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Markets live chat transcript for the chat ending at 11:54 on 13 Sep 2007. Participants in this chat were: Helen Thomas (HT) Neil Hume (NH)

HT: Good morning - and welcome to Markets Live

HT: Different line-up this morning

HT: Paul’s been called away

NH: important meeting

NH: apparently

HT: we’re in the dark

HT: but will attempt hold the fort

HT: how are you this morning neil?

NH: tired for some reason

NH: but obviously raring to go

HT: of course

HT: what’s happening out there? VPnwks already on about the banks

NH: Well the FTSE 100 is only down 9.8 points at 6,296.4 but it feels a lot worse

NH: some nasty falls in the banking and property sectors

HT: indeed

HT: who’s suffering?

NH: Alliance & Leicester are down 39.5p at 925p – that’s a fall of 4.1%

NH: our favourite banking stock Northern Crock is off 19.5p at 652p – that’s a fall of 3.7%

HT: what’s going on - worries about libor?

NH: well, that’s playing a part

NH: but I think its more concerns about the outlook for the mortgage market

HT: because some of the big lenders are putting up rates in order to offset the higher wholesale funding costs

NH: yep. did you see the regulatory announcements from Northern Crock yesterda, issuing 3 month notes with a coupon of 7%

NH: Anyway Abbey and Bank of Scotland raised rates on their tracker mortgages yesterday and HBOS is expected to follow suit

NH: Now if HBOS, which trades under Halifax, does it everyone else will follow

NH: and the fear is that this could all get very nasty

NH: and the banks will end up writing off a lot of bad loans

HT: hang on - nasty as in people with fixed rates will come to the end of the their term and get hit

NH: yep

NH: that’s one thing that will happen

NH: and other thing is that it could slow the entire housing market and put pressure on prices

HT: bad debts galore then

NH: could be

HT: so you think have our own subprime crisis?

NH: well there are a lot of leveraged households out there and a rise in mortgage payments is gonna hurt

HT: particularly if they fixed in a few year ago and are now coming off that rate

NH: are you speaking from personal experience???

HT: mmmmm - might be

NH: also did you see the house price survey stuff this morning

HT: yes

HT: RICS said house prices fell for the first time in August since Oct 2005. New buyer inquires declined for 9th consecutive month

NH: do we have a Libor fix yet??

HT: nope think it’s a bit early

HT: where is our libor provider? no sign of him today

HT: Yonathan??? Where are you?

NH: we need you

NH: but don’t give us yesterday’s fix

HT: No sign. Readers - so fickle

HT: right

HT:

HT: what next?

HT: you mentioned property earlier?

HT: further weakness in the sector

NH: yep

NH: and its British Land leading things lower – off 20p at £12.04 at the moment

HT: why them

NH: very bearish note from Morgan Stanley

NH: analyst Martin Allen reckons there is a real chance the shares could fall to 956p

HT: now that is bearish

NH: downgraded rating on stock to underweight

HT: what’s the arguement?

NH: basically, Mr Allen reckons the credit crunch will ultimately hit demand for office space in the City of London

NH: he also says the sale of its Meadowhall shopping centre and share buyback will do nothing to support the share price

HT: He is probably right

HT: I mean what impact did the announcement from Land Securities that it was considering a break-up have

NH: anyway here are the thoughts of Mr Allen on the City office market, which is a core market for British Land

NH: Relatively high exposure to City of London offices
British Land has around a third of its property portfolio invested
in central London offices, approximately in line with Land
Securities but significantly more exposure than Liberty
International (see Exhibit 4). British Land’s central London
office exposure is significantly more skewed to City of London
offices than that of Land Securities (see also Exhibit 4).

NH: we expect reduced demand to drag down rents
However, our analysis shows City of London office rental
growth is driven at least as much by fluctuations in demand for
office space as variations in supply (see Exhibit 7). We believe
that financial services employment in central London has
already peaked and could fall materially over the next two or
three years owing to fallout from the recent ‘credit crunch’ —
one commentator has already suggested by as much as
10-15% (see FT, 31st August 2007).

NH: Central London office prices are very demanding
The combined effects of rental growth and positive yield shift
mean that prices of City of London offices are now significantly
above where they were at the peak of the last boom around
2001 (see Exhibit . While the supply of office space is
significantly more constrained in the West End, we think this is
already significantly over-discounted in the price of prime
offices, which we believe can only be described as a ‘bubble’
(see also Exhibit .

NH: think current yields are unsustainable
We think that central London office yields are currently very low because the direct property market is paying up for future rental growth, and we anticipate that they will rise as rents peak and eventually fall. We think this process will be accelerated by the wide gap that currently exists between debt funding costs and central London office yields (see Exhibit 9) and the fall in demand for space from financial tenants that we have already referred to.

NH: Expect City offices to go from ‘hero’ to ‘zero’
Given the above, we expect sentiment towards central London,
and particularly City of London, office investments to switch
completely from positive to negative over the next 12-18
months, which is the period over which we are setting our price
target for the group’s shares.

