Markets live chat transcript for the chat ending at 11:58 on 26 Nov 2007. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Welcome to Irrational Markets Live, FT Alphaville daily rant about stocks that defy our expectations.
PM: Rob Orr is with me, Neil Hume having been called to kid duty at home.
PM: Do you know how many kids he’s got?
RO: Many
PM: 15 to be precise
PM: Mix of boys and girls – 15 kids and Neil himself is barely 30.
PM: actually, fear he may feel closer to 40 to this morning
PM: While Neil is at home, I have spoken to him this morning about Mitchells & Butler and Punch Taverns and the story in Saturday’s paper saying the latter was eyeing the former.
PM: That has been followed up by a denial this morning from Punch – but we will come back to that, cos we need to go thru it in some detail.
PM: 
PM: First tho, the bank former known as Crock.
Readers may also know this former bank as Northern Rock.
RO: Just extraordianry today – Branson’s crew has come out with its terms today as it has been named as preferred bidder and there is a commitment to an accelerated takeover timetable
PM: Sir Richard.
RO: What? Branson what?
PM: Sir Richard – to you. Not just Branson! Show some respect.
RO: Oh right – as in “Did you see that Sir Richard skidding down the wall of a casino in Las Vegas recently? Sir Richard split his pants and bumped himself. Poor chap
RO: Here’s the Crockmobile link for those who missed it. V funny
RO: http://ftalphaville.ft.com/blog/2007/10/15/8071/quick-to-the-crockmobile/
PM: Anyway, Sir Richard and his team come out with their terms – and Rock’s stock HAS GONE THRU THE ROOF
RO: Yep – shares initially sunk as low at 78p
RO: then shot as high of 135p at one stage. Trading has been suspended on the order book
RO: on several occasions – pushed into the auction.
PM: Yes — order book stopped — adn moved into auciton trading
PM: The price is currently up 25p at 111p
RO: The Branson magic, eh?
PM: Well, literally. As in the ability to make pigs fly.
PM: But let’s step back for a mo and look at some actual numbers.
RO: Oh, go on then.
PM: Okay, there are currently 421m Rock shares in issue.
PM: Sir Richard’s Rock crew are buying at least 2.6bn of new shares at 25p apiece – and a further 2.6bn new shares are being offered to shareholders at 25p apiece.
PM: So that will leave 5,621m shares in issue after the takeover.
PM: Now, assume all the public offer stock is taken up by existing shareholders who – for the sake of argument – have bought at 115p.
RO: Branson will have 55% of the business at 25p a share – and everyone else will have 45% of the business at 70p a share.
PM: Now – how much money is Rock going to make?
RO: It’s anyone’s guess at present – especially when they will not be paying out dividends for a number of years while they have still got BoE borrowings.
RO: I was looking at a note from Panmue this morning. Here’s a par:
RO: Northern Rock (NRK.L):-
Our rough calculations point to a 65p share price target in 2010 for NRK. This would give over 150% upside for the Virgin Consortium but 24% downside for current NRK shareholders. Given the execution risks, we cut our share price target to 40p and maintain Sell.
RO: Paul’s on the phone . . .
RO: Arranging his lunch
PM: Sorry about that — lunch with a serious mover/shaker
PM: Some interesting points on teh implied valuation of Rock below
PM: And that fact that the rock shorts are being BURNED this morning
RO: 
RO: Re: Paul’s lunch. Unable to confirm Branson invite.
PM: But the hard fact on valuation is that it is just a guess – just a gamble.
PM: If Sir Richard mends this bank and – say – rebuilds it to half its previous profitability …
PM: Rock made 95p of earnings last year. — but then another 5.2bn of shares are coming down the slipway –which is rather dilutive
RO: yes, and sizable profits could be years away.
PM: and you are assuming he is actually able to complete this takeover.
RO: Sure – but I don’t think – -given the political sensitivity and the treasury’s insistence that execution risk would be minimised
RO: I don’t think they would have won preferred bidder status without out clearly showing that they can complete.
PM: But — a couple of questions…
PM: why is there no underwriting as yet???
PM: And where has AIG gone????
