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Markets live chat transcript for the chat ending at 12:06 on 19 Nov 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM: Welcome to Markets Live, FT Alphaville daily obsessive rant about a feckless Newcastle based institution.

PM: But we do also discuss other stuff.

PM: And, dear readers, do feel free to catch us out with tough points about currency correlations, ABX stuff, yield curves, whatever.

PM: Neil is with me to answer what ever you throw at him.

NH: hello

PM: Neil can say Hello — but he has connection probs

PM: Bear with us….

NH: hello again

NH: my computer is not working

NH: can’t see anything I am typing

NH: all blank

NH: still not working

NH: will have to do this blind

PM: Crock is ticking this morning.

Readers may also know this former bank as Northern Rock.

PM: As you will see we have a new facility this morning

PM: But it only works once for each word

PM: Crock

PM: Watch this:

PM: Pearson

Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.

PM: neat — eh?

PM: Brought to us by Assanka — nifty little software house behind Alphaville

PM: Anyway - Crock ticking

PM: As in a bomb. Not like a Grandfather Crock

PM: Are we still gagged?

PM: Yes – formally the injunction runs until tomorrow night – seven day affair, but look don’t get me talking about the legal stuff.

PM: Cos it will cause Julia – on our legal team – to have a fit.

PM: And it might give our readers from Shillings an idea that they are earning their money, sitting watching their terminals – reading what we say as we write it.

PM: Point is – the injunction is irrelevant now. Not only was the cat out of the bag last week, thanks to Catsoutthebagville, but the “refreshed” board at the Wreck have effectively confirmed the situation.

NH: right this rubbish system is still not working

NH: will have to publish blind

PM: Right this morning — crock

PM: Come out and said that the bids so far tabled value the existing equity at “materially” below Friday’s market price.

NH: So Friday’s market price is the market price no longer.

PM: Certainly isn’t — current quote is down 21.9 at 110.7

NH: that’s a fall of 16.5%

PM: And another new low.

NH: But it has also been interesting to watch the price moves in detail

PM: Go on.

NH: Well, even the Crockettes – around the boardroom and at the advisers – Citi, Merrill Lunch and Blackstone – are trying to talk the price lower.

NH: Given what has happened, after this morning’s statement you would expected the price to halve.

PM: But it hasn’t.

NH: In fact, the opening fall was rather small – 6% — and the price actually rallied from there initially. Even over the past few mins the price has bounced off the bottom.

PM: So what do you think is happening?

NH: Well – series of factors.

NH: 1 – No one can go short. There is no stock to borrow.

NH: 2 – Many of the remaining holders are little retail investors or simple people who got stock in the original flotation and haven’t looked at it since.

NH: Some of these people wont even know how to sell the shares – never mind keep up with the news and make an informed judgement.

NH: 3 – Jon Wood’s SRM and Philip Richard’s RAB Capital might be buying more stock.

PM: What to average down?

PM: (Reduce their average buying price by purchasing more as the price falls.)

NH: Er, thanks Paul.

NH: Yes, but it’s what their strategy is here that is interesting.

PM: Hmm — we must speculate.

NH: The sense is that Wood in particular must have a plan.

NH: We must assume that these hedge funds want a blocking stake – to block any deal unless it provides them with value.

NH: But until we know how a deal is going to be structured it is difficult to know whether shareholders could actually block it.

NH: But there is an underlying assumption here…

NH: The hedgies are betting aggressively that the government will not put Crock into administration – even if that would be the most humane (and politically expedient0 thing to do.

NH: Administration would freeze depositors’ money. And even if they could somehow arrange for an ultra short administration, freezing accounts which the government is supposed to be guaranteeing just would not look good for the treasury.

PM: Not very good at all.

PM: So if Wood et al are betting the Treasury cannot just wipe them out — calling in the Bank of England’s loan – how about the other side of this coin?

PM: How about Wood blocking a rescue deal?

NH: Well, as I said – it depends how it is structured. We don’t know as yet whether Bryan Sanderson might need 50% or 75% or 90% support from shareholders.

PM: Hmmm

PM: What a mess. Do you think the Treasury have got a measure of this hole??

