Markets live chat transcript for the chat ending at 12:04 on 8 Nov 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Aaaaaarrrrrrgghhhhhhh!!!!!!!!!!!!!!!!!!!!!!!
NH: 
NH:
PM: WE ARE SPITTING TACKS
NH: yep
NH: we were poised to bring you details of the BHP approach for Rio
NH: dates, everything
PM: A big bell to ring — we were feeling so smart about ourselves
PM: you know Neil — im really reallly reallly sorry
NH: what??
PM: I think i may have triggered
NH: the statement??
PM: Hmm — i put a promo post up earlier saying we had details of an unnamed bid
PM: carlomagno — please catch up
PM: FTSE up vertically cos RIo has gone thru the roof
PM: Shares in Rio tinto currently up 195 at 51.75
PM: Sorry — should be 19% — up 825p
NH: and here’s the statement that Paul helped triger
NH: BHP Billiton notes the recent speculation in relation to a potential offer for
Rio Tinto at a premium.
BHP Billiton now confirms that it recently wrote to the Board of Rio Tinto
outlining a proposal in relation to a potential combination with Rio Tinto on
terms incorporating a premium, reflecting its confidence in the benefits for
both sets of shareholders of such a transaction. In preparing its proposal, BHP
Billiton has examined in detail the regulatory issues and other practicalities
of a combination.
In its letter, BHP Billiton sought to pursue discussions with Rio Tinto
regarding its proposal. Rio Tinto rejected the proposal.
BHP Billiton has again written to Rio Tinto and intends to continue to seek an
opportunity to meet and discuss its proposal with Rio Tinto. There can be no
assurance that any transaction or offer will result from BHP Billiton’s
proposal.
PM: Actually neil — you are the one who started this — last week in the paper, bno?
NH: indeed, although one or two of our rivals have trying to claim credit
NH: anyway let’s tell the readers what we know of the approach
NH: BHP Billiton, using Goldman Sachs, approached Rio Tinto with merger terms over the weekend.
PM: Right!
NH: Plan to create a mining giant worth something north of £XXbn.
PM: Substantially north, perhaps.
PM: Do we have the terms?
NH: That’s where it gets tricky.
NH: One top, top, top source insists that this was presented as a nil premium merger.
PM: Ok. That sounds rather disappointing. Those who propose nil premium mergers have a habit of becoming bid targets themselves.
NH: Sure – but then another top, top, top, top source insists that that offer for Rio was pitched at a 30 per cent premium.
PM: Right – that would be something close to £60 a Rio share!
PM: currently trading at 53.40
NH: Ah, but be careful here – we have no idea whether it was 30% before or after all the recent speculation kicked off.
PM: You kicked it off you mean.
NH: Well yes.
PM: So let’s be clear here. We are saying that we understand that – using Goldman Sachs – BHP Billiton approached Rio Tino with takeover terms at the weekend.
PM: We don’t know for sure whether this was a nil premium suggestion – or whether it was pitched at a substantial premium.
NH: We don’t know for sure whether this was a nil premium suggestion – or whether it was pitched at a substantial premium.
NH: That’s right.
PM: And what did Rio say.?
NH: They said: No. Go away
PM: Outright rejection.
– as this morning statement confirms
NH: Yep.
PM: Hmm. I thought Goldman were working for another of the big miners. Anglo American?
NH: They are. But clearly they don’t think there is a conflict.
PM: But look I know this story has been percolating for ages – but seriously – Rio and BHP – together.
PM: ?????
PM: That’s huge – aren’t there all sorts of competition issues here.
NH: You would have thought so – especially in the business of mining iron ore.
PM: Right – so what’s the story there? iron ore?????
NH: Well this is where it gets more interesting – and I must confess, a tad more speculative
PM: Go on. We are consenting adults and so are the readers.
PM: We can deal with speculation – and assess its likelihood.
NH: Ok – well the talk – and it is only talk – is that Xstrata has been linked up to take on a good chunk of the iron ore assets from BHP Tinto.
PM: So Rio Billiton would pre-sell assets to allay competition concerns.
NH: That’s the story – but one person who is in a position to know says there have not been any talks with Xstrata – tho he hurried added that if such assets were on the block Xstrata would be interested.
PM: So Xstrata’s being advised by Morgan Stanley then.
NH: I didn’t say that!
NH: But yes, you’re right
PM: Hmmm
PM: So what happens next?
NH: Well, some people say BHP might go hostile.
PM: I can’t see that – not with a merger of this size.
NH: Well, that what some people say.
NH: Oh, and there’s a Chinese angle
PM: Whoa! No way!