RO: This is the huge US insurer that was supposed to be part of Branson’s team – but does not appear to be any longer.
PM: Hmm
PM: Just noting Bohemia’s important correction below…
PM: Important point on implied value of Virgin Money
PM: As for bsb’s Q on Rab and Wood — who knows
RO: Thanks NJS. Possibly true.
RO:
PM: look we could go on and on and on about this.
PM: It’s a guessers’ market.
RO: So let’s move on
PM: 
PM: Turning to the mining sector, I see Rio Tinto has published its long-awaited defence document.
RO: Yes, been working my way through that this morning
RO: Could call it a non-defence document
PM: Oh course — it is just an investor update, really. Except rio is facing a bid from BHP
PM: Anglo-Australian rival BHP Billiton has, of course, made a £62.4bn all-share offer for Rio.
RO: The non-defence document makes interesting reading
RO: Divestments
RO: Asset divestment target following the Alcan acquisition raised from at
least US$10 billion to at least US$15 billion following the completion of a
strategic review, which has highlighted approximately US$30 billion of potential
divestments.
Rio Tinto will explore options for the sale of a shortlist of assets.
These are all good businesses and any sales will be value driven and dependent
on price. The following businesses are included in the short list:
RO: Rio Tinto Alcan Packaging (previously announced)
o Rio Tinto Energy America (previously announced)
o Rio Tinto Alcan Engineered Products (global)
o Cortez/Pipeline (gold, 40 per cent stake, US)
o Greens Creek (zinc, lead, silver, 70 per cent stake, US)
o Rio Tinto Minerals Talc (Europe, Australia, North America)
o Northparkes (copper/gold, 80 per cent stake, Australia)
o Sweetwater (uranium project, not operational, US)
o Kintyre (uranium project, not operational, Australia_
RO: Dividend
RO: The total 2007 dividend will be increased by 30 per cent with a
further annual total increase of no less than 20 per cent in each of the
following two years, reflecting the Board’s belief in the business
RO: Increase synergies from the Alcan acquisition
RO: Post tax synergy target from Alcan integration increased to US$940m per annum (up from $600m), deliverable by the end of 2009.
RO: Investment
RO: $2.4bn has been committed to develop the Mesa A and Brockman 4
iron ore deposits in the Pilbara in Western Australia.
RO: Tom Albanese, Rio chief executive, said:
RO: The rise in global mineral demand is a trend that we expect
to continue for decades because of fundamental demographic and economic shifts,
especially in developing economies like China and India. We believe that the
value in Rio Tinto is yet to be fully reflected by the market.
‘We believe we have a better growth pipeline than our competitors, which puts
Rio Tinto in a strong position to supply the metal-hungry world. We have the
people, execution capability and resources to work smarter, faster and better
than our competitors. We also believe our track record of delivery is
unrivalled and we look forward with confidence to a hugely exciting future”
RO: The quote on Reuters was better
RO: “While BHP may need Rio Tinto, Rio Tinto doesn’t necessarily need BHP”
PM: Bullish stuff – how has the market reacted?
RO: Rio shares are up 148p to £54.65 and BHP is 30p to £15.98
PM: probably not just to do with the non-defence document though.
RO: Yes, there has been talk in the market for a few days that BHP may raised its offer for Rio.
RO: More importantly, talk over the weekend that the China Investment Corporation was poised to counter bid for Rio.
PM: Well, we know how keen the Chinese are to secure mineral resources
RO: This is from today’s South China Morning Post.
RO: CIC plans to enter battle for Rio Tinto Beijing group may offer US$200b to counter BHP
Frederick Yeung
557 words
26 November 2007
South China Morning Post
1
English
(c) 2007 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.
The country’s US$200 billion sovereign wealth fund plans to step into an iron ore bidding war with Australian miner BHP Billiton for London-based Rio Tinto, according to a China Business report.
The weekly business magazine yesterday said China Investment Corp, launched on September 29 to boost investment returns on the country’s massive pool of foreign reserves, could unite with domestic steelmakers to counter the US$150 billion bid by BHP for Rio Tinto.
