Markets live chat transcript for the chat ending at 12:07 on 3 Oct 2007. Participants in this chat were: Helen Thomas (HT) Neil Hume (NH)
HT: Good morning
HT: welcome to markets live
HT: I will, shortly, be joined by Neil Hume
HT: He has dashed off to get his mobile phone
HT: without which he ceases to function
HT: and will be getting online soon
HT: As we get underway, the FTSE is up 25.6 points, at 6526
NH: right back now. left the phone downstairs
HT: ah hello
NH: right, we start where we always seem to start at the moment
HT: let’s get it out the way
HT: the CROCK REPORT
NH: today sees shares in the former bank up 13.2p to 148.8p
NH: that’s a gain of 9.7%
HT: presuably following our front page scoop
HT: I should say the FT’s scoop
HT: That JC Flowers, the private equity group, has secured £15bn of funding which could be used to fund a takeover of the former bank
HT: Which on the face of it sounds like good news?
NH: it does but not necessarily if you are a shareholder
NH: Flowers is going to need every penny of this cash to refinance the £20bn of liabilities that fall due at the former bank in the next year
NH: He is not going to waste any of that on shareholders, unless he has to for political reasons
NH: Now it may be that he makes a token payment to shareholders
NH: a 100p would cost £421m
NH: 75p £315m
NH: those figures, however, do not incoporate the 15% stake that would be issued to the Northern Rock Foundation in the event of a takeover
NH: But Flowers is not known for his philanthropy
HT: So there should be danger signs all over this one still
NH: very much so
NH: and here are a few
NH: 
HT: a six-sign warning!
HT: some kind of record
NH: it is
HT: what is the view among analysts to the story?
NH: Alex Potter, the banks analyst, at Collins Stewart has penned another good note this morning
HT: ah yes, I seem to get SELL notes from them on the Crock every morning
HT: usually strong stuff as well
NH: and today is no different
NH: he says 190p a share bid is possible in theory. but in reality it will probably be much lower
NH: pasting the note now
NH: Sell into strength
NH: Press reporting JC Flowers has secured c.£15bn of funding
In our recent report on NRK (27th Sep
Still overvalued ) we stated that we
believe the best standalone course of action for management would be to
put the bank into orderly run-off, yielding 130p for shareholders, we
estimate.
NH: Alternatively, we believed a sale, possible as long as funding
considerations were met we estimated the bank requires at least £15bn of
funding therefore a takeover now appears an increasing likelihood.
NH: Price remains contingent on funding costs
We believe a private equity bid would require bank backing, not for the
acquisition of the equity but for the ongoing funding of the balance sheet.
NH: The price which can be paid for the equity is mainly contingent on the cost of
that funding we believe any bank (or consortium thereof) would charge an
economic spread, though this would likely be lower than the cost of funding
the balance sheet as a standalone
NH: A higher price can therefore be paid by a bidder compared to a standalone run-off, even taking into consideration the charitable Foundation s dilution.
NH: We assume protection of the deposit base
NH: The deposit base clearly has a long-term value though is materially smaller
today than the figure reported for 30th June 2007, we believe. We assume it
stabilises at c.£15bn in size and, in order to protect the deposit base for the
future, we assume 100bp of additional funding costs here.
NH: and a relatively small rise in wholesale funding costs
NH: This is where the spread being charged by Flowers bank backers is
incurred. We have assumed 50bp, this being materially lower than the
current BoE penalty rate being used by NRK.
NH: We believe a bidder can go as high as 190p on these assumptions
NH: We see 190p as the ceiling for bids and, with most other bidders reportedly
having dropped out, we doubt that Flowers would bid as high as this level.
We would continue to sell into any strength and again caution that this is a
very high-risk situation.