PM: 
PM: How’d you hide that rabbit?
PM: What’s the Chinese angle?
NH: That they’re not interested.
PM: ??????
NH: Well, the suggestion is that BHP looked to link up the Chinese gov – in the form of a SWF – to join the bidding party.
PM: sovereign wealth fund
PM: Right ….
NH: But it is said that the Chinese were not interested
PM: Hmm – can see why – all sorts of politics would be kicked off. We’ve seen what happened when the Chinese tried to buy some American oil….
PM: As fxtrader notes below it would also be tantamount to buying australia
NH: but u have to think that the Oz govt is going to be in favour of any BHP/Rio deal
PM: is that so?
NH: create a huge national champion
PM: Let’s move on. Im furious that we didnt get this out before the statement
NH: so close. if BHP had just waited another 30mins
NH: would have been scoop of the year
PM: Decade even
PM: 
PM: 
PM: To the commetns below….
PM: OJ — please log off
PM: And Tony — yes, this is a very special day for me
PM: For those of you who are behind the curve Tony is alluding to the fact that the great leader
PM: one Martin Lukes
PM: dropped me a story about his pay packet at AB Global
PM: And was terribly upset at the treatment we gave it here on Ft Alphaville
PM: Humourless bugger
PM: Anywaay — i got my name in the M Lukes column. Which is some honour
PM: Doesnt make up for missing BHP Tinto tho
PM:
NH: anyway, the Rio bid has pulled the London market out of the doldrums
NH: on the back of Wall Street’s dismal overnight performance
PM: yes — was down earlier but maybe not as low as expected
NH: the FTSE 100 hit 6,290.3
NH: now down just 5.9 points on the day at 6,379.2
PM: You were talking earlier about the so-called “Tale of Two Markets”
NH: yeah
NH: on the one hand we have banks being obliterated
PM:
NH: consumer stocks being hammered
PM: 
NH: and on the other side of the street
NH: mining stocks flying
PM: 
NH: like two separate markets
PM: Hmm, is interesting
PM: And the next effect is just five footsie points either way
NH: actually we should have a quick look at these banks again
PM: oh yes — appalling
NH: RBS down 17.5p at 420p
PM: That’s a fall of 4.1% — again!
NH: and its lowest level since March 03
NH: Barclays
PM: oh my
NH: down 21.25p at 492p
PM: That’s down 4.14% – again
NH: despite all the noise over that Bernstein note yesterday
NH: i reckon the real damage was done by the Citigroup piece
PM: What — the one about core capital?
PM: beware the uber-leveraged — rbs, barc and deutsche
NH: yep
NH: really frightening stuff
NH: talking about recapitalisations
NH: in case u missed it yesterday, we will jus get it out again
NH: before we do
NH: also worth noting that Barc and RBS will have been affected by the write-offs announced by Morgan Stanley overnight
PM: t used to be much simpler — Gone are the days when capital adequacy at European banks was easily measured by their reported Tier 1 ratio. Confidence in both the numerator (capital) and denominator (the risk weighting of assets) appears to have evaporated, with the result that a wider suite of capital adequacy measures are being monitored by investors, rating agencies and regulators as never before.
So many measures, but still little confidence — Jostling for investors’ attention are a labyrinth of capital measures, ranging from the old fashioned tangible equity to asset ratio, through leverage ratios and equity Tier 1 ratios. But which ones matter?
Ask the audience — At present the ultra-conservative tangible equity to asset ratio is the most correlated with valuation measures. By contrast, Tier 1 ratios are almost being ignored when it comes to individual bank valuations.
Sizing the deficit — Whatever the measure, however, European banks have a problem. Our analysis shows that relative to banks elsewhere in the world, Europe’s banks have significant capital deficits that would require sector recapitalisation ranging from 5% of market capitalisation (on an Equity Tier 1 basis) to c20% on both a leverage ratio and a tangible equity/asset ratio test.
Value traps — There are several banks that superficially look cheap on both a PE and price-to-book basis, yet are actually expensive once adjusted for their weak capital positions. These include Dexia, Danske, Credit Agricole, and Deutsche Postbank, where capital deficits range from 25% to 45% (of market cap). Most strikingly, however, are Europe’s “uber leveraged” trio — Barclays, RBS and Deutsche Bank — where capital deficits range from 60% to 80% of market cap.
Expensive, yet attractive — By contrast, several superficially expensive banks look very attractive on a capital-adjusted basis, including most of the CEE sector, KBC Group, NBG, HSBC, Intesa Sanpaolo and Hellenic Bank.