If the latter bid were to succeed, the merger of the two companies would create a mining giant that would control more than 33 per cent of global iron ore sales – a prospect that has alarmed policymakers and steel miners in the country.
Citing unnamed sources, the China Business report said the mainland government was considering whether to bid for a stake in Rio Tinto.
“We are studying how the mainland steelmaking industry might respond to the BHP Billiton bid for Rio Tinto earlier this month,” the report said, quoting an unnamed source.
“Our suggestion is that several state-owned steelmakers such as Baoshan Iron and Steel, Shougang Group and Angang Steel should join hands with China Investment Corp to form a consortium to launch a bid.”
The report added that it expected the government to take action on the bid soon.
RO: However, Chinese newswires are running denials from unnamed Chinese officials so it is hard to know what it going on to be honest.
RO: Obviously big political implications of China buying Rio.
PM: What are Rio saying about the alleged Chinese interest?
RO: Spoke to Rio this morning and the steer is they have had lots of calls from lots of people but have not been engaging with them.
RO: Got a note here from Liberum Capital.
RO: Had not heard of them before but was apparently founded last year by some group who used to be with Cazenove.
RO: Rio Tinto have released a series of RNS announcements ahead of their 9am analyst day presentation. For a company that is a genetically challenged when it comes to self promotion, they are unusually bullish. They focus on four areas:
RO: 1. Global macroeconomic backdrop very favourable for commodities. They highlight PPP GDP growth is expected to be 4.8% and 5.0% in 2008 and 2009 respectively, with sustained high growth levels to 2020 on the back of 9%+ GDP growth pa in China and India. Demand growth for commodities in this context is very fast. Also, they see higher sustained prices and margins for the ‘big three’ commodities of iron ore, aluminium and copper. A paper by their economist, Vivek Tulpule is attached. It is well worth a read.
RO: 2. Huge volume growth upside in iron ore, aluminium and copper. RIO talk about a conceptual study to take iron ore production to 600mt (current year prodn c.164mt, previous conceptual target 450mt). On Alcan they have ‘an excellent potfolio of growth projects’ and for copper they highlight that they have a few large scale projects including La Granja where forecast prodn has been doubled to 0.5mt (new news).
RO: 3. Divestment target raised from $10bn to $15bn following strategic review.
RO: 4. Increased dividend of +30% in 2007, +20% in 2008 and +20% in 2009. This equates to a 90% increase in the divi over 3 years, taking RIO’s yield to 1.9% by 2009. Given RIO has never cut its divi, this is a serious vote of confidence in the underlying business.
RO: It would seem they have not chosen to address the BHPB approach, instead focusing on their own very strong growth prospects and the relatively favourable outlooks for their ‘big three’ commodities. The back door for a deal is left open then? It is now up to BHPB whether they want to make this deal go the way of Aviva/Pru or Mittal/Arcelor.
PM: Interesting thoughts.
RO: Rio’s bullishness is such that it seems to be driving the whole sector higher today – Antofagasta is up 28p to 712p and Xstrata is 131p higher at £31.49.
PM: Ok — thanks for all that
PM:
PM: Shall we take a look at the wider markets?
RO: Lots of blue of the board today and FTSE 100 is up for a third consecutive session – currently 20.8 points higher at 6,283
RO: That means that since closing at a low of 6,070.9 on Wednesday the main index has risen getting on for 4 per cent
RO: Helped, of course, by the fact the US has been distracted by the Thanksgiving holiday
PM: A decent rally – how are the US futures looking now?
RO: Pointing higher at the moment
PM: Will be interesting to see how Wall Street reacts to this mini European rally, given they have not done any meaningful business since close of play on Wednesday
RO: Plenty of data due out of the US this week including consumer confidence figures for November tomorrow and existing home sales for October, due on Wednesday
PM:
PM: Right — Carlomagno makes interesting point below re Rio
PM: Fitz – jsut to be clear — Chinese are currently denying interest
PM: We can come back to rock if people want, but first….
PM: Punch / M&B
PM: Ok – lets run through this Punch / Mitchells & Butler story to date.
