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Markets live chat transcript for the chat ending at 11:51 on 16 Jul 2007. Participants in this chat were: Neil Hume (NH) Paul Murphy (PM)

NH: Good morning and welcome to Markets Live

NH: Alphaville’s daily chat on what’s moving and why in the London market

NH: as ever Paul Murphy is with me

NH: but he is on the phone at the moment

NH: we have got an interesting story to tell this morning and Paul is just finishing what seems to be a heavy conversation

NH: so if you can just bear with us for a minute

PM: Hi there — that was difficult conversaion — but hey ho

PM: We are both very jittery.

NH: Some of you will know why – since we published a preview of today chat that was headlined – “An eye-popping merger?”

PM: So should we disappoint everyone straight away.

NH: Well you know we’re not going to!

PM: Ok, let’s get the news out.

NH: Caveats / escape cutes first!

PM: Ah yes – while big and fascinating, we think there is no more than a 30% chance of this deal actually happening.

NH: i’d say much less than that

PM: No, it is only at discussion stage and we fully expect the key company involved to say something like:

PM: “No comment” publicly, while privately telling people – “Look, this was just one blue sky idea that we looked at – it was just some low grade, low level corporate finance pitch that was dismissed out of hand at the time.”

NH: Yes, they will probably say that – and you will promptly go off on one about how regulation has led to a redefinition of what constitutes THE TRUTH

PM: I will – but that’s no reason why the readers shouldn’t know the actual story.

NH: OK – the names are…

PM: Vodafone, and

NH: Verizon

PM: That’s Vodafone looking in some detail about bidding for its estranged American partner Verizon.

NH: And we are not just talking about some passive offer fro Verizon Wireless, the mobile business in which Voda has a 45% stake.

NH: We are talking about the whole shooting match – a bid pitched at about 30% above Verizon’s market price, valuing the full telecoms group at something like $160bn.

PM: Told you it was big.

PM: Here’s the full tale we are printing on the blog.

PM: Mobile phone group Vodafone has been considering a $160bn takeover bid for its American peer and partner, Verizon Communications — a deal that, if consummated, would rival AOL’s takeover of Time Warner and Vodafone’s earlier acquisition of Germany’s Mannesmann as one of the largest M&A transactions on record, FT Alphaville has learned.

PM: Vodafone has not yet approached Verizon with the plan and sources cautioned that there is no certainty the British mobile group will pursue the idea. Nevertheless, the move would be aimed, squarely, at settling uncertainty over the future of Vodafone’s US mobile interests — acquiring the whole of Verizon as the route to buying the 55 per cent of its mobile division, Verizon Wireless, that Vodafone does not currently own.

PM: The audacious plan has been discussed in recent weeks as Vodafone has considered whether to trigger a little-known put option it holds over part of its stake in Verizon Wireless — a move that, accompanied by an asset revaluation at the American company, could allow it to suck up to $20bn out of Verizon and distribute this to its shareholders

PM: The extreme alternative of bidding for Verizon would create a business capitalised at around $300m — bigger than AT&T, currently the world’s largest telecoms business.

PM: According to well placed financiers, in contemplating such a move, Vodafone has looked at a range of deal structures. These include a plan to buy the whole of Verizon and then simultaneously spin-off its fixed line interests to a private equity consortium. The company has also looked at whether it could part-fund the deal with the issue of a tracker stock for US investors

PM: If pursued, the private equity side deal alone, valued at around $90bn, would constitute the largest leverage buyout on record.

PM: News of Vodafone’s ambitions — with its stubborn commitment to continued growth by acquisition — is likely to flummox critics who have pressed chief executive Arun Sarin to scale back expansion plans and focus instead on cash generation. Most recently, a growing group of rebel shareholders, including former Marconi boss John Mayo, has pressed for the sale of Vodafone’s 45 per cent holding in Verizon Wireless and the return of cash to investors.

