Markets live chat transcript for the chat ending at 12:03 on 25 Jan 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: It’s Friday
PM: It’s Markets Live, FT Alphaville’s stock knock about.
PM: Neil has graced us with his presence.
PM: Which is a rare occurrence, of course – on a Friday
PM: 
NH: morning all
NH: column has been outsourced this week
PM: 
NH: thought we would get our new property guy Dan Thomas
NH: to have a look at the sector
NH: best performers in London so far this year are either housebuilder or property stocks
NH: and we want to know if it has gone too far too fast
NH: and on that note
PM: Good theme
NH: here’s an amazing stat
NH: Persimmon
NH: biggest fallers in the FTSE 100 this morning
PM: Down 46.5p at 840 i notice
NH: which is quite unremarkable in these volatile times
PM: it is
NH: But consider this
NH: it comes courtesy of Cazenove
NH: On Jan 11, the broker published a note, saying that Persimmon shares were pricing in a housing recession
NH: Two weeks later the share have risen 40% and Persimmon is no longer pricing in a housing bear market
NH: and what has changed in between???
PM: beats me!
PM: Are you sure those stats are right — 40% ????
NH: yep
NH: hit 645p earlier in the month
NH: was back at 887p yesterday
NH: and that’s despite the fact that the housing data has been gloomy
NH: and no one expects it to pick up
NH: in fact Caz are expecting gloomy mortgage approvals data on 30 January, followed by weaker house price data from the Nationwide and Halifax at the turn of the month
NH: these markets are too fast I just can’t keep up with some of the price moves
PM: Looks a v sensible injection of reality from Caz tho on Persimmon
NH: and talking of strange share prices movements
PM: Knocked 5% off this morning
NH: have u seen where the Crock is trading??
Readers may also know this former bank as Northern Rock.
NH: no, no, no
PM: Down presumably
NH: up 8p at 112p
PM: Eh????
NH: WHY????????
PM: 112p — i know the gov has effectively given it a fresh gilt-edged life line, but …..
PM: 
PM: So the financial world still reeling from these horrendous events at SocGen?
NH: Don’t know about reeling. It’s certainly cheered everyone up.
NH: FTSE 100 has put on about six per cent since the news came out.
NH: So, all power to Jerome’s elbow.
PM: Still the case that no one can quite work out how this could have happened – an how it might not have been uncovered earlier.
PM: The story is certainly shifting – in terms of when he did it, over what period, how it was discovered and how much money he actually lost.
PM: We’ve relaunched Alphaville this morning is the No1 SocGen Conspiracy Site.
NH: Produce millions of hits!
NH: almost as many as Robert Peston’s site on the BBC
PM: What we’re actually lacking is details of his middle name. Assuming he had one.
NH: How so?
PM: Well if it was something like Fredrick or Francois, say… Jerome Fredrick kerviel…
NH: Ah1! We’d have a new JFK CONSPIRACY!
PM: That would certainly get the traffic numbers up.
NH: You worried about traffic?
PM: On the contrary. Assanka are having to upgrade our servers cos we are nearing capacity.
Cracking little software shop who built FT Alphaville
PM: Anyway….
PM: One thing that caught my eye was that in our front page report we said that he actually only lost about 1.5bn euros with his hidden positions.
PM: It was SocGen’s decision to liquidate these into a weak market on Monday that caused the loses to soar to 5bn.
NH: That is very interesting — and a TOP entry for our list of THINGS TO BE REALLY SUSPICIOUS ABOUT.
NH: Think about it.
NH: Your own bank pricing systems say the loss is 1.5bn
NH: So you go into a falling market on a day of predictably low liquidity (US shut) …
NH: You start selling and end up losing three times as much money as you expected.
NH: So either 1. Your pricing models are wrong. And/or 2. You are pursuing an idiot liquidation strategy. Or – most probably – the Bank of France were holding you at GUN POINT while you straightened the books and shipped in EMERGENCY capital from the American.
