH: Strategy presentation: We believe BSkyB will today provide an upbeat assessment of its strategy, its consumer offering and its broadband progress. We believe the ‘See, Speak, Surf’ triple pay offering is strong and this is reflected in the fact that BSkyB is now established as one of the UK’s leading broadband providers and is adding more broadband customers than any other competitor. Moreover, we believe the strategy is reinvigorating growth in the core pay TV business.
NH: Forecasts: We do not expect to change PBT/EPS forecasts for the year to June 2007 (£680m/27.0p) and the year to June 2008 (700m/28.0p).
NH: Recommendation: In the last three months the BSkyB share price has risen from c. 570p to yesterday’s close of 672p and our recommendation is Hold. However, we remain supporters of BSkyB and we believe it is well positioned to deliver on its broadband strategy.
PM: Ok — thansk for that
PM:
PM: Other stuff on the move?
NH: Unilever
NH: shares up 55p at £17.02
NH: that’s a rise of just under 4%
NH: there is some story about a bid from Colgate doing the rounds
PM: 
NH: but as Colgate is smaller than Unilever I don’t think anyone is taking that too seriously
NH: Colgate market cap is $34bn
NH: Unilever $53bn
NH: not sure how the maths would stack up on that deal
PM: Big reverse takeover!
PM:
NH: it would. perhaps Colgate could find a private equity partner to join in
PM: Yeah, yeah, yeah
NH: I am hearing thereal reason for the rise is a combination of the multiple Danone paid for Numico and rumours of stake building by an activist investor
NH: and the story here is that if an activist is positioning himself, Unilever’s new chairman will respond with plans to break up the company
PM: What’s his name — the chairman
PM: And makes sure you get the spelling right
NH: Michael Treschow
NH: he had quite a track record
NH: real cost cutter and when he was at Electrolux he gave that company a real shake up
NH: demerged a couple of divisons. one was the world’s biggest maker of lawn mowers i think.
NH:
NH: Moving on from Unilever, Astrazeneca are also in demand
NH: no speculative reason for the rise, just an upgrade from Morgan Stanle
NH: here are the brief details
NH: upgraded to “overweight”, reckons the stock is cheap
NH: will just paste some of the highlights
NH: We are turning positive for the first time in two years
as we believe the market is underestimating AZN’s
cash flow and earnings, both over the near and long
term.
NH: At 10.7 times pre-amortization 2008e EPS, the
stock is trading at close to historical industry trough
multiples. We believe the downside from here is limited
to 10%, whereas we see three drivers that together
could yield potentially 25% upside (our bull case); our
price target implies 18% upside potential. This attractive
risk/reward drives our upgrade to Overweight-V.
NH: AZ shares currently 63p higher at £26.94
NH: hang on Paul just on the phone
PM: yeah, sorry about that
NH:
NH: what was that all about???
PM: Well, seen this E-Pay Asia thing?
NH: Yeah, it’s screwed up this morning.
PM: It was one of the directors on the phone, trying to explain things
NH: We’ve got a trading statement — its an IT firm focused on the the far east (obviously)
NH: Bascially they’ve had problems in Indonesia – and they’ve also re-worked their plan for expansion in China – the result will be a “significant” hit to profits.
PM: So the shares are?
NH: Down 2.25p at 7p. Also, the spread’s as wide as the channel – quoted at 6.5p to 8p.
PM: What caught my eye his is that back on June 20 – just three weeks ago – one Simon Loh, who is the controlling shareholders as well as managing director, sold 18m shares.
NH: Wot?
PM: Yes, 18m shares sold at 30 Aussie cents.
PM: The equivalent of 13p a share.
NH: And they are now 7p – well, 6.5p if you are trying to sell.
NH: Hmm — £2.34m of stock sold three weeks before a major profits warning. Obviously Mr Loh was completely clueless as to what was coming down the slipway.
NH: and Mr Lo was iin what position at the company???
PM: Er, founder and managing director
NH: so not a non-exec director in the boardroom a few days each month then?
PM: Er, no — but he obviously didnt know this was going to come out when he sold his block of 18m
PM: Anyway I hope so
NH: What do you mean?
PM: because otherwise he is going to have some very difficult conversations with his boardroom colleagues.
NH: why???
PM: Almost 7 million of the shares Loh sold in June went to a fellow director, Dato Hassan.
NH: Oh dear
PM: While Loh’s stake has fallen to 48%, Hassan’s has risen to 7.6%.
NH: I bet he’s happy! Half his money gone in three weeks!
PM: Well, the director ive just been chatting to says this “sale” was more like a “transfer” between two founders
NH: what a transfer of value between two founders???
