Markets live chat transcript for the chat ending at 12:44 on 1 Feb 2008. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: It’s Friday
PM: It’s Markets Live, FT Alphaville’s stock knock about.
PM: Rob Orr is with me. Which is refreshing – Alphaville is being de-Humed for the day.
RO: Morning
PM: First – a point about tech stuff. Assanka have been working THRU the night to fix things. Hopefully things are a lot better – if you are getting probs you can mail:
Cracking little software shop who built FT Alphaville
PM: techsupport@ftalphaville.ft.com
PM: Either way, pleasse don’t beat up Andrew Betts and his team. He’s feeling rather bruised – cos of you lot.
RO: But let’s get on with the news!
RO: Cos there is lots of it.
PM: Where to start ………….??
PM: We can come back to FKI for VP
PM: And we can also come back to the Footsie competition
PM: First we must go to …..
RO: Rio
PM: start in the mining sector, because it is the miners that have really fired things up this morning.
RO: Yep. We got news first thing that the Chinese had made a tender offer for 12 % of Rio Tinto.
RO: This is a move to block the bid by BHP Billiton. Costing $14bn and being done with the partial support of Alcoa of the US. Chinalco – China’s biggest aluminium firm – is the buyer.
PM: Government owned. We ran their mission statement on the Alphaville home page earlier.
RO: Apparently, lehman brothers went round long only managers on Thursday night, picking up stock.
PM: And it’s the price they were picking up stock that has shocked this morning – that and the fact that the Chinese would mount such an aggressive move.
PM: And sophisticated, I must say.
RO: And kept it quiet.
PM: VP is asking below whether it is 12% or 9%
RO: Interesting question.
PM: I jsut assumed it was 12
PM: Is this a ref to the complexities of deciding just how big Rio is — given the Aussie listing
PM: Anyway — we can debate whetehr this is a block
PM: What we do know is that the Chinese have bought in at 60 quid a share
RO: So Rio’s market price first rocketed to 57.50 – then slammed into reverse as everyone said — oh, BHP will walk.
RO: Fell back below 53 quid.
RO: Then raised higher again as people said well – even if BHP does walk the Chinese are probably ready to buy more stock at 60 quid.
RO: So, two questions:
1. Will BHP walk?
2. Could the Chinese bid?
PM: On the first, my sense it that it is v v difficult for them to pursue this now.
PM: For a start they would have to pay cash – and pay more than 60 quid
PM: China has deep deep pockets – much deeper than BHP or Australia, for that matter,
PM: There’s a signal of US opposition here – in the form of Alcoa supporting the Chinese move.
RO: And on the second – could the Chinese bid?
PM: Well, I’m told they really don’t want to.
PM: They approached Rio and offered to buy 25 % but were sent away. The Chinese accept that they don’t have the management or experience to run a global mining biz like Rio.
PM: They want Rio run by its existing management – and to remain independent.
RO: China may feel it lacks skills in global corporate leadership, but what does this say about its M&A saavy??
PM: Well, its certainly moved up a few gears.
RO: This going to get you to reverse your view on Chinese stocks generally?
PM: Er, no. I don’t think so.
PM: I’ve never said the Chinese leadership were not ultra smart.
PM: In fact id say now they must be ultra ultra smart, otherwise they wouldn’t still be in power as a communist cabal controlling 1.4bn through retail therapy. It’s quite amazing.
PM: But as for Chinese shares – well there was a disaster earlier in Shanghai
RO: Disaster ? – what was that
PM: China Coal – had an IPO – and the stock only rose 32 per cent on day one.
RO: Only 32% ???
RO: That is a disaster?
PM: Certainly is – in fact it is the worst first day IPO performance for a major firm in 15 months!!!!
PM: I tell you – reality is dawning Shanghai. And it’s gonna hurt.
PM: 
PM: So how has the Footsie responded to this — adn the fact that the Rio move has sent all the miners higher in London this morning
RO: Currently up 80 points at 5,960
RO: Almost touched 6,000 at one point
PM: Just to go to a couple of points below….