NH: Oh course they have. John Kingman is doing it – he’ll have every angle covered.

NH:

PM:

NH: Bright chap. Ex-FT.

PM: Hmm – I worked with him briefly at the Telegraph years back.

PM: I was taken by the fact that he shouted at telephone receptionists when trying to get thru to people.

NH: Always works – shout at the receptionist

PM: Do you understand who you are talking to? This is John Kingman of the Daily Telegraph.

PM: That’s what he used to say.

PM: Anyway he left hackery. As he did so he said to me:

PM: Journalism doesn’t give you enough power. I want to do something that gives direct power.

NH: Lovely

NH: Well I suppose he has got it now.

PM: No he has not – he’s just got a shovel – in a hole digging.

NH: Because if there was an easy route out of the Crock fiasco we’d be out by now.

PM: That’s right

NH:

PM:

NH: of course the Crock is not the only banking stock to have taken a hit this morning

NH: the bear raid on Alliance & Leicester continues

PM: Yes – smashed earlier. Down over 7%

NH: price is currently down 20p at 587p

PM: Did go as low as 560p

NH: And this is after it being smashed last week.

NH: now this morning’s fall seems to have been caused by one rumour in particular

PM: yes and it read:

PM: STORY IN THE MKT THAT A UK MORTGAGE BANK ARE AGGRESSIEVLY TRYING TO BUY 6MONTH
MONEY IN THE MKT AND ARE PAYING WELL ABOVE LIBOR

NH: But then A&L came out and said this to Reuters:

NH: We are continuing to successfully raise funds at around Libor. We have not raised any funds from the Bank of England, and our share buyback programme continues.”

PM: So what does “at or around libor” mean?

NH: good point

NH: and as Libor keeps ticking higher this must hit margins

NH: also do we know if Bradford & Bingley have commented on this rumour??

PM: Nope — not that i know

PM: But they said they did not need to go to the wholessale markets for three months

NH: hmmmmmm

NH: but i seem to remember the crock telling everyone things were OK before it went to the BoE

PM: Steady!

NH: nothing official mind you, just these spokesman making comments

PM: Anyway — Sam has done a post on A&L — here’s the address

PM: http://ftalphaville.ft.com/blog/2007/11/19/9009/if-its-not-alliance-leicester/

PM: On the main Alphaville home page

NH: anyway there could be another reason for the weakness in A&L this morning

PM: Wots that then?

NH: fading bid hopes

NH: do u remember last year Credit Agricole approached them

NH: an offer around £12

NH: was dismissed rather rudely by Derek Higgs, A&L chairman

NH: anyway, does not look like CA will be coming back any time soon

NH: even now the A&L price has halved

PM: Close escape for CA

NH: CA have acquired 15% of an Italian lender this morning

PM: Oh yeah?

NH: Bankinter

NH: they already had 5%

NH: so it seems they are placing their bets on Italy and not the UK

NH: and who can blame them

PM:

PM: Extraordinary situation we are in.

PM: And there is so much more to come.

NH: You are talking about the insurers.

PM: Well yes, Swiss Re came out with a write down of $1.1bn on CDS this morning.

PM: This was through a SIV – to credit default swaps.

NH: Yes, and as one smart analyst we sometimes talk to pointed out….

NH: Swiss Re write down came 2 weeks after company reported Q3 results which beat consensus. Another financial institution that doesn’t know how to add up. Worrying.

NH: Important point here is that up until now all the write downs have been of CDOs not CDS.

PM: Hmm. That is true – going to have to pay a visit to Paul Davies over on markets. He’s particularly good at the CDS market.

NH: The other big point is the sector switch.

PM: ??

NH: Well – to insurers making provisions and not just banks.

NH: This was bound to be the case. If the banks are making write downs then the investors have lost hard money will have to

PM: Yes, is suspect continental Europe is choc bloc full of insurers who took this paper for the extra bit of yield, only to see spread explode.

NH: Oooh, — “spreads explode” employing the language of the credit markets. I’m impressed.