PM: Id go for the latter
NH: another theory I have heard this morning is that JFK’s trades
NH: triggered a load of other losses at SG
NH: and they decided to bundle the total up
NH: and blame this guy
NH: and the other things still puzzling traders
NH: is how they unwound this
NH: they said they were resposible for no more than 10% of the market
NH: yet to lose that much money would imply that you controlled 30% of open interest
NH: nothing seems to stack up
NH: the maths just don’t work
PM: It’s a conspiracy!
PM: But at the endof the day…
PM: France’s second biggest bank almost went bust – and the response is 6 per cent on leading share prices
NH: we live in truly remarkable times
NH:
NH: right, let’s have a quick peak at the wider market
NH: once our Reuters machines is back up and running
NH: FTSE 100 is up 63.8 at 5,939.6
NH: almost back above 6,000
NH: and it is the miners which are leading the way this morning
PM: And Soc Gen is actually up as well this morning — 1.7% better
PM: how mad is that?
NH: and while we are back on Soc Gen
NH: thought I would post this joke
NH: doing the rounds of City dealing rooms this morning
NH: FRENCH TRADER WAS FORCED TO WORK 30 HOURS A WEEK
FRIENDS of rogue trader Jerome Kerviel last night blamed his $7 billion losses on unbearable levels of stress brought on by a punishing 30 hour week.
viel hid his November losses in a batch of wonderfully fresh croissantKerviel was known to start work as early as nine in the morning and still be at his desk at five or even five-thirty, often with just an hour and a half for lunch.
One colleague said: “He was, how you say, une workaholique. I have a family and a mistress so I would leave the office at around 2pm at the latest, if I wasn’t on strike.
“But Jerome was tied to that desk. One day I came back to the office at 3pm because I had forgotten my stupid little hat, and there he was, fast asleep on the photocopier.
“At first I assumed he had been having sex with it, but then I remembered he’d been working for almost six hours.”
As the losses mounted, Kerviel tried to conceal his bad trades by covering them with an intense red wine sauce, later switching to delicate pastry horns.
At one point he managed to dispose of dozens of transactions by hiding them inside vol-au-vent cases and staging a fake reception.
Last night a spokesman for Sócíété Générálé denied that Kerviel was overworked, insisting he lost the money after betting that the French were about to stop being rude, lazy, arrogant bastards.
PM: boom boom
NH: right back to the miners
NH: a load of M&A speculation this morning
NH: Rio’s CEO has made some comments in Beijing
PM: Colourful comments at that
NH: says has not engaged with Chinese investors to help him defend against BHP Bid
PM: Said the all share proposal was “two ball parks away” from fair value
Rio Tinto (RIO:LSE): Last: 4,728, up 209 (+4.62%), High: 4,796, Low: 4,559, Volume: 3.03m
BHP Billiton (BLT:LSE): Last: 1,442, up 56 (+4.04%), High: 1,448, Low: 1,361, Volume: 10.57m
NH: meanwhile
NH: Xstrata is up 132p at £35.32
PM: Good move –w aht’s behind it
NH: partly our Alpha post this morning
PM: Wot? On Brazilian president Luiz Inacio Lula da Silva?
PM: far from blocking the bid — as was previously stated…
NH: Right now I’m neutral because I don’t know about the subject.”
NH: The government “will be requested to discuss it and we’ll discuss it,” Lula continued. “So, when we know what the situation is, which is the offer, then we can say yes or no,” he said, adding that he did not expect that the deal would be discussed at dinner.
NH: that’s from Reuters
PM: So what’s the latest news from the Brazlian press?
NH: they are claiming Vale has financing in place
NH: apparently 12 leading banks are prepared to stump up the $50bn needed to help fund the offer
NH: This is the story that appeared in the O Estado de S. Paulo today
NH: Vale Chief Financial Officer Fabio Barbosa met with
representatives of the banks yesterday in London, the newspaper
said. They indicated they were willing to arrange the financing
without requiring additional guarantees they had discussed at a
Jan. 23 meeting, Estado said.