PM: Interesting point from Fitz. Assume answer is that the Chinese were furious with BHP’s move on Rio
PM: They saw it as overly aggressive — and so BHP is probably not considered a company the Chinese could do deals with in the future
PM: And its very, er …. “Australian”
PM: Carlo seems to be holding off making a Footsie prediction
PM: ine is already on the table from a couple of days ago — 6020
PM: 
PM: Winner as of 4.45 today get lunch on Neil Hume’s expense ticket
PM: so im looking good for 6020 assuming the US figs are not too bad
PM:
PM: Right what else is going on Rob??
RO: Well, lots of focus on the pub companies at the moment.
RO: Much of it concerning Mitchells & Butlers – the readers will note Roger Blitz’s story in today’s paper.
RO: He says Punch Taverns, Apax, Cinven, CVC and Permira have all made approaches for M&B.
RO: Also reckons Robert Tchenguiz is seeking to take his holding to the maximum allowed before he has to bid – which would be 29.9 per cent – in an effort to increase his influence in any deal.
PM: I note with a wry smile that Punch’s name is in there.
PM: Good job this is a de-Humed zone today
PM: Punch, you may remember, issued this statement a couple of months ago in response to Neil and Lucy Warwick-Ching’s story that Punch and M&B had held talks to create the UK’s largest pub company.
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:
PM: Clearly, the situation has changed.
RO: It would appear so.
PM: Like I said, good job Neil isn’t here today.
PM: Anyway, you were going to say something about pubs . . . . .
RO: Yes, Morgan Stanley has a note out today highlighting some of the issues facing the industry.
RO: Worth sharing I think. Gloomy reading but if you get to the bottom you’ll see that they reckon that – having been smashed out of sight in the last few months – the sector offers good value.
RO: We assess the six issues facing leased Pubcos:
1. Deteriorating beer volumes. On-trade beer sales
have rarely fallen, but the smoking ban and record input
costs are likely to stifle demand for longer than usual.
RO: 2. Risk of falling rents. While most rents are long term
and RPI-linked, they are also linked to pub profits, and
drops here could have a lagged impact on rental growth.
3. Unviable pubs. Lessees are highly leveraged, but
median profits are high, and this is a ‘sticky’ business.
We think a 5-7% Pubco EBITDA drop is worst case.
RO: 4. Low underlying growth. We estimate true Pubco
L4L growth has been 0-3% adjusting for churn, capex,
and synergies. But investors are not paying for growth.
5. Stretched balance sheets. 7x Debt:EBITDA sounds
high but must be taken in the context of low operational
gearing, and there is headroom above most covenants.
6. Expensive on EV/EBITDA. Cheap debt is an equity
benefit that cannot be ignored, FCF yields are over 10%,
and DCF implies ~50% upside with 1% organic growth.
RO: We conclude it is prudent to expect a lower level of
organic growth, and cut forecasts and price targets.
We assume negative L4L profits for two years, and just
1% organic growth thereafter. We find that the Pubcos
remain resilient (flat EPS 2007-2009), they pay off all
their debt by the end of the term, and remain well within
their covenants. Even on our bear case of bigger profit
declines and zero long-term growth, they do not breach
covenants, and DCFs imply current share prices. We
thus think share prices have been oversold, and remain
Overweight on Punch, and Equal-weight on Enterprise..
RO: Punch Taverns – Overweight, 1000p price target, attractive risk-reward
Enterprise Inns – Equal-weight, 640p price target
RO: There is loads more good stuff in that note – worth getting hold of a copy if you can.
PM: Hmmm
PM: Certainly is
PM: How are the shares doing anyway?
RO: M&B is up 12p to 457p.
Punch up 21p to 717p
Enterprise is 11p higher at 456p.
PM: ta
PM:
PM: Footise entries pouring in below…
PM: Even one from C — who has stuck his neck out
PM: But not as far as VP, who is looked for a Friday afternoon crash
RO: i’ll go for 5999
PM: cheerful chap
PM: In fact a lot of bears online today. 