Sector view remains bearish — While the recent sell-off offers up some valuation opportunities, we view many of these as value traps (see above). With confidence in banks’ balance sheets shaken — and growing concerns over capital strength — we see echoes of the 2001-2003 insurance sector bear market developing.
PM: or here if you prefer
PM:
PM: Note super sivs comment below
PM: Bitching about analysts
NH: tut, tut
PM:
PM: Anyway — shall we ring the bell for you Neil?
NH: yeah
PM: ding ding
NH: this is a story we did manage to break exclusively
PM: Hang on — it was in CityAM no?
NH: don’t go there
NH: think it may have been a pick up
PM: referring of course to Close Brothers here
PM: Neil brought up the idea of Cenkos tabling a bid for Close here yesterday
PM: Andy Steward of Close obviously thought Neil had come up with a good idea — and he has now made his approach
NH: and the shares are up 155p at 915p
PM: Move of just over 20% — not bad neil
NH: and we have had a really aggressive response from Close
NH: they have come out and basically told Cenkos and Andy Stewart to get stuffed
NH: Saying offer significantly undervalues company
PM: What price was the offer?
NH: 950p
NH: but we are going to break from Close quickly
NH: just had statement from Rio
NH: got the deal terms
NH: 3 BLT shares for each Rio share
NH: based on live price, valued Rio at £52.50
NH: shares traded well above that
NH: £54 now
NH: market expecting increased offer
PM: Up 24%
PM: terms rejected, of course
NH: like Close Bros
NH: they are saying offer significantly undervalues company
NH: i can’t believe we are discussing a £XXXbn deal in the mining sector in the middle of credit crunch
PM:
NH: i mean what is going on??
PM: Rio is now capped at 55bn
NH: the miners are in a bubble of their own
PM: BHP is capped at XXbn
PM: i think
NH: amazing
PM: Anyway — back to Close Brothers
NH: here’s this morning’s very aggressive response to the Cenkos approach
NH: The Board of Close Brothers notes this morning’s announcement by Cenkos
Securities plc regarding a takeover approach to the Company. The Board confirms
that an approach was received on 7 November 2007 from a consortium of Cenkos
Securities and Landsbanki at a level of 950 pence per share in cash. The
indicative offer was highly conditional, and no discussions have been held with
the consortium.
NH: The Directors consider that this offer is wholly inadequate and accordingly have
rejected the approach. The Board does not propose to pursue discussions with the
consortium.
PM: Oooh, that is aggressive
NH: and here’s the Cenkos statement
NH: Cenkos notes the recent press speculation concerning a possible offer for Close
Brothers Group plc (“Close Brothers”) and can confirm that in conjunction with
another party it has made an approach to the board of directors of Close
Brothers regarding a possible cash offer for the entire issued share capital of
Close Brothers at a price of 950 pence per ordinary share.
NH: Cenkos is interested in acquiring the investment banking and asset management
businesses of Close Brothers. It is proposed that the banking division will be
acquired by the other party.
This proposal is at a very early stage and there can be no certainty that the
approach will lead to an offer for Close Brothers or that if an offer were made
it would be successful.
PM: Interesting
PM: Mr Stewart wants Winterfloods, corporate finance and asset management
PM: and Landsbanki gets the Close bank
NH: yep
PM: So how do we see this one playing out?
PM: I mean — Wins worth 950p on its own, no?
NH: I am sure the boys round at wins think so
NH: i reckon £500m would be a very full price for Wins
NH: but the fact is
NH: CB are now under pressure
NH: they have to justify why they are worth more than 950p
NH: and that could be tough
NH: before today’s move, Close shares had gone nowhere in a decade
NH: and shareholders are therefore going to ask why this offer has been rejected
NH: that said
NH: CB will argue that this an opportunistic bid
NH: that it shares were trading at 985p six months ago
NH: and have a 52-week high of £10.81
NH: they will argue that their shares have been pulled down with the rest of the banking sector and that canny Mr Stewart has just taken advantage of that to lob in a cheeky bid
PM: I see
PM: but that argument is not going to be enough is it
NH: no because
NH: Sure CB shares were trading at 950p six months back
NH: but the world was a very different place then
PM: Certainly was
NH: and it does not look like we will be heading back their soon
NH: especially in the banking sector
PM: That point needs hammering home
PM: Most investors would give their right arm to be able to sell any financial stock at last spring’s price
NH: they would and remember this was a time of mad private equity deals
NH: cheap debt
NH: m&A
NH: i mean a private equity group bought Boots
PM:
PM: And EMI
NH: so I think we can say that defence is not going to cut much mustard
PM: So what’s going happen here?