RO: On Saturday, Neil printed this on the front of the paper on Saturday – on on the web on Friday night.
RO: Punch Taverns and Mitchells & Butlers have held preliminary talks about creating the UK’s biggest pub company, worth £4.9bn and with more than 11,000 premises.
Advisers were locked in talks yesterday, according to people close to the situation. However, no price has been agreed and talks could end at any point.
The discussions come at a key time for M&B, which is under shareholder pressure to unlock value from its property portfolio.
The two companies had talks earlier in the year over asset swaps. Under that plan, M&B, whose brands include All Bar One, Toby Carvery and Harvester Restaurants, would have taken the Spirit estate from Punch, while Punch would have received some tenanted pubs from M&B.
Punch is understood to have sounded out several large shareholders in the two companies, including Marshall Wace. But people close to the situation warned that a full-blown merger would be extremely complex
RO: And also late on Friday night, Dominic Walsh published this on the Times website
RO: Punch Taverns, Britain’s biggest pub company, is in the early stages of considering an audacious £5 billion-plus bid for Mitchells & Butlers (M&B), the owner of the All Bar One and Harvester chains,The Times has learn
PM: “Learnt” after reading the FT, I guess – well, maybe, although Walsh is good on this sector. I suspect he spoke to people before printing.
RO: There was similar stuff in the Sunday Times
PM: And the Mail on Sunday i think
PM: And then this morning we got this formal statement from Punch Taverns:
PM: Punch Taverns plc (“Punch”) notes the current speculation regarding Punch and Mitchells & Butlers plc (“Mitchells & Butlers”). Punch confirms that it is not in discussions with Mitchells & Butlers or any Mitchells & Butlers shareholder regarding any offer or merger.
RO: Now, in the wake of that Punch stock is up 6p at 860p and Mitchells & Butler is down 17p at 625p.
PM: And you have had all sorts of people jumping up and down saying someone or something has been manipulated.
PM: This for example is from Mark Brumby at Blue Oar Securities:
PM: Daft name for a brokerage, but this is from his usually entertaining morning note:
PM: The leaks. Friday’s sharp share price movement, the false market that will have been created if talks are not taking place, considerable volume of stock traded in this false market and what look like authoritative stories in the Press regarding takeover approaches may mean that an investigation into just who said what, when and to whom, may well be necessary. Hopefully it doesn’t sound too pompous to suggest that hints and winks and tips are not acceptable when significant amounts of money are being made (and lost) on the back of them
PM: Where to from here? With regards to Friday’s share price movement and the weekend Press leaks, it would be interesting to know who said what to whom. It may be in the interests of a potential purchaser that the news that there is an indicative offer in the process of being formed as it appeals over the heads of the target’s management to its shareholders but here, denials by both Punch and M&B that they are or have (recently) been in talks suggests that Punch is unlikely to be a source of these rumours. Similarly, M&B cannot be said to have benefited from further destabilizing talk which leave accidental two-plus-two equals five talk or M&B’s share register as the likely sources. Hopefully there will be a sufficiently robust investigation to find out which it was.
PM: Well, with all due respect to Mark, we don’t really need an investigation – because the hacks involved know exactly who they spoke to – from which companies, PRs, and banks – what they said – and when.
PM: I’m sure Brumby doesn’t think we don’t go through certain checking procedures when publishing a splash story like that.
PM: And – I believe that if there is anything that needs examining in detail it is this statement from Punch this morning.
PM: Punch Taverns plc (“Punch”) notes the current speculation regarding Punch and Mitchells & Butlers plc (“Mitchells & Butlers”). Punch confirms that it is not in discussions with Mitchells & Butlers or any Mitchells & Butlers shareholder regarding any offer or merger.
PM: That may – in total isolation – be an accurate statement of the here and now. Punch is not in discussions with either M&B or M&B shareholders.
PM: In the context of what has been printed – and what various advisers and/or officials that may or may not have been associated with either Punch or M&B, or their shareholders MIGHT have said over recently days….
PM: …. Well, I would venture that Punch’s statement is all but meaningless.
PM: Damage limited to less than 3%.