PM: Should have read Sam Brittanin thepaper this morning
RO: what’s sir sam saying?
PM: Lord Brittan: High Time for all of us to ‘buck up.’
RO: stiff upper lip old chap
RO: dunkirk spirit etc
PM: Sir Sam says stop being so miserable
PM: Note the idea of a variant of click-fraud has entered the mind of Monkey below
PM: Go for it M — see if we can spot you!
RO: nothing as sophisticated.
PM:
PM: Anyway we should press on
PM: FKI — someone raised earlier below
RO: Yup, FKI has had another bid approach.
PM: Price is topping the 250 leader board
PM: Up 18.7p at 68.8p
RO: Big rise for this stock
PM: Said this mornign it is in talks — but the suitor is not named
PM: They were involved in a bid battle last year weren’t they?
RO: They were. Talks with Blackstone ended in August without a deal. Not sure if if is the same private equity company interested this time around.
RO: Someone mentioned price below
RO: A price of 130p a share was mooted last year but that’s not going to happen now.
RO: This one is coming off all time lows of late.
PM: Hmm — jsut looking at the chart — not a pretty picture
PM: Good break up candidate this one though isn’t it.?
RO: Exactly. hence the private equity interest last time. Bound to be some of the same names looking at it now.
PM: Thanks for that
PM:
PM: Should go quickly to points below….
PM: We havent heard anything fresh on the Pru and Ping An
PM: Am aware that some people are talking this up aggressively — but I’m not to sure
PM: Sounds like a broker tale to me — and it also suits Pru management
RO: As for ThyssenKrupp – launched a massive share buy-back today
RO: Up 5.7 per cent to 34.61
PM: Note maximus below on the miners
PM: Interesting that Medvedev wants Russians to copy the Chinese
PM: he’s the kremlin’s attack dog, no?
PM: Microsoft bid for Yahoo — that’s a reheat, no?
PM: NO WAY –WE ARE SO
PM: WHERE IS THIS COMING FROM READERS
PM: ?????
PM: OUR NEWS EDITORS CANT FIND THE NEWS
PM: Got it ta
PM: Footsie up 116
PM: On the ball, some of these Markets Live addicts
RO: Just on the microsoft site now – can’t find yet
RO: Paul is checking the US futures now
RO: Am sure they will have jumped
RO: That’s will mess up some of the FTSE bears below
PM: I cant find the code for Nasdaq futures
PM: Reuters navigation is so clunky
PM: Good point below on such a big premium a day after Google misses targets
PM: Right — Rob has found the full release
RO: Microsoft Proposes Acquisition of Yahoo! for $31 per Share
Transaction valued at approximately $44.6 billion in cash and stock; provides 62 percent premium to current trading price for Yahoo! shareholders; combined entity to create a more competitive company, providing superior value to shareholders, better choice and innovation for customers and partners.
REDMOND, Wash. — Feb. 1, 2008 — Microsoft Corp. (NASDAQ:MSFT) today announced that it has made a proposal to the Yahoo! Inc. (NASDAQ:YHOO) Board of Directors to acquire all the outstanding shares of Yahoo! common stock for per share consideration of $31 representing a total equity value of approximately $44.6 billion. Microsoft’s proposal would allow the Yahoo! shareholders to elect to receive cash or a fixed number of shares of Microsoft common stock, with the total consideration payable to Yahoo! shareholders consisting of one-half cash and one-half Microsoft common stock. The offer represents a 62 percent premium above the closing price of Yahoo! common stock on Jan. 31, 2008.
“We have great respect for Yahoo!, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market,” said Steve Ballmer, chief executive officer of Microsoft. “We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners.”
“Our lives, our businesses, and even our society have been progressively transformed by the Web, and Yahoo! has played a pioneering role by building compelling, high-scale services and infrastructure,” said Ray Ozzie, chief software architect at Microsoft. “The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own.”