HT: ah yes, as he puts it – Unlikely Flowers pays top dollar as the only bidder left in town
HT: So he agrees Flowers will pay as little as he can get away with
NH: yep
NH: mind u if he does Flowers will take a real battering in the press and from politicans
NH: is the crock really worth that much hassle
HT: well – depends how much he can make out of it
HT: and it’s a pretty risky situation
NH: fair play to the guy. if he wants to risk money on the crock and makes a fortune out of it, then I have no problem with it
HT: 
NH: Actually the banks are all doing well this morning
NH: Alliance & Leicester up 33p to 855p
NH: Royal Bank of Scotland up 15p to 555.25p
NH: Barclays 14.5p to 635p
HT: whyfore?
HT: credit crunch over
HT: done and dusted?
NH: Partly that but also there have been some reassuring noises from Deutsche Bank
NH: Deutsche put out a trading statement ahead of presentation by its CEO at the Merrill Lynch banking conference in london today
NH: and this is what Deutsche had to say
NH: FRANKFURT (Dow Jones)–Deutsche Bank AG (DB) Wednesday said it will book a total EUR2.2 billion in charges on leveraged loans and trading books but that third-quarter net profit will still exceed the year-earlier figure, helped by tax credits and capital gains.
NH: Due to difficult market conditions, mark-to-market valuations of the bank’s positions were pressured, leading a EUR700 million charge on leveraged loans and loan commitments, on top of similar charges in the second quarter.
NH: In addition, the bank will book charges of around EUR1.5 billion on structured credit products, residential mortgage-backed securities and relative value trading in both credit and equities.
NH: It said that while other businesses in Corporate Banking & Securities produced strong results for the quarter, its structured credit product business is likely to report a pretax loss in the quarter, currently estimated in the range of EUR250 million to EUR350 million
NH: Net profit is seen exceeding EUR1.4 billion, up from EUR1.24 billion one year ago, due to tax credits for the quarter, reflecting benefits from the German tax reform, beneficial tax positions as a consequence of the resolution of tax matters, and claims related to current and prior years.
NH: The bank’s corporate investments business is seen posting a pretax income of around EUR600 million in the third quarter following the sale of a Wall Street building in New York and from gains on other assets.
HT: so not as bad as expected…..again
NH: does not look that way
NH: and there is relief that DB has got it all into the open
HT: Deutsche share up I presume
NH: shares currently up 2% at e95.5
HT:
HT: good point from rahodeb below
NH: busy boy at the moment Mr flowers
HT: Sallie Mae looking increasingly messy stateside
HT: after they rejected a lower offer
HT: and he’s looking at taking on the wreck
NH: he likes a challenge
NH:
NH: Fitzsimons – just passing your comments on to our commodites guy. will get back to you
HT: where next?
HT: any raw market goss?
NH: few rumours flying around in BP
NH: talk earlier this morning was of a profits warning
NH: but now we are hearing that Cazenove have downgraded
NH: i think they have been big supporter of BP for a while
NH: so they if they have changed tack it could be interesting
NH: shares currently down 9p at 550.5p
NH: actually Helen is picking up some flashes on BP from the wires
HT: *DJ BP Statement Follows Talk About Oil Output Drop Guidance
HT: *DJ BP Not Giving Information That Isn’t Publicly Available
NH: statement, what statement???
HT: I’m mystified
HT: maybe this is related to the Caz note?
NH: could be. just mailing contacts to see if anyone has a copy of this note
NH: will get back to you if it arrives before the end of the show
HT:
HT: wider market then
NH: despite BP’s weak performance, the FTSE 100 is 37.3 points at 6,536.9
NH: banks leading the way
NH: but today’s action has not been in London but Hong Kong
HT: that’s right
HT: an amazing session which the saw the index hit a record high and then plunge to close down 720 points
NH: now that’s volatility for you
NH: apparently it was the busiest ever day of trading in Hong Kong
NH: so The Hang Seng Index closed down 719.81 points or 2.6 percent at 27,479.94. having earlier reached a high of 28,871.04, another record
NH: the whole index went into a massive reverse in the last hour of trading
HT: any idea what sparked it?