HT: hero to zero

HT: nice

NH: pretty worrying

NH: doesn’t seem to have put Paul Reichmann off buying more share in Songbird Estate though

HT: the co that owns most of Canary Wharf

NH: it is and I have it on good authority Mr Reichmann has bought another 5m Songbird shares in the past couple of days

NH: so someone at least is bullish on City offices

HT: isn’t everything pre-let down there

NH: hmmm not sure how much speculative build there is there

HT: the City proper is full of cranes though

NH: it is. we are just across the river from a big Minerva development called Wallbrook

NH: opposite Cannon Street station

NH: don’t they have signed up any tennants yet

NH: building supposed to open in 2009

HT: weren’t macquarie linked to that bulding

NH: that was the rumour

HT: any more from the bearish mr allen

NH: here’s the executive summary

NH: Great value but no fundamental catalyst
The group’s shares offer great value based on discount
to NAV. However, given our expectation of limited NAV
growth and the absence of any fundamental catalysts for
the stock, we see no obvious trigger for a closing of the
discount to NAV. Our new Underweight rating on the
shares is a relative call within the quoted property sector
in Europe (including the UK), and reflects our view that
plays on other regions, such as Germany and Russia,
offer much better upside. In addition, we see a relatively
high probability that the outcome for British Land is in
line with our ‘bear’ case.

HT: thanks for that

HT:

HT: where to turn next?

HT: S&N?

NH: yeah we keep coming back to this story

HT: mmm - you and paul, a broken record

NH: fair point

NH: but we have some more developments in the phantom Carlsberg bid story

HT: what’s the latest?

NH: well it’s coming out of Merrill Lynch

NH: they have downgrade their rating on S&N to neutral from buy this morning following a meeting with Jorn Jensen, Carlsberg’s CFO and deputy CEO, in New York yesterday

NH: Merrill says that although Mr Jensen declined to comment on the speculation

HT: but of course

NH: he added that he had yet to see a convincing business case for a tie up with S&N

HT: ah

HT: I think I’m with Carlomagno on this one

NH: this has gone on for too long, you would think that the Panel would force Carlsbery to say something about its intentions

HT: in the absence of Carlsberg saying anything - what are Merrill saying?

HT: have we got hte note?

NH: yep

NH: Downgrade S&N to Neutral as Carlsberg bid not imminent
During a group meeting with investors in New York, Jorn Jensen (CFO and
deputy CEO) sent a strong message to investors. Although he did not comment
on recent speculations he indicated that he has not yet seen a solid business
case for a full combination with S&N.

NH: He reiterated that the changes to the
Carlsberg Foundation statutes had nothing to do with a potential S&N acquisition,
and that the discussions to change the statutes were initiated years ago, post the
acquisition of Orkla’s 40% stake in Carlsberg Breweries

NH: He was very clear that
Carlsberg had significant organic opportunities, which will remain the core focus of
management. The four key value drivers he highlighted were to: 1. Improve
earnings (margins) in Western Europe, 2. Grow profitably in BBH and E. Europe,
3. Build a platform in Asia, 4. Monetise non-core assets (real estate).

HT: seems pretty categoric

HT: how have the shares responded

NH: proving to be very resilient

NH: down just 8p at 606.5p

HT: how come?

NH: not everyone believes Mr Jensen is being totally honest

NH: look at this amusing email I got sent from the sales desk of a big bank this morning

HT: surely not - I am aghast

NH: One of our smaller US rivals have said this morning that Carlsberg is unlikely to bid for SCTN LN after a meeting with the former.

HT: who’s this from??

NH: sorry can’t reveal my source

NH: These ‘consensus seeking’ houses have beautifully phrased arguments but have
one thing in common, a 4% correction in the mkt and SCTN LN has moved up 4% & at its peak, +8% since we recomended.

NH: So in short, the mkt is telling you one thing, they are telling you something else. Remeber MKS LN, BOOTS, SBRY, the consesus has an amazing habbit of being….wrong!

NH: SCTN has formed its bid defence with their own target of GBP10. The rumour of GBP7.00 initial bid, 2/3 cash 1/3 shares persists, and every dip, re BBH, SCTN miraculously recovers.

NH: So ask yourself, is Carlsberg really going to tell a sell side analyst at a major house, ‘yeah sure, we’re gonna bid for SCTN next week’ - possibly not!

HT: excellent stuff

HT: from an institution referring to Merrill as a ’smaller US rival’ yes?

NH: i think that’s tounge in cheek

HT: always good to belittle the opposition

HT:

HT: I’m being offered refreshment by the readers!!

HT: Well - a reader. But still nice

HT: Neil - anything for C&C?

NH: yep. HeidelbergCement has put out a statement on how it plans to finance its handson bid this morning

HT: and?? what does it say

NH: looks complicated but it seems they are having some difficulties in the CP market along with everyone else

NH: just looking at the statement. too complex to post but it is on rns if anyone wants to look

HT: we’re not sure on Tata C&C

HT: but certainly worth looking into

NH: i’ll ask our credit people to take a look

HT:

HT: moving on

HT: any RAW market info for me?

HT: don’t save it all for murphy

NH: believe it or not there is some how can I put this, educated buying of Sports Direct

HT: come again?