Vale also met with credit-rating companies Standard &
Poor’s and Moody’s Investors Service, which told Vale it
probably won’t lose its investment-grade rating after an
acquisition of Xstrata, Estado said, citing unidentified people
close to the situation.
PM: So its game on then! 
NH: well some people in the market seem to think so
NH: they reckon £40 a share cash and paper offer will emerge on Monday
NH: but
NH: this stuff in the Brazilian press runs counter to some stuff I have been hearing this morning from my sources
NH: : they reckon that Merrill Lynch, which along with Lehman Brothers has been advising Vale, has been dropped
NH: apparently they could not come up with the financing
PM: Oh 
PM: hang on a mo
PM: that probably says more about the dire situations at Merrill Lynch than it does about this bid getting done
NH: suppose so
NH: but it also shows that there is not a lot of cash around
NH: and I still think another mega bid in the mining sector could be difficult to pull off
PM: thanks for that
PM:
PM: Now, Neil , I believe you have a little treat for readers
NH: i do.
NH: we have managed to track down the Super Bear
NH: The original super bear
PM: The real thing 
NH: Albert Edwards
PM: And guess where he works now?
NH: SG, naturally
NH: left Dresdner last year
PM: Surfaced at Soc Gen just the place all but blows up
PM: Brilliant
PM: So what is the Great Albert saying?
PM: Sell?
NH: obviously
NH: but also
NH: he asking the following question
PM: 
NH: Has the UK now earned Banana
Republic status or has Noddynomics just come home?
PM:
PM: Excellent — I have missed Edwards
NH: here’s the note
NH: M&S’s Chief Executive, Stuart Rose, recently stated that the UK was not a Banana Republic.
Others might claim the UK is close to gaining that accolade. Back in 1986, Treasurer Paul
Keating warned that that Australian economy, with a current account deficit of 6¼% of GDP,
was heading to Banana Republic status. In key respects the grotesque macro-imbalances
now unravelling in the US are also present in the UK. A similarly deep recession might result.
NH: While most of the markets focus of economic attention has been on the sudden
realisation of the dreadful macro quagmire the US finds itself in, the UK economys recent
difficulties have paled into insignificance attributed mainly to chilly winds blowing in from
the other side of the Atlantic. The UKs problems though, are clearly home grown. In many
respects the conjuncture is as big a mess as the US situation and might easily end the same
way – deep recession.
NH: The announcement of a whopping £20bn Q3 current account deficit
some 5.7% of GDP – at the end of December received little attention as Father Christmas
was doing his rounds. On Paul Keatings definition, this is approaching Banana Republic
status. Years of UK macro-mismanagement, mirroring closely the Noddynomics we saw in
Asia a decade ago, may have dragged the UK economy to the edge of a deep precipice.
NH: We have long warned the US macro-Ponzi scheme would collapse. But the UK situation
looks just as bad. For UKs obscenely large current account deficit, like the USs, merely
reflects the grotesquely huge household sector borrowing imbalance both the UK and US
household sectors are borrowing at a cyclically unprecedented 4% of GDP pa (see chart
below). This is also the mirror image of the recent credit bubble that is now also unravelling.
Allowing economic growth to be based on unsustainable asset price bubbles was always
going to be a recipe for disaster because the snap-back, when it comes, can be vicious and
usually results in deep recession. This is a mess of the policy-makers own making
NH: In the US, great intellectual efforts have been made by policy-makers to attribute their
gargantuan current deficit to surplus savings in Asia. The argument is that surplus saving has
been recycled from Asia into the US, keeping bond yields low, stimulating a housing and
consumption boom, resulting in a huge current account deficit. That is the US excuse. I am
not sure what the UK policy-makers excuse is (see chart below). Probably the demographic
tidal wave from central and eastern Europe pushing up house prices etc, etc, blah, blah.