NH: well everyone is saying profit taking and given the run it’s had that would be logical
NH: But to me it looked like some people had seen a ghost and decided to bail out
NH: it’s quite funny .just been flicking through the wires and the number of Chinese companies that have come out and said they knew of no reason for the fall is amazing
NH: and I am really surprised London has taken this turn around in its slide
NH: : I mean one of the bull points in recent weeks has been that the growth of China and India would pull the world economy through if the US goes into recession
NH: if there is a sudden melt down in Chinese stocks, where does that leave things
NH: of course today’s reversal might just have been profit taking and therefore quite healthy
HT: Shanghai I see finished up today regardless
HT: Paul’s favourite – the Shanghai comp up 2.64%
HT: neil’s just on the phone
HT: moving onto stock specific stuff next I think
HT:
HT: a jaunt to the continent is in order
HT: the Netherlands
NH: yep to look at PND’s
HT: wait, wait – I know that one
HT: something navigation devices
NH: personal navigation devices
NH: you know those things you stick on to the windscreen of a car
NH: and then an annoying voice tells you where to go
NH: normally in the most roundabout fashion possible
HT: never used one – old-fashioned girl with an A to Z
NH: nor me. actually i have an incredible memory for directions
HT: if you say so yourself!
HT: hang on – neil is just saying offline that you coudl blindfold, drop him somewhere unknown and he’s find his way home
HT: a human TomTom
NH: a homing pigeon
HT: a rather large one!
NH: all of which brings us on to TomTom
NH: its shares are down 6.2% this morning at 50.86
NH: now this is because of fears that it might get drawn into a bidding war for something called Teleatlas
HT: which is?
NH: a Spanish maker of digital maps
NH: TomTom has agreed to buy it for e21.25 per share
NH: but the the competitive landscape changed this week
HT: ah yes – Nokia’s deal
NH: yep it announced plans to buy Tele Atlas’s main rival a US company called Navteq
NH: offered $8.1bn did Nokia
NH: eye watering multiples
HT: that was about eight times est sales, 40x earnings
NH: anyway, the word in the market is that Ericsson is not going to stand by while Nokia steals a march in the PND area
HT: so they might bid for TeleAtlas
NH: that’s one rumour
NH: also talk that Garmin, a US company worth $25bn might bid
NH: Garmin are the world’s biggest PND maker
HT: so could be a right tussle for this
NH: yep and that is recflected in the price of Tele Atlas, which is up 1.6% to e23.11
HT: well above the offer p then
NH: i bet you never knew that the world of sat nav could be so interesting
NH: BBoy is right. Garmin share price has taken a real thump since the Nokia deal was announced
NH: i did not realise before this all came out what big business it was
NH: i assumed all the sat nav companies where tiny like Trafficemaster
HT:
HT: hold on
HT: BP note incoming
NH: just got a copy
NH: no downgrade
NH: Caz stick at outperform
NH: but they have plenty to say about the upcoming results
NH: and its quite negative i think
NH: BP reports Q3 2007 results at 7am on Thursday 23 October with a conference call / webcast later that day. The Q3 market consensus is still forming, but hasn’t really moved recently which is perhaps surprising given recent press speculation about the Q3 results. IBES shows a Q3 2007 consensus EPS of $1.61 per ADR or around 13.2p per share
NH: That now looks around 30% too high – we reduce our preliminary estimate of Q3 2007 net income of $4.3bn by 9% to $3,915m, EPS 10.1p. This number excludes any IFRS related adjustments. This equates to EPS 9-months YTD of around 35p. We also reduce our FY 2007 EPS 9% from 52.9p to 48.0p which is 6% below the current market consensus of 51.1p (IBES). We also move our FY 2008 forecast EPS from 55.7p to 53.5p which is coincidentally close to the current consensus of 53.6p (IBES) and represents Y-o-Y EPS growth of 12%.