PM: Such a move on Verizon would also be seen as a risky and hugely expensive catch-up exercise in the US following the failed attempt to buy AT&T Wireless in 2004. After a fevered auction, that business was acquired by Cingular Wireless for $41bn.

NH: An all-share deal for Verizon would be highly controversial amongst Vodafone shareholders, who in the past have had to digest some of the heaviest issues of new paper on record - culminating in the $183bn share issue used to buy Mannesmann in 2000.

PM: At the same time, part financing a deal through an LBO of Verizon’s fixed line business, would test the world’s increasingly jittery credit markets, which would be asked to fund around $75bn of debt.

PM: Nevertheless, Mr Sarin’s focus on the plan has been sharpened by the largely unpublicised put option agreement, whereby Vodafone currently has the right to demand that Verizon buy shares from it in Verizon Wireless worth up to $10bn. In assessing whether to exercise the put, which expires in the middle of next month, Vodafone has been re-evaluating its entire US strategy.

PM: One option here has been to press Verizon into gate-crashing the $27.5bn deal hatched by Goldman Sachs’ private equity arm and TPG Capital to acquire Alltel Corp, the fifth largest mobile operator in the US — a deal on which shareholders still have to vote.

PM: In the event that it were to exercise its put option, Vodafone has been working on the assumption that it could generate a tax free payment of $7.5bn from Verizon by reducing its holding in the mobile business to about 41 per cent. At the same time, a further $12bn tax-related payment to Vodafone could be triggered by an asset revaluation.

NH: Let’s just give people a mo to digest that.

NH: there’s quite a bit to get through

NH: This is extraordinary. What do you think is going to happen?

PM: Well I think we are both going to spend the rest of the day – if not the week – with tin hats welded to our sensitive little heads.

NH: Heh! We’re just keeping the market informed

PM: Sure – but other people wont see it like that. Expect an avalanche of conspiracy theories – share manipulators, trouble making activists, accusations we’ve made it all up.

NH: The works –

PM:

PM: Thanks to all those who turned up for our drinks on Friday. it was rather good fun

NH: it was, we even picked up a few stories, which was good.

PM: never mind Ralph — sure we’ll hold another

PM: But tell me Neil — what else is going on this morning?

NH: well we have had the latest chapter of the ABN/Barclays/RBS love story

PM: Yes, of course

NH: The RBS-consortium bidding for ABN have moved quickly to tweak the terms of its offer

PM: that follows Friday’s ruling from Holland that ABN can sell its US division, La Salle, to Bank of America

PM: So what have the RBS bidding team done?

NH: offer has been left unchanged at Eu38.40 but the cash component raised to 93%

PM: Anythings else?

NH: Team RBS have also revised revenue synergies to Eu481m, from Eu742m previously

PM: The Banks — as they like to be known

NH: not by much

PM: How does that affect the returns?

NH: RBS expecting return on investment of 13.2% and earnings accretion of 7%. That compares with 13.5% and 7.3% previously

PM: So not a huge change?

NH: no but its interesting

PM: OK, so what happens next?

NH: I think everybody expected Team RBS to make a revised offer. Probably done it a bit sooner than expected, but I guess the key question now is how Barclays respond

NH: at the moment ABN shareholders have a choice between a mainly cash offer, or a paper bid that comes with a Eu12bn buyback over three years

NH: arguably the buyback is Eu6 a share. Whether anyone looks at it that way I am not so sure

PM: Perhaps the respective share prices of RBS and Barclays can give us a clue

PM: So far in this bid battle, when it looks like Barclays will lose its shares rally

NH: the thinking being that the bank will be vulnerable to an offer from another bank

NH: JPMorgan is usually the name in the frame

PM: So where are the shares trading??

NH: Barclays shot out of the traps this morning. Got as high as 743p, but now trading 11.5p higher at 735p.

NH: as for RBS is shares are up 2p at 642p

PM: from the share price reactions it would seem that RBS is the favourite to win

NH: yep, but there’s not much in it

PM: And ABN stock?