RO: That said, it does not now feel as tho a deal is going to materialise here any time soon
PM: I think you are right
PM: Let’s move on.
PM:
PM: Let’s move down the pecking order.
RO: Biffa has confirmed it has had no further discussions since its rejection of Friday’s bid approach from Montagu Private Equity and Hg Capital.
PM: How are the shares doing?
RO: Shares are off 33p to 292p
RO: Don’t think this is the end of the road thought.
RO: According to Landsbanki, Biffa is still an attractive target for an infrastructure fund or a consolidator.
RO: They see good chance of new bidders
RO: ere’s some of today’s Landsbanki note.
RO: Friday’s announcement
> highlights the fundamental attractions of the waste
> companies – strong underlying growth, long-term
> visibility on contracts, and a bottle-neck on
> environmental projects likely for some time to come
> as the UK attempts to meet EU targets, with c£7-8bn
> new spend anticipated in the next few years.
RO: Despite some mis-steps since Biffa was demerged from Severn Trent, followed by a substantial de-rating, the company has continued in our view to hold significant attractions to a consolidator or infrastructure buyer:
>
> (1) Exclusively focused on the UK, the key
> global market where there is currently a significant
> pace of change/investment in the environmental
> sector.
>
> (2) Asset-backed, with landfill and powergen
> continuing to play an important part in the
> environmental sector, notwithstanding that diversion
> from landfill is starting to gather pace.
>
> (3) A strong, national brand.
>
> (4) Good scope for upside as the collections
> business recovers.
RO: Recent deals have largely been at high historic
> valuations, reflecting the strong drivers
> underpinning the sector (10x-12x for WRG/9.5x
> prospective; c12-13x historic for Cory). Subject to
> no surprises with Biffa’s results on Wednesday, we
> believe that a new bid by Montagu/Hg would be at a
> higher price than Friday’s 325p close – given the
> valuations in other recent environmental sector
> bids. Moreover, on past form we believe there is
> good potential for another bidder, – reportedly six
> bidders at a late stage for Cory six months ago
> included four potential trade buyers. The current
> share price puts Biffa on a 9-10 EV/EBITDA for year
> to March 2008, and values landfill at c£5/ cu m.
> However, the PE at around 22x might limit the upside
> to probably c10-12% in the event of a re-bid by
> Montagu/Hg (and excluding another entrant). We
> retain a positive recommendation.
RO: Sorry for annoying chevrons – that’s just the way it came thru
PM: Thanks for that
PM:
PM: how about Wood Group (not jon wood of NRK fame) — VP mentioned earlier
PM: I saw them linked with Amec again over the weekend.
RO: Yes, story in the Telegraph that Angus Grossart, the Edinburgh-based banker, has been brought on board to smooth an Amec bid for Aberdeen-based Wood.
PM: Well, we know Samir Brikho, Amec chief executive, is on the look out for a transformational deal.
RO: Exactly – and Wood is widely seen as his primary target.
RO: Wood shares up 33p to 414.25p right now – wonder if that might be enough for the Takeover Panel to be on the phone to Wood’s advisers.
PM: Hmmm.
PM:
PM: What else you looked at today?
RO: Well, the impact of England’s dreadful performance in failing to quality for Euro 2008 on Wednesday continues to reverberate.
RO: Citigroup has come out with a very negative note on JJB Sports this morning.
RO: Slashed its stance on JJB to a “sell”.
RO: Off 6.75p to 139p
RO: Here’s the note below.
RO: Kicked out: downgrade to Sell — England’s failure to qualify for Euro 2008, the
impact of a worsening consumer environment and earnings risk for JJB from
the Umbro bid drive our move to conviction Sellers today
RO: England’s failure to qualify for Euro 2008; the market has not priced this in —
JJB shares up 1% since England’s exit from Euro 2008. We argue that this
does not reflect the 13% downgrade to January 2009 earnings driven by nonqualification
RO: JJB’s retail business is vulnerable to a consumer downturn – England’s exit
leaves JJB’s retail business fully exposed to the slowdown in non food retail
sales. This drove management to warn on current year profit in September, but
we believe the downturn will impact JJB in 2008, driving further downside risk
RO: We downgrade our January 2009 PBT forecast by 13% — to £35m (EPS 10.6p,
-5% yr on yr). This is driven largely by a reduction in our retail LFL forecast to
flat growth (from +3%). We raise our January 2008 PBT forecast by £3m to
£38m (EPS 11.2p, -17% yr on yr) as current trading patterns remain resilient.