NH: With respect to Q3 2007, our segment assumptions are as follows:
NH: Exploration & production – The higher oil price will be more than offset by the lower US natural gas price, lower production (due to planned field maintanence and the CATS outage), a Russian mineral extraction taxes (TNK-BP) and higher costs. We forecast EBIT of $6,085m and production of 3,633 kboepd, down 4.5% Q3-o-Q2.
NH: Gas & power – A tricky one to predict in any given quarter since it depends critically on marketing and trading. We take a stab at $325m.
NH: Refining & marketing – The $8/bbl decline Q3-o-Q2 in average global indicator gross refining margins will take a heavy toll on BP, especially given Texas City and Whiting still not operating anywhere close to full capacity. We forecast a refining EBIT loss of $(795)m and a marketing profit of $950m to make a small profit of $155m for the segment.
NH: Other business & corporate – This number remains volatile, we forecast a charge of $(150)m.
NH: Consolidation adjustment – Given the oil price moves through the quarter, this ought to be slightly more negative than the Q2 charge of $(69)m, so we forecast $(75)m.
NH: Interest – Ought to be little changed given an expected fall in net debt and the decline is US interest rates (most of BP’s debt is US dollar denominated, floating debt). We forecast little change to the Q2 expense and expect $(155)m.
Tax rate – the guidance for FY 2007 is 35-37%. Given the profit bias upstream and the rising oil price through the quarter (that creates a taxable stock gain), we estimate a Q3 rate of 35.7%.
Share buy back – we count around 128.3m shares repurchased during Q3 at a total cost of around $1.5bn.
Dividend – it is probably unwise to expect any change to the Q2 dividend, so we forecast 10.825 cents which equates to around 5.3p and leaves sterling dividend recipients with no income growth 9-months YTD compared to the same period in 2006 versus +10% for US dollar dividend recipients.
HT: so they’re moving their numbers after last week’s story
NH: yep and the important thing to note is that they are now below consensus for this year and next
NH: i think Caz might be house broker
NH: BP shares down 9p at 550.5p
HT:
NH: Fitzsimons, Javier Blas our commodities correspondent has just got back to me on gold
NH: here is his explanation for yesterday’s weakness
NH: Profit taking and the dollar moved higher aginst the euro on speculation that G7 or ECB alone could intervene on the FX market.
NH: hope that helps
NH:
NH: in yesterday’s session we have quite a few people commenting on Cookson and its proposed bid for Foseco
NH: and there has been a pretty positive reaction from the market
NH: shares up 30.5p at 825p
HT: Foseco – makes stuff for foundries – casting and the like
NH: yep
NH: just to recap – a sharp rise in the share price of Foseco saw the two sides forced by the Takeover Panel to acknowledge takeover discussions yesterday.
NH: DD has started and Cookson has indicated that it is prepared to pay 295p a share if things go smoothly
HT: And where are Foseco trading at the moment??
NH: down 2p at 278p
HT: mmm – target down, poss buyer up?
NH: i know it odds
HT: why do the analysts love this deal then for Cookson?
NH: well, it will make Cookson less dependent on the steel cycle
NH: At the moment is biggest division, ceramics makes about 70% of its sales in the steel business
NH: around 20% goes into foundry
NH: If it were to buy Foseco that figure would rise and the Ceramics division would not be so exposed to one industry
HT: OK. But I thought there were question marks as to how Cookson might fund this deal
NH: there are. Here’s how the maths work
NH: at 295p, taking into consideration Foseco’s debt the purchase price will reach
£575m.
NH: if cookson chooses to debt fund the deal then its
gearing could rise to 150%.
NH: Now that may unsettle shareholders
HT: Why?
NH: because they would be wary of the company taking on a lot of debt at this point in the cycle
NH: the last time Cookson went on an acquisition spree it almost ended in total disaster
NH: and I mean total disaster
HT: Rock style disaster??
NH: yep
NH: it bought a company called Premier Refractories for
£410m in 1999 and by 2002 Cookson was nearly bust
HT: So it looks like there will be a rights issued involved somewhere
NH: I reckon there will be a smallish one, just to put shareholders at ease
NH: On that note, should point that investors and analysts who follow Cookson have been with the company on a trip to their facilities in Poland
NH: And I reckon there will be plenty of hand holding going on
HT: any chance of a counter bid?