NH: up 3.99% at Eu37.27

NH: actually have you seen these comments from John Varley, the CEO of Barclays?

PM: No

NH: they flashed up on Reuters a bit earlier

NH: said that Barclays will only proceed with ABN purchase on terms that produce the right returns for our shareholders

NH: he also said that the RBS offer still faces considerable regulatory and shareholder hurdles

PM: Doesnt look like Barclays will raise their offer then

NH: yep, but they could tweak the cash component

PM: Ok, any analysts’ comment?

NH: got a note from Caz

NH: The consortium announcement states that each of the three partners is paying the same share of the consideration and therefore some of the $21bn LaSalle proceeds will either be retained within ABN or shared between the partners. RBS’ consideration has fallen by €11bn compared to the €15bn gross proceeds from Bank of America.

NH: RBS has cut the targets for synergies for the wholesale bank (i.e. ignoring the synergies targeted for LaSalle in the original offer):
Costs from €1.3bn to €1.237bn (plus €82m for shared services)
Revenues from €742m to €481m
The statement does not refer to the integration costs

NH: In the statement, RBS describes the financials as “compelling” but implicitly acknowledges the strategic argument is weaker.

NH: We had expected that not all of the LaSalle proceeds would feed through to RBS as we believe that the price agreed by Bank of America is in excess of the value RBS put on the business in the original consortium agreement. However we are surprised at the reduction in synergy targets as the wholesale activities in North America are retained within ABN. It suggests RBS had attached substantial synergies from mid-corporates in LaSalle.

NH: The offer is at a premium to Barclays’ offer (10% on Friday’s closing prices) but we would not expect an immediate response from Barclays, which is not required to provide an update until 23 July

PM: cheers

PM:

PM: Right, time to take a look at the wider market

NH: London is flat

NH: FTSE 100 down 4.8 points at 6,711.9

NH: seems like a pause for breath after a couple of decent sessions

NH: and ahead of busy week

PM: So what’s on the agenda?

NH: here we go: US Empire Manufacturing today, UK CPI and RPI tomorrow, US CPI and UK BoE MPC minutes on Wednesday, US Jobless Claims and UK Retail sales on Thursday.

NH: And if that wasn’t enough Bernanke, the Federal Reserve chairman, will give a testimony to the Senate later this week

NH: so its a busy week

NH:

PM: OK, so what else is moving this morning

NH: there are a few burnt fingers in the mining sector this morning

PM: Why

NH: profits warning from Lonmin

NH: and remember a lot of punters were in Lonmin on the grounds that it could be the next takeover target in the sector

PM: Where are the shares trading?

NH: down 299p at £39.79

NH: that’s a fall of 7%

PM: Ouch

PM: what’s gone wrong?

NH: more of the same I am afraid

NH: Lonmin has been having operational difficulties for a while and this morning’s statement shows that hasn’t changed

NH: in fact things have got worse

PM: more smelter problems then?

NH: nope. The problematic Number 1 furnace is up and running

NH: the problem this time is that there has been an earlier than expected move from mining from the Western side of Markikana site to the eastern side

NH: Now this is important because the ore on the eastern side is lower grade and therefore more difficult to process

PM: Ok

NH: on top of that Lonmin has got come bottlenecks in its processing division

NH: So rather than sell the metal in concentrate, Lonmin has decided to defer 70-90k oz of platinum sales to 2008

PM: So what’s the overfall damage

NH: production guidance has been lowered to 16-17% from 900-1,000k oz to 820-840oz

NH: and this translates into a earnings per share downgrade of 28%

NH: so EPS forecasts are going to fall to around 174p in FY07, and 239p in 08

PM: Seems like this warning has caught the market off guard

NH: most people were still worried about the smelting stuff but this is all new

NH: the mining issues at Marikana just have not been communicated

PM: Hmmmm

PM: I thought the shares would have been hit harder

NH: me too, but traders reckon they are being supported by takeover speculation

NH: clearly Lonmin has operational problems but you have to think that someone line Xstrata must be looking at today’s statement and thinking ‘I bet we could things a lot more efficiently’

PM: Good point

PM: Do we have any analyst comment?