RO: The online advertising market is growing at a very fast pace, from over $40 billion in 2007 to nearly $80 billion by 2010. The resulting benefits of scale along with the associated capital costs for advertising platform providers make this a time of industry consolidation and convergence. Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice while better fulfilling the needs of customers and partners.
“The combined assets and strong services focus of these two companies will enable us to achieve scale economics while reaching R&D critical mass to deliver innovation breakthroughs,” said Kevin Johnson, president of the Platforms & Services Division of Microsoft. “The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers.”
The combination will create a more efficient company with synergies in four areas: scale economics driven by audience critical mass and increased value for advertisers; combined engineering talent to accelerate innovation; operational efficiencies through elimination of redundant cost; and the ability to innovate in emerging user experiences such as video and mobile. Microsoft believes these four areas will generate at least $1 billion in annual synergy for the combined entity.
Microsoft has developed a plan and process that will include the employees of both companies to focus on the integration of the combined business. Microsoft intends to offer significant retention packages to Yahoo! engineers, key leaders and employees across all disciplines.
Microsoft believes this proposed combination would receive all necessary regulatory approvals and expects that the proposed transaction would be completed in the second half of calendar year 2008.
Microsoft is also committed to working closely with Yahoo! management and its Board of Directors as they, along with Yahoo! shareholders, evaluate this compelling proposal.
Below is the text of the letter that Microsoft sent to Yahoo!’s Board of Directors:
RO: And there is more
RO: Dear Members of the Board:
I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.
RO: Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use – EBITDA, free cash flow, operating cash flow, net income, or analyst target prices – this proposal represents a compelling value realization event for your shareholders.
We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.
Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.
RO: In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.
While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:
Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.
Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
RO: Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.
Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.
We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.
We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.
Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.
In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.
RO: Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.
We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.
Sincerely yours,
/s/ Steven A. Ballmer
Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation
RO: http://www.microsoft.com/presspass/press/2008/feb08/02-01CorpNewsPR.mspx
PM: Brilliant — thanks for that Rob. let’s have a two min break so people can read…
RO: to repeat: 62 per cent premium!
RO: paul is speechless
PM: Well, this was in the NY Post — before Xmas i think
RO: one of those that’s been mooted for ages
RO: but to come out in this market
PM: Hmm
PM: Anyway, bnot much more we can ssay on that at the mo.
PM: Difficult to follow …
PM: Got any stories to match that Rob?
RO: FKI bid pales in insignificance to be honest
RO: i was going to tell you about carphone
PM: i know Azeem below is an E-guru
PM: A member of various listings like the Guardian’s E-50,
PM: from a few years back
PM: Azeem — can the combination of Microsoft and Yahoo possibly react something positive
PM: Could it work?
PM: How abotu anti-trust?
PM:
PM: let’s move on
RO: Do you still want to know about British Airways figures?
PM: yeah yeah — of course i do!
PM: (Thanks A below)
PM: See British Airways shares came off after the figures.
RO: Down 13.75p to 318.5p
RO: Figures actually look quite good.
RO: Operating profit of £734 million (2006: £571 million) up 28.5 per cent
Operating margin 11.1 per cent (2006: 8.7 per cent)
Profit before tax of £788 million (2006: £584 million) up 34.9 per cent
Company sticking with 10 per cent operating margins target for the current financial year.
PM: Only two month to go before the opening of the giant new shopping centre better known as T5
RO: Can’t wait.
PM: Anyway, why the shares down? Bit of profit taking? Fuel costs?
RO: The soaring price of fuel is obviously a major issue.
RO: Check out this line from the release.
RO: Fuel costs remain a major challenge and our fuel bill for the year is expected to top £2 billion for the first time
PM: Ouch
RO: There is also a very gloomy note from Merrill Lynch but have so far been unable to get hold of it.
PM: ML notes can be difficult to get hold of
RO: Apparently the note says earnings visibility is low and the outlook for BA is still uncertain.
RO: However, instead, I will post a rather more positive note form Collins Stewart.
RO: This is from analyst Andrew Fitchie.
