Markets live chat transcript for the chat ending at 12:13 on 12 Nov 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to a Markets Live, FT Alphaville’s daily chat around London stocks.
PM: Neil Hume is with me.
PM: He came in to the office wearing his tin hat this morning.
PM: Hat it on on the train and the tube - which was brave of him.
PM: But then had to whip it off in the morning . everything ‘s up in London.
NH: Yes, but this is a temporary thing – just for the morning
NH: We’re not giving the readers carte blanche to take their tin hats off, are we?
PM: No of course not.
NH: But then the FTSE100 is up 22.6 points at 6,327.5
PM: Hmm. Quite extraordinary given Asia overnight and Wall St again on Friday – late on.
NH: yes a bit all over the place
NH: was up at 6,365 earlier
PM: And i see it has been as low as 6276
PM: So what is it??
NH: we’ve got the Dead Cat Banks this morning.
PM: 
PM: 
one?
NH: Barclays up 26.5p at 501p
PM: two?
NH: RBS up 18p at 420.75p
PM: three?
NH: HBOS 22p better at 774.5p
PM: four?
NH: Bradford & Bingleu 3.25p stronger at 266.25p
PM: great — that’s enough
NH: the background here is the soft briefings the banks have been giving the media over the weekend
PM: oh yes — lots of explanatory stuff in the weekend press
PM: Also - -guess they had all taken such a beating last week
PM: due some sort of bounce
NH: lots of reassuring noises in the weekend press
NH: Sunday Times for example carrying a piece claiming that Barclays has brought its auditors in and asked them to produce a through report for this month’s trading statement
PM: Yes of course — to give the numbers credibility
NH: hmm, not sure the market is in the mood to believe anything at the moment
PM: That’s true
NH: but full marks for trying
NH: so
NH: what do we think in these banks
NH: today
NH: and losses tomorrow
NH: must be a huge short in Barc and RBS
PM: Do try and find that out
PM: I was looking at the Wachovia numbers from the US earlier
NH: on the case. trying to get hold of some short interest data now
PM: They said then that the value of their CDO subprime assets had fallen from $1.8bn to $676bn in october
PM: Stuff fell in value by TWO THIRDS in ONE MONTH
NH: scary
PM: 
NH: now, there is one bank we have not mentioned yet
PM: Former bank stock
PM: Crocket was first to roar – up 10 per cent at the opening – hit 161p
NH: This was on the back of news at the weekend that Luqman Arnold might come to the rescue – ex-Abbey chief.
PM: Hmm – this is very interesting. Talented chap.
NH: But you will have noticed that the stock has come off the top. Crockies are currently up 5.9p at 151p. The 10% gain has shrunk to 4%.
NH: This is after people have looked at Arnold’s statement – issued by his channel islands vehicle, Olivant.
PM: What does Olivant mean?
NH: Well it’s just a deviant of olive, I guess.
NH: Anyway – for those of you who haven’t seen the actual wording, here’s the statement
NH: Olivant, an independent investment group, today announces that it is preparing a
proposal for the Board of Northern Rock. The proposal would involve the
immediate introduction into Northern Rock of a core team of Olivant’s
experienced principals, led by its chairman, Luqman Arnold, to work intensively
alongside its existing Board and management, together with a subscription of a
minority stake in Northern Rock, intended to ensure Olivants alignment with the
Board and shareholders. Olivant is not proposing an offer for the shares of
Northern Rock.
NH: So – no price, no idea of the size of stake Arnold might want for his services. And, most worryingly, he’s happy to see Adam Applegate stay in his job.
PM: Ah, but you know I think there is real value to the expertise Arnold could lend in this matter.
NH: Such as??????
PM: Well, Arnold is one of the few people on the planet who has actually rescued a stricken British mortgage bank.
PM: He was the guy that stopped Abbey National going bust five years ago.
NH: Bust?
PM: Yeah – bust. No one has every properly acknowledged the fact, but Abbey national – as it was then called – got itself so overstretched there had to be a board clear out, with Arnold and team parachuted in to repair the balance sheet.
NH: I can feel a history lesson coming on here…
PM: RIGHT – you’ve got one!
PM: First roll back to circa 1998. We get a tip that the Bank of England has discovered something nasty in Abbey’s treasury department – worried about it’s risk management.
PM: Phone call to Abbey is met with a threat of an injunction, claiming we were in receipt of confidential documents.
NH: This was at the Guardian.
PM: Yeah.
NH: But we didn’t have any documents.
We didn’t even have a story – just a tip that something was wrong.