NH: dunnow I think a few shareholders have already been taken offside
NH: so there seems to be some support for a bid at 950p
NH: and one I think Mr Stewart can finance
NH: remember he has the Icelandics in with him
NH: and look at the people who backed Cenkos
NH: Paul Roy and Michael Marks
NH: new smith capital partners
NH: and Neil Woodford, the legendary fund manager at Perpetual
PM: So how are Close going to defend themselves?
NH: one view in the market is that Close will respond by breaking itself up
NH: as we discussed earlier this week there are four very distinct parts to CB
NH: and they could all be sold off
NH: or some of them sold off and the proceeds returned to shareholders
NH: one rumour we are picking up very strongly this morning is that Close will respond to this approach
NH: by getting their new FD in position quickly and launching a strategic review
PM: Now the new FD he’s the guy from the stock exchange no?
NH: From the glorious LSE, who brought us yesterday’s trading fiasco
PM: 
NH: his name is Jonathan Howell
NH: and he did a very good job at the LSE
NH: and getting him is a real coup for Close
NH: he is due to turn up Feb
PM: Ok
NH: but something tells me he might be in place before the end of the year
PM: Presumably Mr Howell was instrumental in helping the LSE repel all those bids
NH: yes
NH: and it seems those skills we be called upon again
PM: and assuming close was broken up what would it be worth
NH: well
NH: a couple of sector specialists have been through it with me and they reckon over £10
PM: Do we have any broker comment on this?
NH: this is from Peel Hunt
PM: Punt
NH: Six weeks after reporting an excellent set of full year results and two days after paying its shareholders 50p in dividends (25p final and 25p special), Close Brothers is rumoured (by the FT) to have received an all cash bid at a 30% premium to yesterday’s closing price.
NH: We see value in Close Brothers, particularly following the current credit crunch. It is well capitalised, has a well diversified sources of funding and an exceptional collection of asset management, corporate finance, securities trading and banking businesses.
NH: Will the Cenkos bid succeed? That depends on Close Brothers’ shareholders and the attitude of the Board. We expect this bid will be a spur to better communication of Close Brothers’ excellent underlying and reported performance.
NH: On 12 October Jonathan Howell announced he was leaving the London Stock Exchange and would take up his appointment as Finance Director of Close Brothers in February 2008. If the bid is to be taken seriously Mr Howell may take up his appointment earlier than planned.
NH: Valuation: At 760p a share Close Brothers is trading on a 4.9% historic twice covered dividend yield (ex special dividend) and prospects of double-digit growth. It is trading on 1.4x current NAV and a PE of under 9.0x. We think 900p is a credible price target without a bid premium.
PM: Rumoured by the FT — cheek
NH: i know
NH: And this is from Landsbanki
NH: Close Brothers (General Financials, No Rating) – FT report
The FT reports that Close Brothers (no rating) has received an all cash offer of ‘more than £1.1bn’ from Cenkos (no rating) which has a market capitalisation of £133m. Close’s market capitalisation was £1.13bn at last night’s close. There’s no RNS announcement as at 07:25 this morning
Close’s shares are down 25% year-to-date whereas those of Cenkos are up 24% over the same period.
NH: The most often-heard comment about Close Brothers is that its share price suffers from a conglomerate discount. Close Brothers comprises businesses that don’t look out of place within the same group. But many banks can boast more diverse groups of subsidiary businesses without attracting the conglomerate discount tag, though. In terms of valuation, a quick SOTP on a reasonably conservative basis produces a value of around £1.4bn or close to 950p per share. That’s without assuming bid premium and is indicative of the sort of discount that is in Close’s shares.
NH: Its business lines comprise Investment Funds, Wealth Management, Corporate Finance, Securities Trading, Lending Services and Deposits & Treasury Services. Whilst solid businesses in their own right, they look very much stand-alone by nature and there have been plenty of rumours that parts of the business could be hived off. Close has pushed organic growth but also bought businesses to augment its geographic and product footprints but mainly to bolt into place within particular divisions.
NH: One can’t help looking for the same sort of potential internal synergies that many banks have realised through addressing central systems, processes, services and administration functions to save costs. For Close, the Asset management business is the most likely source of such internal synergies, in our view.
PM: Right thanks for that
PM: let’s move on
PM:
PM: Actually — a Landisbanki statement has just come out on Close
PM: What does it say Neil?
NH: just saying that they are interesting in buying the CB’s banking business
NH: does not really add too much
NH: says its early days
NH: looks like HSBC are advising Cenkos and Landsbanki
PM: No 
named
PM: Scramble — just been looking for broker stuff on Rio — nothing minted as yet
PM: These are analysts we are talking about
NH: they like to have a long stoke the chin before putting a note out
PM: Politik — note the BHP chart — straight line since August
NH: but interestingly once the terms of the deal were announced they went into reverse
NH: now down 31p at £17.25
NH:
PM: FX trader and bsb mentioning the LSE outage yesterday
PM: Did we get to the bottom of what happened?