RO: BA has published its 9-month interim management statement. Q3 EBIT was £178m
(+38%), ahead of our £170m forecast. Traffic in the quarter rose 1.8% and it
looks like yields rose 2.3%. Fuel cost rose £72m, as expected. The
conference call is at 2pm; a more detailed breakdown will be provided.
RO: Guidance maintained … 3-3.5% revenue growth, 10% margin
Management maintained its guidance for the year. This is 3-3.5% revenue
growth, which given 0.9% revenue growth year-to-date, indicates they expect
a strong Q4 (compared to last year). The statement also flags BA is on track
to hit the 10% margin target. This means £87m EBIT is Q4, which is less than
the £98m in Q4 ’06 (last ‘normal’ year), which included a £45m staff bonus.
9m net financing costs are much lower than expected which means eps will
adjust upwards for financing.
RO: Premium strong, non-premium showing signs of weakness
On market conditions, BA continues to report that long haul premium remains
strong. It continues to say long-haul non-premium and short-haul premium are
weak. It also notes a fall in non-premium bookings in the January booking
period.
RO: T5 on track and new premium-only service
T5 is on track to open at the end of March. BA recently launched its new
Open Skies airline, to fly between the US and Continental Europe. Today it
announced that in ’09 it will launch a premium-only service from City
Airport to New York.
Cheap on 9/11 scenario .. pair with easyJet to neutralise sector
risk
Our note on 28th January looked at the sensitivity of BA to a range of
‘doom’ scenarios; this showed it as cheap even on a 9/11 repeat. Quest(tm)
fair value is 533p and our airline fleet-cashflow valuation model points to
521p. We continue to advocate Long BA, Short easyJet as a sector neutral
pair, given the 36% valuation differential and the risks to the short haul
market.
PM: great thanks for that
PM:
RO: I think i’ve got people’s hopes up on carphone!
RO: i don’t really have any BIG news. I was just going to remark that the shares are strong again.
PM: This constant Best Buy speculation I assume
RO: Up 14.2p to 343p.
RO: yes, that’s it. morgan stanley upgrade today too
RO: Obviously quite a bit of short closing in this stock
RO: Might have expected a bit of profit taking this morning but would seem not.
PM: Ok
PM:
PM: Can we mop up some of these other fallers?
PM: Smith 7 Nephew — what’s wrong there?
RO: Downgrade today from Nomura Code – a specialist in anything pharma and, in this case, orthopedics.
RO: down 21.5 at 660p
RO: S&N has been a strong performer on the hope that the stock is relatively recession proof.
RO: But Nomura Code was shares are pricing in “unrealistic expectations” for Q4.
RO: Has cut to “neutral” ahead of figures on the 7th.
RO: Following a poor sales performance in the last quarter and warnings from the CFO of ‘tough comps’ in 4Q, we are not expecting Smith & Nephew to deliver particularly exciting 4Q07 financial results on Thursday 7 February. The stock has been buoyed recently by a flight from risk by investors and strong results from orthopaedic peer Zimmer. A more thorough analysis of competitors’ recent results indicates that although annual US hip growth has accelerated by 3% compared to last quarter, OUS hip and global knee growth was stable – this is not enough to justify 10% share appreciation in the 2.5 days since the results (vs a flat FTSE 100 in the period), in our view. At its current level, S&N is trading near the top of its 9-month historical trading range versus the FTSE 100, on a forward P/E basis, and is trading at only a 3% discount to its peer Stryker, which continues to post 20%+ earnings growth. At such a lofty valuation we struggle to view Smith & Nephew as a good defensive investment, even though fundamental drivers are predictable. With a recent record of optimistic expectations by investors into results and disappointment thereafter, we believe that the risk-reward profile is currently skewed to the downside, and would advocate selling the stock into the full year results.
PM:
PM: Funny comment on carfone below from Pakora
PM: Rob — how abotu British Land — why they so weak??
RO: Another of the leading fallers
RO: Down 20p to 990p.
RO: That’s on a very gloomy note on the real estate sector as a whole from Credit Suisse.