PM: This was a Friday – so we sat back and thought for a bit, trying to work out how we could get at the real story. Then the Sunday Telegraph comes out with a carefully moulded story about how Abbey had had a purely technical hitch in its Treasury dept TWO YEAR previously – and that everything was fine now.
NH: So a soft, carefully managed piece which basically said “No story”.
PM: That’s right – and from that moment – Abbey and its chief executive Ian Harley was in my little black book. Everyone else thought Abbey was brilliant – they even had their own plans for world banking domination.
PM: So we kept writing about how Abbey was basically raising oodles of cash in the Euromarkets – principally through FRNs – and then punting the money on anything and everything
PM: There were train assets, airplanes, Korean corporates, paper issued by a thing called ENRON.
PM: The lot. – well over £100bn of stuff – and much of it was about to go toxic.
PM: Dot comedy bubble bust, Telecoms crashed, 9/11, Enron crashed, world com – etc etc.
PM: Arnold and his technician – Stephen Hester (now at British Land) had to move in fix it. Literally, over about 18 months they unwound the whole lot. It was an extraordinary feat – and largely unacknowledged because the powers that be did not want to draw attention to the fact that one of the biggest banks in the country almost went bust.
NH: So you are saying Arnold is therefore the perfect person to sort out the Wreck.
PM: He could well be.
NH: Well I think you are missing something here.
PM: 
PM: What’s that?
NH: Arnold is rubbish at running retail banks – and he’d probably admit it.
PM: Eh??
NH: I hear you on his success in unwinding Abbey’s toxic treasury operation – but look what happened next.
NH: He and Hestor tried to re-invent high street banking with Abbey – they rebranded, changed all the customer service, outsourced stuff like fund management. All sorts of “radical” changes.
NH: wasn’t one of the marketing lines “turning banking on its head”??
PM: Er, yes
NH: And it was a DISASTER. Bascially they had to put the bank up for sale – the plan just did not work.
PM: Hmm. That’s true.
NH: They put it up for sale – Santander came along – Arnold tried to organise an auction – but no one else wanted to buy it?
NH: Or at least no one who would not have been snared by the competition authorities.
PM: Yeah that is all true.
PM: But look – he’s just talking about “intensive” work. He has a plan for sorting out this Granite thing—the unstable reactor core at Crock. Others will run the bank.
NH: And another big difference – he was largely able to unwind Abbey’s toxic stuff out of the public eye.
PM: That’s also true.
PM: We will just have to watch and see what happens. The Crockadory story is not done yet
PM: let’s move on — but should also acknowledge points below on this from VP and JB
PM:
PM: OK, we need to take a look at Rio Tinto
NH: sure
NH: shares up again this morning
NH: 153p higher at £57.77
NH: went as high as £59.30
PM: BHP has issued a very detail statement this morning
PM: In which it puts forward the rationale behind its approach
PM: and why Rio shareholders should back it
NH: and basically the argument seems to be that
NH: there are massive cost savings and synergies on offer
NH: and because the deal is structured as an all share offer, Rio shares get to share in the upside
NH: here are some of the figures BHP has put out this morning
NH: This combination is expected to generate material synergies - the total being
unique to a combination of BHP Billiton and Rio Tinto due to the substantial
overlap in neighbouring and jointly-owned operations, combined with the usual
areas of duplication. In particular, BHP Billiton expects:
NH: * US$1.7 billion nominal per annum of cost savings in the third full
year following completion, achieved through removal of duplication as well as
procurement and operating efficiency savings; and
NH: * further EBITDA enhancement of US$2.0 billion nominal per annum in the
seventh full year following completion, driven primarily by the acceleration of
volumes to customers.
NH: In the seventh full year following completion this, therefore, gives a total
incremental EBITDA of US$3.7 billion nominal per annum of quantified synergies.
NH: The total one-off implementation cash costs related to achieving these synergies
are expected to amount to US$0.65 billion over the first two full years
following completion.
NH: This estimate of cost savings and further EBITDA enhancement has been reported
on under the City Code on Takeovers and Mergers by KPMG and by BHP Billiton’s
financial advisor Goldman Sachs International
PM: So big numbers in there
NH: yep
NH: and its interesting that BHP have wasted no time in getting this document out there
NH: and meeting shareholders
PM: yes, they are taking the initiative
NH: sure are
NH: but the market still thinks they are going to have increase their offer
NH: this figure of £70 a share that we laughed at on Friday is now being taken seriously
PM: Really?
NH: yep
NH: even analysts reckon £65 a share is possible
NH: take a look at this note from UBS
NH:
Reiterate Buy - Raising price target to £65