NH: could be
NH: Fosceo is the no1 in its field and any of Cookson’s competitors
such as RHI and Minerals Technologies, could be interested
NH: actually I am told that MT has a strong balance sheet and could make a cash offer
NH: And given that Cookson will not reap any massive cost synergies from the deal it may struggle to match a higher offer
HT: right – let’s see some of this comment then and move on
NH: This is from UBS
NH: We believe that Foseco’s activities will be mainly complementary to Vesuvius
given Foseco’s strong presence in Foundry applications and Vesuvius’ strength in
steel making applications. We estimate that overlapping sales between both
companies are of the order of c £100m and that Cookson could have to shed certain
businesses where market shares become an issue from anti-trust point of view.
NH: this is a bit of comment from Kaupthing
NH: Clearly this is not a knock out price but one priced to give headroom to raise it and still be sufficiently earnings enhancing to Cookson but to ensure the management of Foseco are able to demonstrate to shareholders that they managed to get better value for the shareholders. The group has remained silent so far and they are clearly reviewing their options. We think that they will probably fight for a better price but are not fundamentally opposed to relinquishing ownership.
NH: The possibility of a monopolies review appears to be the reason why the shares are trading at such a discount to the proposed bid price. However it is our view that Cookson want the foundry business and would like the Steel business. Having to divest of the Steel business would not be a deal breaker – note that Steel is expected to make c£4m of EBIT in 2008 vs total EBIT of £54m so it is barely material. The possibility of an increased bid and the high probability of success means that there should be further upside for the shareholders.
NH: COOKSON – The momentum of earnings growth was slowing so the group need to do something. The balance sheet has improved significantly over the last few years and whilst working capital outflows in H1 weakened the H1 net debt position this should reverse in H2. Consequently the need for and ability to do a deal is clear
NH: The combination of Foseco’s foundry business with Cookson’s ceramic business is an obvious fit and the additional benefits of the cross-over in the Steel business enhance the attractiveness of the deal. Assuming the acquisition is funded through debt and that the new debt carries a coupon of 6.5%, the pro forma debt for the enlarged group is c£720m. Assuming £7m of cost savings then the revised PBT to Dec-08 for the enlarged group is £183m vs £160m consensus – this represents a 14% uplift. The tax rate might be a slight issue as Cookson’s rate of 26.5% is 10% lower than Foseco’s
NH: In the event that they are net able to get the tax rate of the enlarged group down to their existing rate then the EPS enhancement will be lower than 14%. In terms of debt this would represent c2.5x the enlarged EBITDA and just over 4x interest cover. Whilst the EBITDA multiple is within normal covenant ranges it is towards the high end in our view and we would not be surprised to see future disposals to assist in funding the deal if successful.
HT: ok – thanks for that
HT:
HT: hedgehog – not that I can think of
HT: usually been on opposite or competing sides
HT: offer from a group including Hunter for Shell Mex house went nowhere
HT: but does lead us neatly onto ERG
HT: neil?
HT: it looks like things are coming to head
NH: it does
NH: hedge fund Fursa have increased their holding in the property services group to 19% this morning
NH: the holding was about 6% last week
NH: and from what I hear they are absolutely disgusted by what has gone on at ERG and are planning to use their holding to call and egm and get rid of Neil Belis
HT: that’s the former CEO
HT: managed to hang on to a job last week – despite ERG’s troubles
NH: despite overseeing a massive destruction of shareholders value
NH: from 400p to 40p
NH: yeah he was given the job of excutive Deputy Chairman with particular responsibility for the property transaction division.
HT: so despite busting its covenants and a shocking set of interims, he keeps a job – a sideways move
NH: reward for failure
NH: although property sales are the only way ERG is going to pay off its debt and get out of the mess that Belis has got them into
NH: So perhaps it is better to have Belis on board
HT: maybe
NH: but I can’t believe Fursa have increased their holding to 19% because they are backing the company
NH: it looks as if an EGM request will be winging its way to the company very soon
HT: and the shares?