RO: But singles out BL for a downgrade.
PM: been a bit of a bounce in the real estate sector this year hasn’t there?
RO: There has. I was looking earlier – three of the top ten FTSE 100 risers this year are real estate.
RO: Hammerson up 10 per cent, Land Securities up 7 per cent and British Land up 5 per cent.
RO: That’s since start of the year of course
RO: Anyway, Credit Suisse thinks it is far too early to be talking of a rebound. Here is their thoughts.
RO: Falling interest rates should mitigate yield reversal as the reinstatement of positive funding spreads encourages buyers back into the market: By the end of December 2007, the All Property equivalent yield had moved up to 6.19%, reinstating a positive spread of approximately 94bp (pre-margin) against the 5yr swap rate. The same measure taken against initial yield is just turning positive. The divergent effect of rising investment yields (as capital values fall) and falling interest rates should encourage buyers back into the markets as ‘deal hungry’ opportunity funds and well financed REITs vie for deals.
Falling interest rates are one thing, the outlook for the UK economy another-look for restructuring plays for exceptional returns: For real estate, a positive backdrop of falling interest rates is one thing (i.e., beneficial for investment markets), the cautious outlook for the UK economy another (i.e., concerning for occupational markets). As a result, we suggest investors look for restructuring stories with the potential to produce exceptional returns in an attempt to risk-adjust divergent prospects, as real estate markets are far from out of the woods yet, in our view.
RO: Our preferred corporate restructuring plays-Land Securities and Segro: Land Securities is our preferred stock out of the major UK REITs. We are supportive of the proposal to de-merge the business and estimate that LS Trillium could alone produce exceptional returns in excess of 10%, and this could be realised in H108. We maintain our Outperform rating and target price of 1934p. We upgrade Segro to Outperform (from Underperform) as we believe, based on previous management comments regarding real estate co-investment models, that the Group could undergo milestone restructuring of its UK business in 2008 and in so doing, rebalance its capital allocation more towards Continental Europe-paramount if Segro is to meaningfully differentiate returns from its UK IPD benchmark. We revise our target price to 608p (from 628p). We downgrade British Land to Neutral (from Outperform) in anticipation of the City office market repeating history. We revise our target price to 1173p (from 1603p).
RO: We believe the sector could rally by c. 10% from current levels as interest rates fall: Of the seven UK-REITs under our coverage, we estimate the average decline in NAVs in the next 12-18 months at c15%; therefore the ‘true’ discount is closer to 23% than 38%, which is the current average discount on our estimates. A REIT-adjusted historical average discount of 8% would imply upside of 15% but allowing for a wider ‘down-cycle’ discount, we believe 10% is more realistic. So far in 2008, prices have moved up c2%.
Based on the above, we are upgrading our sector weighting on UK Real Estate to Overweight from Market weight, predicated on interest rates falling significantly in the short to medium term.
PM: thanks for that
PM:
PM: Couple of late ones to squeeze in
PM: , Cranswick.?
RO: The sausage maker.
RO: Down 139p to 630p.
RO: Has warned on the soaring input costs and oddly, sales price deflation.
RO: During the second half, the food division has suffered from some sales price deflation. Furthermore, the industry is experiencing rising input costs in pig meat, beef and poultry. Whilst Cranswick is benefiting from higher than planned volume gains, it is currently proving difficult to pass on the full impact of rising costs. Discussions on this are ongoing with customers.
Assuming a continuation of current conditions, the impact of these two factors, together with the impact of the fall in the value of sterling on the charcuterie business, is expected to have a modest negative impact on the results to 31 March 2008. The Directors expect the effect of these issues in the current year to be approximately matched by exceptional gains of around £1.8m.
RO: Whilst it is disappointing to be experiencing these pressures, which can be expected to moderate the Company’s growth rate, Cranswick is in a very strong position to capitalise once equilibrium returns to input prices and selling prices. Our market positions are strong, our plants are well invested, the business is highly cash generative and we have excellent customer relationships.