HT: good god, they’re up

NH: they are

NH: shares up 2.5p to 132.25p

NH: and that’s despite an incredibly bearish note from Panmure Gordon

NH: analyst Philip Dorgan has slashed his forecasts and set an 80p target price

HT: 80p!

HT: after floating at 300p

NH: yep

HT: so what’s the story?

NH: well, Dorgan has looked again at his numbers following this weeks trading update from SPD

HT: what? the one with no information in it

NH: that’s the one

HT: reading the coverage this week I get the feeling the analysts are enjoying this now

HT: let off the corporate leash and being allowed to get stuck into someone

NH: yep. they will weep when Ashley finally buys the company back and takes it private

NH: they will have no one to pick on

HT: back to like-for-likes - and store refits

HT: where’s this note then? any juicy highlights

NH: its quite short so I can put it all up

NH: We have downgraded our forecasts by up to 50% and cut our target price from
120p to 80p. The company urgently need to appoint a new Chairman to bring
an outsider’s perspective to what is now a difficult situation.

NH: New forecasts. As promised, we have looked again at our forecasts. The interim
management statement contained few pointers, but we have input a series of what we
believe to be reasonable assumptions in arriving at our new numbers.

NH: 40% to 50% downgrades. The result is that we have cut our current year pretax profit
forecast by 44% to £69m, and next year’s by 55% to £61m. Within our current year
numbers, we are assuming a return to 2004/5’s EBITDA margin of 9.3%.

NH: New valuation. Companies such as DSGI, Home, Next and Signet trade at between 11
and 13 times calendar 2007 earnings. We have used a midpoint in arriving at our new
target price of 80p, significantly down from the previous 120p. Coincidentally, this is the
price which the Deputy Chairman said that the shares might fall to.

NH: New Chairman? Our new numbers are our best estimates based on 23 years experience
as a retail analyst of what happens next when the wheels come off at a retailer. An external
Chairman is urgently required to bring an outsider’s perspective to a difficult situation.

HT: ooooo - 23 years of experience

HT: never seen anything like it

NH: aggresive stuff and it makes the rise in the SPD share price all the more puzzling

HT: indeed - after jjb as well - strange

NH: actually JJB are getting smashed again this morning

NH: down a further 8p at 163.5p

NH: good point from VP. SPD will be helped by the england result last night

HT: I’m surprised it’s taken this long for the football to come up

NH: who makes the scotland kit????

NH: just checking the price of Umbro, which makes the shirts. they look to be up 2.5% at 121.25p

HT: big night in paris last night

NH: for the scots that is

NH: i think our very own robert orr was there at the stade de france

HT: where england play on Friday?

HT: in the rugby that is

NH: yep. are u going?

HT: acutally there is an invite among the Alphaville team

HT: but it’s a thomas - murphy stand-off currently

NH: ahh

HT: I think I’m going to lose

NH: no such luck on the markets desk

NH: the only invite we have for friday is to go and see a domestic boiler in operation at the stock exchange

NH: it’s a special boiler mind you

HT: not the fabled Ceres boiler

HT: doesn’t that get the readers going

NH: yep the one that produces power and heat

HT: CHP

NH: and there is a real debate going on over whether this boiler will ever be economic

HT: so they’re actually demonstrating this thing at the stock exchange

NH: well not sure there will be much of a demo

NH: mind you it might be able to power that stupid modern art thing they have in the foyer

HT: I quite that

HT: anyway - less chit chat

HT: that shoudl have been like that by the way

HT:

HT: Neil - you mentioned Rio?

NH: yep. more bid rumours doing the rounds this morning

NH: hang on got a flash on three month libor

NH: looks like it has come down

NH: 6.88%

NH: no reaction among the banking stocks yet

NH: going back to rio

NH: apparently overnight in Oz there was heavy buying of deep out of the money Rio call options

NH: some people think BHP might strike with a counter offer before Rio shareholders vote on its deal to buy alcan

NH:

NH: just been sent an email about wheat

NH: the price of which has been flying

NH: the EU are intervening

NH: he European Commission Thursday said it has proposed
cutting the set-aside rate for farmable land in Europe to 0% from 10%, for one
year only.

NH: The decision to reduce the rate was spurred on by the “growing price of wheat
and food in the shops,” said commission spokesman Michael Mann.

NH: that might help AB, Peter Clothier

HT:

HT: any small cap stuff before we round up?

HT: Jessops?

NH: company has lost its finance director this morning

NH: which in the middle of complex refinancing cannot be good news

NH: company says he is leaving at the end of the month

NH: having joined 11 months ago

HT: short stint

NH: probably had enough

NH: this company is heading for a debt for equity swap

NH: and at 10p the shares probably gone too high

HT: ok - any more on that?

NH: no. I am off to try and track down this punchy cazenove recommendation that has sent the share price of Cable & Wireless up 4.1%

HT: good luck

HT: paul is back with us - but seems more interested in wheat free foods

NH: ah Paul is not in a meeting aftter all

HT: let’s sign off

HT: thanks for having me - normal service resumes tomorrow

HT: thanks neil

NH: see you tomorrow

HT: bye all