NH: This author certainly believes this is self serving nonsense. Surplus savings in Asia (as
represented by burgeoning current account surplus) have been the result of – not the driver of
- unsustainable consumer booms in the US and UK. In the US the situation is unprecedented,
but at least we have been here before in the UK – in the late 1980s. That ended though in
deep recession as the housing bubble collapsed! For more than a decade, excessively loose
monetary policy on both sides of the Atlantic has allowed consumption driven economic
growth to lever off asset price inflation. A given level of GDP growth is obtained by driving the
household sector into deeper and deeper deficit (see chart on front cover). This is also
mirrored in record lows for the more familiar saving ratio (SR, see chart below).
PM: Self serving nonsense, eh?
PM: love it!
NH: We dismiss as quite ludicrous Bank of England Governor Mervyn Kings recent comments that
interest rates will be sticky downwards because headline inflation might go above the 3%
upper bound of the target range. Who is he kidding?
But this is the same sort of tough anti-inflation rhetoric Fed Chair Bernanke was spouting until
very recently before doing his 180 degree turn. The BoE will cut, cut and cut again if the
economy and the housing market slides into recession.
We expect that the market will soon do a flip-flop on inflation fears. Evidence will soon appear
that inflation pressures are evaporating. This is already visible in the US, where company
output price inflation (as measured by the corporate deflator) is slowing very rapidly indeed
(see chart below this slump in pricing power also helps to explain the profits downturn that
has unfolded and why company expenditures are under pressure. Margins are not just being
squeezed from higher unit labour costs but also from the price side as well).
It seems clear that corporate pricing power leads core CPI inflation measures somewhat (see
chart below). If we are indeed heading into recession, expect deflation talk to re-emerge within
the next few months! Markets are fickle.
NH: here’s the summing up
NH: Where we would agree with Mervyn Kings recent comments is his point that there are
limitations to what central banks can do in the current circumstances. This is exactly the same
point that ex-Fed Chair Volker made recently about the Fed not being in control of the current
situation. This is not understood by the market which still has a touching faith that the
monetary authorities will just wave their magical monetary wands and sherzam – growth and
debt appetite will revive. If, as this author believes, the US and UK slide into deep recession as
the housing bubbles burst and the credit crunch deepens, one thing is clear: policy makers in
the US and UK have failed and should be held accountable. Asset bubble-backed GDP
growth was always going to end in tears. Bananas all round Noddy?
PM: Bananas all round — vintage Edwards stuff.
PM: Move to a French bank and a 30 hour week has not dimmed his wit
PM: lets move on
PM:
PM: Right any RAW info Neil?
NH: some very strange stories drifting around in Carphone Warehouse
NH: first we were hearing talk of a 420p a share bid
NH: then the price was cut to 380p
PM:
PM:
NH: apparently the bidder is BestBuy – Carphone’s US joint venture partner
NH: and apparently the 380p bid was knocked back coz it was too low
PM: do we really believe any of this?
NH: well, the cynic in me says no
NH: goldman placed a block of 13m Carphone shares yesterday
PM: 
NH: and this morning we get takeover stories
NH: surprise, surprise
PM: Er, what are u saying?
PM: Some one is long and wrong??
PM: And making up stale bull stories??
NH: no. coz that would be wrong
NH: Anyway the first tip I had on this today
NH: Came from number 10 and we all know how good he is
NH: 
PM: uh ho
NH: but
NH: there is a third carphone story doing the rounds
PM: Oh, go on!
NH: apparently Best Buy is going to buy Carphone’s retail business
PM: Which would leave Carphone was what?? A broadband internet business???
NH: I know, sounds unlikely doesn’t it.
NH: and let’s remember
NH: Although Best Buy owns a 3% stake in Carphone and the JV in the US has been a great success
NH: why, oh why would they want Carphone’s retail stores in the UK???
NH: they are not exactly out of town sheds are they
NH: and best buy is a high volume retailer
PM: Bit like DSG International
NH: Exactly
NH: So why would it want the Carphone’s shoe box stores in the UK
NH: and furthermore
NH: Best Buy has committed to a big dividend increase this year
NH: and wants to expand in Asia
NH: Not the highly competitive UK market
PM: So it’s safe to say u are not a fan of this story
NH: No
NH: and I don’t think much of this Liberty International tale either
PM: Oh, wots that?