NH: Well, a little impressed

NH: here’s a bit more from our smart analyst friend

NH: Swiss Re has a credit solutions division which was doing this. This was a liability side of the balance sheet ie they chose to underwrite this sort of risk. Most European insurers don’t do this . The market is concerned about what is on the asset side of the balance sheet, what credit investments they have taken that have gone bad. To date that is very little

PM: Swiss re is down 6.4% this morning at 91.30

PM: That’s swiss francs

PM:

PM: How about the other usual suspects amongst the banks?

NH: It was pretty quiet this morning.

NH: but now the rest of the sector is taking a thump

NH: could be on this Goldman Saschs sell note on Citi

NH: RBS is off 14.5p at 412.25p

NH: mind u Barclays aren’t worried

NH: And Barclays has actually come out this morning to say that it is hiring 800 people.

PM: Hiring – 800?

PM: What as industrial cleaners or something – clear up the toxic mess??

NH: No – in its wealth management business, which seems to be going gangbusters

PM: Oh, right.

PM: Shouldn’t they just be re-training people that are now surplus to requirements in structured finance.

PM: Teach em how to play golf or something.

NH: Hmm. Think they have different skill sets to the people employed in wealth management. Not just a matter of golf

NH: They’ve got to be able to speak in sentences, write letters. That sort of thing.

PM: Anyway, let’s move on.

NH: before we do got a question below on Stan Chart

PM: From GKB

NH: market reaction to the China stuff has been positive

NH: up 41p at £17.05

NH: which is a real achievement in a very weak banking sector

PM: Can’t see the Singaporeans selling to the Chinese tho

NH: not yet anyway

NH: must say I am not massively surprised the Chinese want to buy a stake in Stan Chart

PM: Go on

NH: well it has a good presence in Africa, which is somewhere the Chinese are focusing a lot of effort

PM: Ah, yes –

NH: mind you what price the Chinese making an offer for Old Mutual’s 50% share of Ned Bank in SA??

PM:

NH: the Chinese have already bought into Standard Bank

NH: they now want a slug of Stand Chart

NH: would have thought Ned Bank would be attractive

PM:

PM: The wider market…

PM: Index now down 65.5 at 6225.7 in London

PM: That’s the Footsie — come off progressively this morning

NH: and aside from the banks, the property sector is the main area of weakness

PM: BREAKING OLD NEWS

PM: *NORTHERN ROCK CUT BY MOODY’S; SUB DEBT TO Baa1
*NORTHERN ROCK BFSR OUTLOOK TO NEGATIVE BY MOODY’S
*NORTHERN ROCK’S BFSR, SUB DEBT, CUT AT MOODY’S
*NORTHERN ROCK S-T RATING AFFIRMED BY MOODY’S
*MOODY’S CUTS NORTHERN ROCK’S BFSR, SUB DEBT, T

PM:

PM: Sorry — lets get back to the property sector

NH: back to the property stocks

NH: now apart from the bearish comment over the weekend on the outlook for property

NH: martin allen the property analyst at Morgan Stanley went through the British Land half year figures with a toothcomb last week

NH: and he found some very bearish stuff

PM: Interesting — can you share this??

NH: In footnote 8 to their table
on page 11, British Land flags the shifts in prime yields that have occurred between September
and November according to CB Richard Ellis, the leading valuer in the UK. In short, the rises in
yields imply falls in value of 5-12% which is equivalent to a 16% fall in NAV since September. If
we weight these according to their proportion in the British Land’s portfolio, this would be
equivalent to an additional 9.5% fall in values to date. Allowing for gearing at a circa 40%
loan-to-value ratio, this would be equivalent to a fall of 16% in NAV since 30th September.

PM: Goodness me

NH: remember the results published by B Land the other day were for the six months to end Sept

PM: Helen was wondering earlier why the props were taking such a beating — look like bargain basement stuff

NH: there could be another reason for it - another downgrade etc

PM: But then we see that

NH: but the stocks are v weak

PM: British Land down 41.5p at 848

PM: hammerson down 38 at 936

PM: And Land Secs off 55p at 14.15

PM:

NH: right time for something a litte lighter

NH: some RAW market info

NH: in fact quite a lot of RAW market info

NH: we start with Dairy Crest

NH: rumours that it has lost the Starbucks contract

PM: This is RAW - untested information

PM: But interesting all the same

NH: stock down 19p at 589p

NH: and then we have a story in Kelda

PM: That is the owner of Yorkshire water

NH: it is

NH: now we are picking up rumours that a infrastructure fund from the middle east is running the numbers on a possible bid

PM: Well that’s a chunky piece of RAW

PM: Can we give it a bandit rating??