NH: i think so
NH: problem was at the LSE
NH: with infolect
NH: that’s the system the LSE uses to send prices, trading data to data vendors like
PM: not infolect
NH: Fidessa, Reuters, Bloomie
NH: now this is all a bit techie
NH: but infolect has four interactive gateways
PM: course it does
NH: just before 16.00 yesterday, one of those went down
NH: as a result all the data that was going down that gateway was re-routed to the others
NH: they could not cope and eventually the system ground to halt
NH: at which point we think the LSE shut the whole thing down
NH: re-booted it
NH: and got everyone re-connected
NH: then the LSE announced an extended auction period and by 18.00 we finally got some closing prices
NH: although it took the FTSE another hour to calculate the final index closing prices
PM: what a mess
NH: and lucky it was not a busy day
NH: volume was only 2.2bn by 16.00 yesterday
NH: imagine if it has been a melt down day when vols have hit 4bn
NH: they would never have cleared the backlog
PM: Ok
PM:
PM: bsb mentioning the ABX index
PM: off a cliff — as Sam has noted we will be doing a post on Alphaville a little later on this
PM: But it is quite appalling
PM: People can see it here — click on the top AAA tranche
PM: http://www.markit.com/information/products/abx.html
PM: Down from 80 to 72.5 in a matter of days
PM: Was trading close to 100 bck in July
PM: Oh — and Punchy — went to find the rio story in the AFR but it is not in our edition
PM: Do post a link if you have one
PM:
PM: What else is moving?
NH: big move in the share price of Micthells & Butlers this morning
PM: Ah yes — was mentioned below earlier
PM: What’s the price
NH: up 34.5p at 644.5p – that’s a rise of 4.9%
NH: and I don’t think that’s on the back of the results from Punch Taverns
NH: which frankly were pretty lacklustre
PM: so what’s happening?
PM: : Are the Irish racing tycoons buying again?the Coolmore mafia
NH: what Magnier and McManus you mean??
PM: yep
NH: well that’s what the market thinks and who is to say they are wrong
NH: but
NH: I have no indication from my spies that’s the case
NH: and let’s not forget who it was who revealed the Irish were shareholders in the first place
PM:
PM: as if you would let me
PM: So what’s going on, smart arse?
NH: well I reckon some of the company’s biggest shareholders
NH: Robbie Tchenguiz (19%), the Irish (£.4) and some hedge funds (10%) are putting pressure on the company to consider a property deal
PM: Ok
PM: but I though the £4.5bn property joint venture with RT had been shelved because of the problems in the debt market
PM: surely now is not the time to resurrect that type of deal
NH: I quite agree
NH: but what about an op-co/prop-co spilt
PM: How would that work?
NH: right, here we go
NH: M&B has £2bn of debt
NH: apparently that would be transferred to the prop co
NH: which would obviously adopt Reit status
NH: so it would pay no tax
NH: now that would leave an ungeared operating company running M&B’s estate of 2,000 pubs and restaurants
NH: all things being equal that would be good news for the share price
NH: but of course there are a number of stumbling blocks to a deal
PM: such as?
NH: first what do M&B do about the hedge they put in place to protect the shelved JV from rising interest rates and inflation??
NH: and what about the covenants on the debt
NH: they would be broken if the debt was moved to an prop co vehicle
NH: that could be quite messy and trigger a lot of payments
NH: nonetheless, that’s the rumour that sees to be driving the share price higher this morning
NH: and there could be something in it
NH: after all if RT does not do something, due to his paper losses on SBRY, M&B shares are just going to be easing pickings for short sellers
NH: they will just keep driving the price lower, knowing that at some point RT will not be able to take any more pain and will have to say
PM: Just looking at the rest of the pub sector…
PM: All seem to be in demand this morning
PM:
NH: right just waiting for the BOE decision
NH: market spiked ahead of it
NH: up 37.3 at 6,422.4
PM: Big mvoe — given that wall street was off 360 points over night
NH: perhaps Merv is going to cut
PM: RATES UNCHANGED
PM: No statement
PM: Right — we are done. Off to drown our sorrows over lunch
PM: With water, obviously
PM: Thank you very much for joining us today
PM: great comments
NH: market only up 25 points now
NH: 22.5 points
PM: Rio?
NH: up 28% at £55.60
NH: must dash have lunch bye
PM: seeya