NH: apparently the company is guiding numbers – eps and NAV – lower
NH: Now given Liberty is due to report FY year results on Valentines day
NH: so it is in closed period
NH: would it really risk the ire of the FSA and been briefing ahead of the results???
NH: I Just can’t see it
NH: mind you, that’s not to say the results won’t disappoint
NH: Liberty owns loads of regional shopping centres
NH: like the lovely Lakeside in Thurrock
PM: Spiritual home of chav
NH: Chav shopping mecca
NH: the more sophisticated essex folk head across the river for Bluewater
PM: Oh yeah — thats lovely as well
NH: anyway given the recent weakness in consumer spending
NH: the results could well be poor
NH: and surprisingly, Liberty shares have performed quite well
NH: only down 18% in the past year
NH: looks to me as if someone has decided to short this
NH: because it has been a relative outperformer
NH: of course Liberty has fallen sharply
NH: since the summer
PM: Well actually — just looking at the chart
PM: The fall is rather mild
PM: Something like 6/7%
NH: no wonder the bears are out in force
PM: This is rather intriguing
PM: rest of the sector smashed piece — and they left one stock alone
PM: Until now
NH:
PM: Well, it’s finally over!!
NH: The battle for Scottish & Newcastle has ended this morning
PM: All bar the shareholders voting and the regulators clearing…
NH: after yesterday’s last minute high jinks
NH: The Carlsberg/Heineken consortium have finally delivered the 800p a cash offer
PM: Applause due to John Dunsmore, the CEO of S&N
PM: Played a good hand in the event
PM: getting the consortium to cough up 800p in this environment is a fair achievement
NH: suppose so
NH: although I am not sure we can call this a 800p a share offer
PM: Why not 800p is 800p
NH: well S&N is not paying a final dividend
PM: oh
NH: for the year ending Dec 2007
NH: Now, if S&N had continued as an independent company I am sure it would not have passed on the divi
PM: and how much would that have been??
NH: last year the company paid a final divi of 14.4p
NH: So take that off 800p and we get closer to the real offer price
PM: 785p
NH: yep
NH: and on top of that what happened to S&N’s demand that they publish all the future info on BBH??
PM: hang on a mo
PM: I think they have
PM: data looks like it goes out until 2010
NH: Ok, but we still don’t know the split of the deal
NH: how much is Carlsberg paying??
NH: did it have to increase its share of the tab
NH: and was that the reason that they had to ask the Takeover Panel for an extension????
NH: di Heineken discovered the operations it was buying were not as profitable as it had imagined
PM: Stop this conspiracy stuff!
PM: Judging by the Carlsberg price, everyone seems relaxed
NH: actually it is off almost 5% now
PM: And what’s S&N’s price — versus the 785p offer??
NH: they are up 18p at 783.5p
PM: That price actually looks a tad high — given that we are still some way off formal completion and the final divi is not going to be posted
PM: Could it be possible that one or two punters are hoping for a counterbid??
NH: yep with the BBH info out there
NH: someone could
NH: and what is also surprising is that
NH: there was no dawn raid today
NH: hang on a mo
NH: got a note from JPMorgan
NH: gives us the split on the deal
NH: so we can see if the Danes are getting a deal
NH: Carlsberg/Heineken consortium and S&N have agreed on an
800p/share cash offer for S&N with no final dividend payable. The
split of the assets is as previously disclosed with Carlsberg taking
assets with an EV of £5.8bn for EBITDA of £479mn in FY09 and
Heineken EV of £4.5bn for EBITDA of £350m in FY07.
NH: Terms
• 800p approved offer as expected
• no S&N dividend to be paid
• equates to 14.3x 2006 EBITDA
• split of assets as expected – Carlsberg gets BBH, France, Greece,
China and Vietnam – Heineken gets the UK, Finland, Belgium,
Portugal, US, India
NH: Carlsberg key points
• Carlsberg gets EV of £5.8bn for EBITDA of £479mn in 2009.