PM:
PM: Er, yes. And also much of the rest of the stock apparently went to other managers
NH: jeepers, morale must be high at e-pay
PM: There’s a suggestion tht Mr Loh might compensate certain people with stock options
NH: it is the least he could do
PM: Yes
PM:
PM: no where were we?
NH: I wanted to talk about William Morrison
NH: shares managing to buck the weak market trend this morning
NH: up 3.5p at 309p.
PM: Why? more stake building runours??
NH: not this morning, although we reckon Robert Tchenguiz has 0.5% holding in the company
NH: the reason for today’s strength is an upgrade from house broker ABN Amro
PM: What factors are they citing?
NH: property and capital structure
PM: Sounds interesting
NH: especially as it coming from the house broker
NH: haven’t seen the whole note, only a summary but from what I can work out ABN are saying if Morrison starts to become more flexible with its capital structure, the shares could be worth in excess of 400p.
PM: that’s 100p of upside from the current price
NH: it is
NH: and from what we know the new management team at Morrison seem to have a different view of leverage to that of Sir Ken Morrison
PM: I bet they do
PM: Sir Ken wouldnt have any of that fancy financial stuff
PM: doesnt fit with pie counters
NH: they don’t like that sort of thing up north
PM: Im from Manchester — just before anyone decides to write in
NH: anyway if MRW manages to sell the 25 supermarket sites it has put up for sale and they fetch more than £1bn it could pave the way for a large share buyback
NH: In fact if the sale goes through MRW will be debt free
PM: didn’t know that
NH: hang on, the ABN note had just appeared in my inbox
PM: Magic!
NH: pasting
NH: We believe the recent weakness in Morrison’s share price presents a
good buying opportunity. We raise our target price, which does not
build in any property deals or capital structure changes, to 363p and
move our recommendation back to Buy.
NH: The group continues to look at the potential of a property transaction that could be worth up to £1bn. A transaction of this magnitude would wipe out the group’s net
debt. Indeed, the group previously has stated that it will update on its capital
structure plans at the time of its prelims in March 2008. In our view, this could
provide a further boost to group valuation, but it plays no role in the derivation of our
price target at this stage.
NH: Price target raised to 363p from 340p; moving back to Buy from Hold
Our 363p price target is derived from separate opco and propco cash flow valuations.
Within this, expected property transactions for now play a minimal role (3% of our
price target). If, however, the group concludes a deal on its investment properties for
£1bn, this would increase our price target to 387p. If the group starts to become
more flexible with its capital structure, we believe the shares could be worth in
excess of 400p. Buy
PM: Excellent. Thanks for that
PM:
PM: Moving naturally on to Sainsbury — which Greenback has raised below
NH: nothing new from the AGM on trading
NH: on this stake stuff
NH: hearing that Tchenguiz may look to sell half his 11% holding to Delta Two
PM: They are the Qatar backed vehicle
NH: they are, apparently this will be the portion held in real shares. not CFDS’ and that ammounts to 5%
NH: that would lift the holding of Delta 2 to 29.99%
PM: Hmmm
NH: the thinking in the market is that this would suit Mr Tchenguiz
NH: he would be able to chrystalise some of the value he had helped generate in SBRY
NH: and at the same time retain an interest
NH: and it would also give him some ammo to go and seek out his next target
NH: which many people believe will be Morrison
NH: and as you can see from the ABN note this morning, there could be a lot of upside in the Morrison price
NH: just getting back to Greenback on the make up of the Tchenguiz holding
NH: 5% is equity, the rest on CFD’s
PM: Thanks for that Neil
PM:
PM: GOO’s on the MOVE!
NH: oh no.
NH: that’s Paul’s oil exploration play on Cuba
NH: and Peru
PM: That’s Gold Oil — with proven assets offshore Peru
NH: onshore you mean
PM: And a punt on on and offshore Cuba
PM: Price zoomed 5 per cent
PM: Er, that’s 0.42p — to 8.3 in the middle
PM: Dont chase it!
NH: i shouldn’t think anyone would
PM: Never know — might come good one of these days
NH: what’s generating today’s excitement. saw they were also up yesterday
PM: No idea — probably Wins just moving the price to generate a bit of business
PM: Sorry – -that’s the respected Winterflood Securities, leading shop for smaller stocks
PM:
PM: We done?
NH: i think we are
PM: Ok — thanks for joining us today. Do come back for the next session of Markets Live at 11am tomorrow
NH: a quick plea for a bit more auidence participation tomorrow
PM: — oh and ocme to our drinks — Bow Wine Vaults — Bow Lane — noon ish on Friday
NH: bye