NH:

PM: Goodness

NH: remember Infra Funds are still active

PM: Bandit No 2

NH: there was a bidding war for Southern Water

NH: and alongside Pennon and Northumbrian Water

NH: Kelda is seen as a likely takeover target

NH: one of the less leveraged companies

NH: Also water fits right in with Arab oil money diversification theme still

PM: Oil and water may mix after all

PM: Thanks for that

NH: and another bid of RAW info is on one of Paul’s fav stocks

PM: been busy this morning

PM: Go on — which one???

NH: seen Gold Oil???

PM: GOO

PM: No

NH: shares up 1.5 at 8.6p

PM: Right….

NH: huge, huge buyer around this morning

PM: Right….

NH: told he wants to go to 29.9%

PM: Right….

PM:

NH: and then wants to use the stake to strike a deal between Gold Oil and a Middle East oil company

PM: Do you want to run thru its fun assets?

NH: go on

PM: Peurvian gas prospect

NH: and what about Cuba????

PM: yep — off shore Cuba

PM: Colomian producer

PM: No country risk or anything!

NH: obviously not

NH: anyway the buyer goes on

NH:

PM:

NH: some more RAW on the Rio bid story

NH: remember friday there were rumours of an increased offer from BHP

NH: well this morning, that piece of RAW has been shot down

PM: What has happened???????

NH: ceo Marius Kloppers hsa said he will not add a cash sweetener

NH: that’s what he has been telling investors in SA today

NH: and one would have thought the panel will be on to Mr Kloppers

PM: Certainly will

NH:

PM: To the comments below….

PM: Not the Daily Mirror Baz

PM: We abide by the PCC — hack code

PM: We dont buy or sell stock

PM: Neil and I only have debts

PM: Think the Goo situation will become clearer later

PM: We understand

NH: FXtrader, yep sorry. Should have said Spain on Bankinter. not sure what I was thinking of. Point stands though, CA are not interested in A&L.

PM: Interesting stuff from FXt on spotlight shifting from banks to insuers

PM: Cant agree more

PM: James — we seem to be having system problems this morning with lots of people

PM: Sees some cant log on at all

PM: Baz — thanks — im a tee totaller

PM: let’s mvoe on

PM:

PM: Right — what else?

NH: good story around in InterContinental Hotels

NH: shares were up earlier this morning

NH: got up to 972p

NH: now 2.5p lower at 943p

NH: but still outperforming the market

PM: yes we are running the story behind this on the home page

PM: comes from Estates Gazette

PM: helen did a post

PM: and is being pushed by a couple of brokers this morning

NH: that’s right

NH: apparently Pacific Group, which is headed by Achilleas Kallakis has bought a 6% stake in IHG

NH: now according to the report Pacific are considering a bid

NH: can’t paste the report

PM: Need to be a Estates gazette subsriber — which we are not

NH: so what’s the background on Pacific

PM: here’s what Helen was saying:

PM: Despite a general allergy to property, the man behind Pacific is very much in buying mode. Greek shipping magnate Achilleas Kallakis runs Pacific Group, the investment arm of a private family trust based in Monaco and Switzerland. Resources and ambition chez Kallakis are ample.

British-based Kallakis has been in the market all year, building a £1.5bn UK portfolio. He bought a large government HQ building in Vauxhall from the Reuben brothers back in January for £75m and reportedly bid circa £200m for the US Navy block on Grosvenor Square. Kallakis was last week said to be planning a super-lux residential development in St James’s Square - including a £105m penthouse, which could edge out Candy and Candy’s One Hyde Park development as London’s most expensive flat.

PM: Pacific Group own the Daily Telegraph building in Victoria

PM: and who are the big shareholders in IHG??

NH: the Barclays Brothers, who own the Daily Telegraph

NH: they have built up a 10% stake over the past year

NH: so could they join forces???