NH: a little bit from Citigroup

NH: Big earnings downgrade: The reduction in production, sales volumes and
increase in costs has caused us to reduce our 2007 EPS by c25% to $3.37.
Given LMI’s recent share price run and today’s announcement we are
downgrading our recommendation on LMI to Hold/Medium Risk, while we
reassess the company’s growth profile and the PGM price outlook. Our target
price has moved to £43 from £40 to reflect current market pricing.

PM:

PM: We were on telecoms earlier — but Neil, why’s BT up on the leaderboard?

NH: big call from Merrill’s this morning

NH: gone froma straight sell on the stock to an outright buy

PM: Hmm - interesting — they dont jump like that v oten — shares in BT up 5.5 at 335p

NH: got some of the detail on the note

PM: Certainly — wahtever youve got

NH: Merrill reckons BT is looking cheap vs Vodafone

NH: also reckons it will whether the broadband storm and still has the flexibility to cut costs and do some fancy balance sheet stuff

NH: hang on let me paste a bit, will be easier

NH: Upgrading from Sell to Buy with price target of 375p
BT’s recent under-performance relative to VOD and the FTSE provides an opportunity. Despite its significant re-rating over the last three years, we believe that BT will be able to weather the broadband storm in the UK and utilise cost, capex, and balance sheet flexibility to protect FCF. Our price target of 375p offers 14% upside in addition to a 5% dividend yield.

NH: BT maintains its position in a tough broadband market
We think BT’s resilient performance in the competitive broadband market hinges on two reasons: BT has more financial flexibility than we estimated and BT’s subscriber base is not the most vulnerable in the market. We expect broadband market repair in the UK, like we have seen in the Netherlands and France.

NH: Still levers to pull: costs, capex, balance sheet, & pension
BT has developed a strong track record of cash returns and earnings stability, and gives all indications of maintaining its momentum. BT’s pension has swung from deficit to surplus by a delta of £11bn in the last three years, itself justifying most of the share price move. Moving forward, we believe we could see a de-risking of the fund, which would reduce future volatility. Every 25bps increase in bond yield reduces BT’s pension liabilities by £1bn, or 4% of market cap.

NH: BT is a safe place to hide within telecoms or the market
We believe that BT’s defensive characteristics will continue to attract investors. BT has virtually no USD exposure and 90% of profits are generated in the UK. BT has a 5% dividend yield and a further 5% return through part of its £2.5bn buyback program. BT trades on 13x FY09E earnings and 6x EV/EBITDA.

PM: Ok, thanks for that

PM:

NH: right let’s move on to one of Paul’s favs

PM: Oh, let it be Northwest Bio — company that is going to wipe out cancer. Hopefully

NH: that’s the plan

NH: but a few cracks have started appeared in the story

PM: Ah, just getting this morning statement up

NH: yes, company have come out this morning to try and clarfiy a few press reports

PM: If in doubt, say it was dodgy press reporting

NH: ok. let’s start with the easy bit

NH: company say rumours that its private equity backer has sold shares or is poised to are false

NH: says Toucan Capital signed a 12-month lock-up agreement when the company listed on Aim on June 22

PM: So far so routine

NH: now it gets a bit more complex

PM: Hmmm

NH: statement says NWBT has not yet received a marketing authorization from the Swiss authorities for DC-Vax

NH: that’s the name of brain cancer vaccine

PM: Riiiiiiiight — that’s not quite the impression i got from reading last week’s statement

PM: That said pretty unequivocally that the company’s potion was “commercially available” in Switzerland

NH: NWBT now saying all it has received is an import/export authorisation

NH: and that is dependent on certain implantation commitments

PM: ie — it needs authorisation !!!!!!

PM: so basically, the company don’t have permission to start selling this drug in Switzerland

NH: nope

NH: all they have is an agreement to be able to export tumour tissue to their labs in the US and send back the personalised vaccine for use in some clinics

PM: I see

PM: Any idea when they might get full marketing approval??