NH: up 1p to 40.25p, as the market awaits the next move
NH:
NH: moving swiftly on from one stock market dog to
HT: carter and carter?
NH: how did u guess
HT: saw the news this morning
HT: their ex-FD
HT: statement a little confused I thought
NH: here it is for those of you who missed it
NH: Carter & Carter announces that John Green has resigned as Group Finance
Director and from the Board of Carter & Carter with immediate effect.
He has agreed to stay with the Group until a successor is appointed.
The search for a new Group Finance Director is underway. In the
interim period, the Board is seeking to appoint an acting finance director
and in the meantime will receive assistance from senior consultants
engaged recently to strengthen the Group’s finance function. A further
announcement will be made in due course.
NH: i agree that is a little strange
HT: hard to know who is in charge of ploughing through the books
HT: in the meantime at least
NH: and it is worth recalling at this point just why Mr Green has resigned
NH: yesterday Carter & Carter issued another profits warning and its shares were suspended pending clarification of its financial position
NH: and there were two lines in the statement that presumably made Mr Green’s position untenable
NH: Company is assessing the recoverability of certain current
assets as at 31 July 2007,
NH: and
NH: together with the accuracy of certain other revenue
streams in the business
HT: any background on the guy?
NH: appointed FD two years ago
NH: previously worked at PWC and Wagon plc
NH: Here is his biog from the C&C website
NH: John Green – Group Finance Director
John Green joined ASSA as Finance Director in 2003 and, following the acquisition by the Group, was appointed Group Finance Director in October 2005. Prior to joining ASSA, John spent two years with a specialist corporate finance advisory
NH: practice and, before this, was Finance Director of Wagon plc’s UK automotive division. John is a chartered accountant and spent seven years with PricewaterhouseCoopers LLP.
HT: but given those ominous lines – why is he staying on at the company? Is he leaving with immediate effect or not?
NH: i think he is staying, presumably to try and sort out the mess that C&C are in
HT: what price C&C if they ever return from suspension?
NH: funny you should ask that
NH: we called cantors, which have started making markets in suspended stocks, yesterday afternoon
NH: They said there had been some business at 33p, but they expected the shares to open 15-20p
NH: that’s compares with a suspension price of 82.5p
NH: of course in the wake of today’s news they could go even lower
NH: we have been trying to get a fresh quote from Cantor’s
NH: and Robert Orr got hold of their spokesman David Buik this morning
HT: and? what did he say?
NH: have a grey market price of 15p-20p, but david admits they have been ringing arround to try to get clients to take a position and clients are VERY unwilling to do so.
NH: conclusion: investors have NO IDEA what this stock is worth.
HT: oh dear
HT:
HT: thanks mctavish on hunter, tchenguiz
NH: not surprised they have teamed and not a surprise it is in this area
NH: VT has been telling people for months how eco investment could be profitable
NH: and I think Hunter is quite an eco warrior too
HT: I seem to remember someone describing VT as the ‘green billionaire’
HT: or phrase to that effect
HT: made me laugh
HT: and property’s a small world really – everyone knows everyone
NH: and the poster below is correct when he says that the are all members of the cummings magic circle of dealmakers
NH:
NH: before we finish a piece of RAW market info
NH: hearing rumours again of a bid for Abbot Group
NH: that’s the FTSE 250 oil field services company
HT: have you mentioned that before?
NH: many time but there is finally some meat to put on the bone
NH: apparently 3i, the private equity group, have made an offer of 375p a share and are set to get access to the books
NH: now remember this is v RAW and it is just a market rumour
NH: but shares are up 2.75p at 291.75p
HT: proceed with care then
HT: we’re done
HT: Paul returns tomorrow
HT: the dynamic duo will see you then
NH: see ya
HT: bye