PM: Dunno — interesting tho

NH: just going through the archive and seems Kallakis has tried to buy some of IHG’s flagship hotels before

NH: the one on Park Lane in London

NH: now those hotels – IHG has a 20 or flagship ones – are technically up for sale if management can find a suitable buyer

NH: so perhaps this stake is nothing more than a bargain tool

PM:

PM: MNA was asking about Burren earlier — anything more on that?

NH: yes

NH: shares currently down 172p at £10.16

NH: a drop of 15%

NH: that follows news that Eni, the Italian oil company and Burren’s partner in Congo, has dropped plans for a bid

PM: Ouch

NH: two very different stories coming over about the reason for the talks ending

NH: the burren side are hinting that Eni swung by their offices on Friday put a £12 a share bid on the table and said you have 48-hours to recommend it otherwise we walk

NH: the Burren side claim that they were prepared to talk but ENI said no its £12 or nothing

NH: and by way of background, remember that Eni had a £10 a share offer rejected a month or so ago

NH: Here’s what Burren had to say about the latest offer

NH: Response to statement by Eni SpA
The Board of Burren (the “Board”) has noted today’s announcement by Eni SpA
(”Eni”) that it is withdrawing from discussions concerning a possible offer for the Company. Following receipt of a revised proposal on 16th November, 2007, the Board indicated to Eni that it was prepared to enter negotiations. However, Eni was not prepared to increase its proposed price of 1200p per share, which fails in the view of the Board to reflect the fundamental and strategic value of Burren’s assets. The Company continues to develop its business actively and is currently pursuing a number of initiatives which it expects to enhance shareholder value in due course.

PM: What does that last par mean?

NH: seems to mean that Burren are still on the lookout for an acquisition

NH: in the company’s last results statement, Burren said it was looking for a third leg to its business

PM: and what are its two other legs

NH: The Congo and Turkmenistan

PM: so they are on the look out for a deal

NH: possibly

NH: although the company has just been out in Turkmenistan at a big conference

NH: apparently all the big players were there

NH: and all very excited by the prospects

NH: so perhaps Burren are looking to a partner to help them in Turkmenistan and they make an acquisition elsewhere

PM: Ok

PM: and what the Eni side saying?

NH: well they are hinting that Burren are just not willing to be acquired

NH: apparently they were told only an offer of £13.50 was acceptable

NH: and that they were not allowed to talk to anyone senior at Burren when they made their increased offer on Friday

NH: apparently they had to talk to Burren’s bankers

NH: Now the Eni side claim that a number of shareholders have been gently sounded out at the some were prepared to accept an offer of £12.30

PM: so they must be pretty angry

NH: well if any of this is true and the Burren side are saying it is not. (added at 13.11GMT Burren say ENI had full access to the board and the CEO even flew back to make the meeting. On top of that they are saying that they did not say only an offer of £13.50 would be entertained.)
NH: anyway Eni have left themselves a bit of wiggle room

NH: have a look at their statement and the four carve out clauses

NH: Eni wishes to clarify its position regarding Burren by announcing that it is no longer considering making an offer for the company.

On 9 October 2007, Eni announced that an indicative offer proposal of 1050 pence per share in cash had not been accepted by the Board of Burren and that it continued to seek limited due diligence, irrevocable undertakings from key shareholders and a recommendation from the Board of Burren prior to making a formal offer to all shareholders.

After a number of discussions between Burren and Eni, it has become clear that we are unable to reach agreement on the key terms of a recommended offer.

For the purposes of Rule 2.8 of The City Code on Takeovers and Mergers, Eni, reserves the right to make or participate in an offer or possible offer for Burren within the six months following the date of this announcement: (i) with the agreement or recommendation of the Board of Burren; (ii) if any announcement is made by or on behalf of Burren or by a third party relating to the making of an offer or possible offer for Burren; (iii) upon the announcement by or on behalf of Burren of a “whitewash” proposal (as defined in the Code) or of a reverse takeover (as defined in the Code); or (iv) if there is a material change in circumstances.

PM: What constitutes a material change in circumstances??