EBITDA multiple of 12.1x in that year
• BBH and France will deliver £355mn and £121mn EBITDA in
2009 respectively. France is lower EBITDA than we expected –
we had £145mn.
• Carlsberg expects £126mn synergy by year 3 with BBH
contributing £100mn and France and Greece £26mn – this is
against our estimate of synergies of only £46mn
• The transaction ROIC will exceed WACC in year 3 according to
Carlsberg
• BBH is expected to deliver EBIT of €990mn in 2010 – we have
€988mn in our forecast. This comes from expected volume growth
of 9% in FY08E (market 5%), 7% in FY09E (market 4%) and 7%
in FY10E (market 3%). This is in line with JPME expectations –
so there is no positive BBH growth surprise here
NH: Carlsberg financing will be debt and an equity bridge loan as
expected to retain investment grade. The Carlsberg lenders will
2
Europe Equity Research
25 January 2008
Mike J Gibbs
(44-20) 7325-1205
mike.j.gibbs@jpmorgan.com
underwrite a rights issue of DKK31.5bn. The terms of rights issue
will be determined at later date – this in all line with what we
expected
Heineken key points
• Heineken gets EV of £4.5bn with £350mn of EBITDA in 2007.
EBITDA multiple of 12.9x in that year
• Heineken is claiming £120mn of synergies by year 4 ahead of the
£62mn we assume
• Split of synergies is 70% from costs and 30% from revenues
• Heineken claims it will have proforma FY07E net debt of
EBITDA 2.7x
• Heineken says the deal will be immediately eps accretive
NH: Other key points
• Subject to EU approval and approval in US Russia and Ukraine
• Heineken shareholders approval is required but family controlling
shareholders are already committed
• Hartwall Capital’s 9.2% equity stake in S&N is irrevocably
committed
• Heineken will inject £50mn into the S&N pension fund
• Arbitration around BBH shareholders agreement will continue in
private
• Effective date to close will be Q208
• Break fee 1% of offer
PM: Thanks for that
PM: Good point below on 850p break threshold
PM: So its a case of this “probably” being all over
NH: it is even though S&N shraeholders are not really getting 800p a share
PM: Hmm — thanks for that.
PM:
PM: Any small cap stuff to finish off with today?
NH: looks like the Clapham House’s days of independence could be numbered
PM: ah this is the Gourmet Burger Kitchen lot
PM: Beloved of some of our culinary-challenged readeres
NH: it is
NH: and the private equity group stalking the company has tightened its grip
NH: Capricorn Ventures has announced a raised holding of almost 25%
NH: and I am guessing this is not a long term investment
PM: er, no — doesnt look like one
NH: let’s look at the background here
NH: Capricorn Ventures
NH: Capricorn, alongside its business partner TDR Capital, was a start-up investor in PizzaExpress
NH: and David Page, the chairman of Clapham house, was also chairman of PizzaExpress
NH: they are specialists
NH: Also have a 11% stake in Nandos, the chicken chain
NH: So a bid looks likely to emerge
NH: oh, look at the shares go
NH: up 15.5p at 231p
PM: that’s a gain of 7%!
PM: we are just geting the chart up…
PM: Hit 150p after the profit warning in December
PM: So quite a run since then
NH: still it’s not all good news in the world of burger and fries
NH: results from Prezzo this morning a touch disappointing
PM: urgh
PM: Pizza Express clone
NH: saying FY profits will be at the lower end of expectations
PM: Price is off just 1.75p at 43p tho
NH: good point from Monkey below
PM: That’s a very good point!
PM: If you cannot hold the hamberger in your hand and place it in your mouth it is not a hamberger
NH: is that right??
NH: u must be able to hold it on your hand??
PM: Knife and fork!?!?!
PM: Cant spell hamburger now
PM:
PM: Right — we are done — at the end of a busy busy week
PM: Thank you for joining us here — thanks for the thoughts and laughs
PM: And occasional insight
PM: We will be back refreshed on Monday — at 11am
PM: Do join us then!
NH: see ya