NH: planning to apply by the end of the year

NH: butsays main Swiss evaluation agency has yet to conduct any evaluation of the safety or the efficacy of DCVax-Brain

PM: Well again that’s not quite how last week’s statement came over

NH: ummmmmmmmm

NH: anyway Navid Malik, the analyst who follows this company at Collins stewart and who joined us on the blog last week, is still positive

PM: Is he? (float broker)

NH: very positive

NH: this is what he wrote a little earlier

NH: Clarification of some inaccurate media reporting
Northwest Biotherapeutics (NWBT) has provided the market with a
clarification of its Authorisation for Use approval for DCVAX-Brain®
in Switzerland, following confusion and inaccuracies in media reports
surrounding the approval. Several facts need to be made clear.

NH: Absolutely nothing has changed with regards to the excellent news
regarding Swiss Authorization for Use
the statement confirms the
status quo

NH: The Swiss decision allows NWBT to import the product to predetermined
clinical centres in Switzerland, which collectively, in our
opinion, cover a large percentage of the primary brain cancer market.
Anyone with brain cancer in Switzerland will be able to be treated with
DCVax®-Brain. In addition, applications for Marketing Authority would
typically follow Authorisation for Use approval.

NH: We are re-confirming our previous sales projections.
Recommendation
We re-iterate our STRONG BUY recommendation with a price target of
300p. NWBT has achieved a landmark milestone in the industry and we look
forward to more news-flow in the short-term including the historic launch of
DCVAX®-Brain into Switzerland.

PM: So what are the share doing now — with the market having been previously misled by the stupid press

PM: Allegedly

NH: unchanged at 220p

NH: it was all our fault for over hyping the drug

PM:

PM: Just to answer questions below…

NH: A&L

NH: yes the bid rumour is back

NH: vague chatter of renewed interest from Credit Agricole

NH: can’t see it at these levels

NH: nonetheless, big short position in the UK mortgage lenders at the momeent and a few people are probably covering this morning

NH: on top of that the banks are in focus because of ABN and as Greenback points out we have numbers next wee

NH: shares currently up 38p at £11.62

NH: personally I think it is mainly short covering

NH: sector has been a dog this year and I think a few of the shorts are being closed

NH: indeed we saw this in Friday’s session with the likes of Lloyds in demand

NH: no real rally in Northern Rock, but then it has probs and a poison pill that prevents it from being taken over

PM: Er, thanks for all that Neil

PM: Just on GOO — Gold Oil — sorry no fresh news. and just to be clear — We are very wary on this one. fun stock — but a penny affair that is just as likely to go down as go up.

PM:

PM: Right — other small cap stories?

NH: one stands out

NH: Carter & Carter

NH: stocks cratered on Friday

NH: fell 80% to 52p

NH: after its second profits warning in as many weeks

NH: remember these shares were trading at £12 before its founder and chief executive Philip Carter died in may

PM: Long time since we’ve sen something unwind at this pace

PM: V v worrying — notice the price has rallied this morning — currently up 6p at 58p

NH: unsurprisingly the retail punters piled in at the opening

NH: on the grounds Friday’s sell off was overdone

PM: Sounds completely reckless punting to me

NH: it does

NH: this think is unravelling so quickly I don’t even the company has a handle on what is going on, so how can investors?

PM: So here’s some advice: avoid this stock.

PM: We’re not saying sell or buy — just avoid either way

NH: it seems to me there are two possible outcomes here

NH: either it gets acquired

NH: Serco and Capita are both looking to expand in this area. as are private equity

NH: or the company is forced by its lenders into an emergency right issue

PM: Hmm — ok thanks for that

NH: if they do that it will be very dillutive and the shares are likely to have further downside from here

PM: Right — that’s it from us. Thanks for joining today. We will be back tomorrow at 11am for the next session of Markets Live.

NH: bye