NH: dunno

NH: but I don’t think that wording is standard

NH: : anyway, Burren are still in an offer period so Eni could come back if someone else bids

PM: who is the other bidder.?

NH: The state oil company of South Korea

NH: they revealed their interest in the company on Oct 22

NH: but it seems they are probably more interested in Burren’s Turkmen assets than anything else

PM: any analyst comment??

NH: this is from Evo Securities

NH: BURREN ENERGY (BUR.L) - REDUCE - PRICE/TARGET : 1188p/1084p - Eni takeover talks end

NH: Not at any price
EVO TAKE - While bid activity may be picking up across the industry it is clear that deals won’t be done at any price. Eni has decided not to pursue its bid for Burren after raising its initial offer from 1050p to 1200p and being rejected again. This follows on from the protracted unofficial negotiations this time last year between Premier and an unnamed third party from the Middle East. Management expectations in each case have clearly exceeded the upside perceived by the suitor. Premier suffered a slump in its share price after talks ended and we suspect Burren could suffer similarly given the absence of a significant exploration programme and the fact that prior to the Eni approach analyst target prices were well below 1200p.

NH: DETAILS - Eni has formally announced that it is no longer considering an offer for Burren Energy. In a regulatory annoucement it said that it became clear that it was unable to reach agreement on key terms of a recommended offer. In response Burren stated that it felt that Eni’s revised offer of 1200p per share failed to reflect the fundamental and strategic value of Burren’s assets.

NH: VALUATION AND RECOMMENDATION - Burren has a simple portfolio which is easy to value. It has been made easier by the read through from Eni’s purchase of Maurel et Prom’s share of the M’boundi field in Congo earlier this year. Having received and rejected an offer from Eni at 1050p and now 1200p a new floor is set for the shares. Deals in the sector have typically seen premiums to core asset value of 30-40%. Applying this to our core asset value of 808p gives a target price of 1050-1130p. Our core plus risked upside is 1084p based on a long term oil price of US$50/bbl. If we use US$55/bbl then our target price rises to 1213p, only marginal upside from the current price.

NH: this from ABN

NH: Eni has announced this morning that after a number of discussions between the two companies, it is no longer considering
making an offer for Burren. In a response, Burren’s management indicate that on the 16th November (i.e. last Friday) Eni made
a revised proposal of 1200p. It appears that the Board were prepared to enter into negotiations if Eni were prepared to increase
its proposal (to an undefined level), although Eni was unwilling. Eni has reserved the right to return to the fray within 6 months.

NH: This is a negative for Burren – for us Eni was a natural bidder for the company given the shared interest in M’Boundi and the
strategic foothold in Turkmenistan that the Nebit Dag assets would deliver. At least one other offer (at 1100p) has been tabled
(widely thought to be KNOC), and it remains to be seen what KNOC’s intentions are, although at the very least this morning’s
events reduce the chances of a bidding war. Burren is probably the most attractive bid target of its peer group – it is a relatively
simple company with 100% oil production and assets that hold out the prospect of meaningful production growth

NH: In addition, it
is not too difficult to get to a valuation above 1200p (although this does depend on recovery rates at both main assets
increasing to 30% and progress on Turkmen gas sales), and we believe Burren’s reponse this morning appears to be a clear sign
that it would be willing to negotiate if a bid came in at around 1250-1300p. We retain our Hold recommendation, and while the
shares initial reaction this morning is understandable, we would be buyers on prolonged weakness (i.e. down to 1000p).

NH:

PM: Anyone out there got a Libor fix? Told it has just moved sharply higher than its 50 day moving average — possibly another reason for the banks being hit hard again this morning

PM: Ah — we’ve got it

NH: a big jump in three month sterling libor

NH: from 6.39875% to 6.44750%

PM: oh dear

PM: Banks not trusting one another once more

NH: Euro three month libor has biggest daily increase in three months

PM:

PM: Right — we are done. Sorry if people have had tech issues this morning

PM: We will investigate

PM: Suspect it is a network prob at our end

NH: see you tomorrow

PM: But thanks for your comments. Keep those tin hats strapped

PM: We will be back tomorrow at 11am

PM: Seeya