RO: Thart”s from the RNS
RO: No obvious jokes about what gets inputted into sausages.
PM: What, the soaring costs of ears and tails?
PM: This is no joke at all in China!
RO: Maybe put that in the type of sausages they serve up in the Murphy household. Cranswick makes premium sausages. Mmmmm.
RO: One more stock to talk about.
RO: @UK
PM: wot? mistake
PM: Rob — you cant come on here if you cant spell properly!
RO: 
RO: pot and kettle!
RO: anyway, it’s not a mistake. that’s the real name
PM: Just a cr@p name
RO:
PM: What do they do?
RO: It is a leading eMarketplace provider of eCommerce and eProcurement solutions group
RO: Admit I am not sure what that means.
PM: e-f off
RO: Anyway, the name may be innovative or rubbish depending on your point of view, but either way they’ve warned today. Result for the year will be below market expectations. The rate at which closing NHS contracts is slower than expected.
RO: paul’s lost it. he’d had a hard week
PM: that was a typo
RO: he has to do this 5 days a week. i can tell you one is hard enough!
RO: @UK shares down 1.p to 4.45p.
RO: It’s only a penny stock so maybe we should not be to mean.
RO: i mean “too”
PM: Well, i dont think you can every be too mean to a penny dreadful like this – especially with a name like cr@p
RO: thanks monkey. paul does miss neil when he goes away. but oddly, they still send each other messages on holiday.
RO: which is either very sweet or very weird!
PM: Well right now its very useful!
PM: neil has just forwarded a note on Microsfit / Yahoo from Goldman Sachs
PM: Shall I share — or shall we just go to lunch
RO: lunch!
PM: yeah, let’s go to lunch
PM: GS buy note on MSFT can wait
PM: This dated yesterday — so v v v timely
PM: Applause please for Sara Friar from GS
PM: Does Microsoft Yahoo!? Thoughts ahead of analyst briefing
PM: What’s changed
On February 4, 2007, Microsoft’s CEO Steve Ballmer and CFO Chris Liddell
will host a briefing for financial analysts and shareholders in New York.
Microsoft’s strategic initiatives, and not FY2009 guidance, will be a key
focus of this meeting and the most important of these initiatives will be the
company’s current direction in the Online Services Business (OSB). We
also include our updated ownership analysis, underscoring that Microsoft
is still an under owned stock by growth managers.
PM: Implications
We believe that OSB lies at the nexus of key themes that will dramatically impact Microsoft’s business over the next decade. The online advertising industry has the growth and market potential to move the needle, even for a company of Microsoft’s size. Additionally, understanding advertising
monetization may be key to how software gets sold in a more heavily dominated SaaS world. However, Microsoft has been slow to gain critical mass in an area where this is the key to success. While the company remains focused on significant CapEx investments and some inorganic
shifts such as buying aQuantive and investing in Facebook, the bigger question is should Microsoft just buy Yahoo!. In our view there is a compelling case that says yes, although the risks of a culture mismatch and potential employee attrition would have to be managed carefully.
PM: Valuation
Microsoft currently trades at a CY2008 P/E of 17X versus the software median of 21X and the S&P 500 of 14X. Our triangulation of historical P/E multiples, current EV/adjusted FCF/growth multiple, and DCF analysis
leads us to our 12-month price target of $42, about 30% upside potential.
Key risks
Risks to our price target and view include: (1) Uncertainty from a more aggressive acquisition strategy; and, (2) Ongoing economic uncertainty impacting enterprise and consumer spending.
PM: Right — that is enough for today
RO: good stuff.
RO: re: derek and clive. more withnail and I.
PM: Lively stuff ! — Thanks for all your comments
PM: Boom Boom Rob
PM: Rob and I will be back on Monday
PM: have a good weekend
PM: get your Footsie predictions in here before 12.30 — and we will tot up later
PM: Prize is lunch with Neil — on his expense account — at a good quality City eater — possibly the Don, maybe Boisdale
RO: FT canteen
PM: Seeya
RO: bye