Notably the 7% dividend yield remains only 1.1x covered
RO: Investment debate — JJB currently trades on 13.6x January 2009 earnings, a
20% premium to retail peers. We value JJB on 11.3x January 2009 earnings, in
line with the UK retail average (cal 08E 11.2x) driving our Sell investment code
(3M) and our 120p target price (reduced from 165p
RO: For the record, Sports Direct has gained 2.75p to 96p after hitting an all-time low on Friday.
PM: Thanks for that — jsut before we mvoe off sports
PM: Jezzman put up a link to a Man U story earlier — iw as jsut reading
PM: Dates back to september, but assume things can only have got worse for the Glazers
PM: Link below, but here’s a taster:
PM: GLAZER DEBT COST TO HIT £100m IN 2007
FINANCIAL MARKET TURMOIL AND FANS’ REJECTION OF UNFAIR SEASON TICKET SCHEME LEAVES OWNERS WITH STEEP BILL AND FEW OPTIONS
Despite appearances to the contrary, Manchester United’s owners, the Glazer family, continue to face an extraordinary and growing debt problem.
Since last year’s debt refinancing (“a bit of housekeeping” according to a Glazer spokesman) United and the Glazers have been faced with a series of interest rate rises which have increased the annual debt service bill from a then-confirmed £62 million a year on the total acknowledged debt of £660m.
The interest bill is currently an annualised £100 million+, of which £77m is payable this year and the other £23m is payable in the future – a ticking debt time-bomb (see below).
The recent and continuing turmoil in financial markets has not only forced the Glazers to postpone indefinitely any further refinancing, but has also seen the 6-month LIBOR rate (the variable interbank lending rate to which the United debt is undoubtedly tied) increase to almost one percentage point above the bank base rate, so that it today stands at 6.68875%, driving up the annual cost of servicing United’s debt to painful pre-refinancing levels.
PM:
PM: Thanks for ON libor rate from Baz
PM: I can add taht 3m sterling money is also moving higher once more
PM: 6.55375 v 6.53438
PM:
PM: Now — Rob — find me a better performer than Northern Rock ordinary stock this morning
RO: ???
RO: Ah, hint is in the question …
RO: Northern Rock prefs.
PM: The 12 5/8ths — very nice price move this morning (so long as you are not short)
RO: Currently up 32.5 at 84p
RO: That’s 60 per cent.
RO: So many comments on Rock below.
RO: We’d love to answer them all.
PM: We just dont have an answer yet on what is a reasonable valuation — Even Lex has been on the blower asking whether we have any thoughts
RO: That’s a first.
RO: Perhaps some sort of helpline could be set up?
RO: Northern Rock investors anonymous
PM:
RO: Lots of question regarding Virgin paying back the Treasury.
RO: Can’t see Brown/Darling giving any room on this one
PM: Not if they want to stay i office
PM: On this stuff below about the penalty interest charges and subordinarted debt….
PM: I think this is dealt with in the branson statement — bascially the subordinated facility will disappear
PM: Intersest charges to date will be paid
PM: And some sort of new long-term facility will be arranged at commercial rates
PM:
PM: Right — we have got to go. I have a lunch with important contact.
RO: Where he taking you?
PM: Collosi
RO: ????
PM: Famous politico greek place
PM: Cheap as vine leaves
RO: Pret a manger for me. 
PM:
PM: But thank you for joining us — and thanks for lots more lilvely comments
PM: I’m minded to leave this chat open if people want to continue discussion….
PM: Demand for that?
RO: good idea. great comments today. thanks.
PM: We are planning a forum — if anyone wants to help set the functionality for that, let me know.
PM: But Ive got to run. Back tomorrow at 11am.
RO: bye
PM: Thanks bsb — closing the chat down now