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Markets live chat transcript for the chat ending at 12:14 on 5 Mar 2008. Participants in this chat were: Helen Thomas (HT) Neil Hume (NH)

HT: Good morning - and welcome to Markets Live

NH: Morning all

HT: Neil Hume is with me

NH: and what a great morning it is

HT: and it’s safe

HT: something good happened in the world of football

NH: yep

HT: or so I hear

NH: I managed to track down ITV 4

NH: and watch the Arsenal dismantle AC Milan

NH: I wonder if this dreadful scheduling decision will be mentioned at the ITV results presentation today??

HT: yes, yes Neil - it’s an outrage

NH: actually I heard Michael Grade on the Today this morning

NH: and boy was he angry

NH: ask the awful share price performance of ITV

NH: and he went into one

NH: then he want into an even bigger rant when asked if ITV should separate their content and broadcast businesses

NH: amusing stuff

NH: the BBC hack was speechless and quite unprepared for the onslaught

NH: a bit like Milan

HT: ah ha - the hoof

NH: anyway ITV up 0.3p at 66.7p

HT: wants us to move on

HT: the reader is always right neil

NH: will try and find some comment on the figures later

HT: where to next?

NH: Liberty mentioned below by VP

HT: yes

NH: shares on the move this morning

NH: in fact they are the biggest riser in the FTSE 100

HT: shares up 50p to 993p

HT: so what’s going on?

NH: Bit of a strange one this

NH: this morning Jermey Warner

HT: respected City ed of Indy

NH: Yep

NH: and he wrote this in his column this morning

NH: Wedneday’s a takeover rumour, Liberty International, the shopping centres property group, is one of those hardy perennials that never seems to go away.

NH: At the right price, both GIC, one of Singapore’s two sovereign wealth funds, and Westfield, with extensive interests in Australian and US shopping malls, would happily buy. The problem has always been Sir Donald Gordon, Liberty’s founder. With more than 20 per cent of the stock, he’s not in the past been a seller, even to the ultra-expansionary Frank Lowy, founder of Westfield and one of Australia’s richest men.
Now that Sir Donald has retired from the business, has Mr Lowy, or even the Singaporeans, finally persuaded him? That’s the story, but what about the price? The time to have sold was more than a year ago, when Sir John Ritblat bailed out of British Land. Back then, everyone believed that property values would rise for ever, companies were queuing to convert into Real Estate Investment Trusts, and property shares were still riding high. Today, the share price of Liberty International, whose focus on shopping centres ought to make it relatively immune to the downturn in the rest of the property sector, is down in the dumps alongside everyone else.

NH: It seems unlikely in these circumstances that anyone would pay the 1500p a share that Sir Donald used to demand as the price of his exit. Westfield, with problems in the US, probably couldn’t afford it even if it felt so inclined, while even the Singaporeans, who certainly have the money, would surely baulk.
Yet what about a merger with Westfield, or even the GIC shopping centres, to create what would be far and away the largest specialist property company of this kind in the world? That might appeal to the still engaged Sir Donald. In the past, he’s always turned Mr Lowy away. Word is that he may now be open to offers.

NH: As for the company itself, Liberty seems to be unaware of any impending deal, and is quietly getting on with its business of building and operating shopping centres. Yet it has always known that its fate lies largely in Sir Donald’s hands, even though he’s no longer involved in the business. Ultimately, it is he who will play kingmaker.

HT: hmmm

HT: Warner is not normally given to speculation

HT: so he must believe this

NH: and so does the market

NH: as we said earlier shares on the move

HT: what are the company saying?

NH: naturally, they are playing it down

NH: saying they are not in merger talks

NH: and pointing out that brokers are sceptical

HT: and what do you think??

NH: well

NH: Peter Lowy, the CEO of Westfield, was speaking a Citi property conference yesterday said they had no interest (more upside from their existing portfolio).

NH: But I can’t help feeling there is something in this

NH: Or there was at some point

NH: anyway, here’s some broker comment

NH: this is from Harm Meijer at JPMorgan

NH: Liberty/Westfield rumoured talks emerge…again: The Independent Online reports today that talks are taking place (again) between Liberty International, Westfield Group and GIC Real Estate about a potential merger. The article suggests that Liberty’s life president, Sir Donald Gordon, is understood to hold the key.

NH: His family holds a 21% stake in the group and until his retirement as chairman in June 2005, he was resistant to a sale. Since stepping down, though, Sir Donald could have become more willing to countenance a deal. GIC declared a 3% stake in Liberty in early January, subsequently increasing this stake to 5%. Liberty already had links with the Singapore fund after it signed a strategic partnership over the MetroCentre, the shopping centre in Gateshead. GIC agreed with Liberty’s subsidiary Capital Shopping Centres to buy a 40% stake in the largest mall in the European Union. Neither company has commented on this latest story.

NH: We note that while this story could be true – Liberty has ventures abroad in India and China – speculation has been there for a while. The key is in the hands of ex-chairman Sir Gordon (21% stake). We would say there is a higher likelihood than other stories but it is not clear whether Liberty is really waiting for this. However, you may recall the story in an earlier daily about my three year old daughter (who was annoyed with me after I teased her three times and suddenly bit me hard in the nose): I think some shorts may be closed today…..

NH: and this is from the property team at Merrill Lynch

NH: Plenty of press chatter today - headlining is a suggestion that Liberty may be in talks with a group that might create the world’s biggest shopping-mall company - Westfield & GIC were both speculated. Call me a sceptic. Anyone would have to pay a full price. WDC is down 16% ytd & at the moment are very focused on getting White City right.

NH: Liberty - The Independent is reporting that Talks are taking place that may see Liberty International team up with a major rival to become the world’s largest shopping mall group, citing an unidentified person close to the matter. Westfield & GIC are mentioned as potential suitors. ‘’A source close to the negotiations said talks had occurred, although Liberty may not yet have been approached.'’ So who are they talking with then? GIC hold a c. 5% stake already. Please disregard the press suggesting that Merrill Lynch identified Liberty as a potential target for Westfield.

HT: so merrills are distancing themselves

NH: Looks that way

NH: and finally this is from Martin Allen at Morgan Stanley

NH: Quick Comment: Report suggests bid talks “taking place”.Today’s Independent newspaper in the UK asserts that “talks are taking place” that may lead to a merger with Westfield or a take-over by GIC Real Estate, which owns 5% of Liberty’s shares. The paper reports that “a source close to the negotiations said talks had occurred, although Liberty may not have been approached” [sic]. The article goes on to suggest that Mr Donald Gordon, life president of the company, may now be more willing to consider selling his family’s 21% holding in the company now that he is no longer the company’s chairman. The company has not commented on the report.

NH: Liberty is strategically attractive. Liberty International has a dominant position in the UK’s regional and super-regional shopping centre market. We think the type of assets it owns and its high market share could make the company very attractive to a whole range of international investors, including both quoted property companies and institutional investors.

NH: However, it is controlled by the Gordon family. However, the key to Liberty International is Donny Gordon’s family’s 21% stake. Given his longstanding commitment to Liberty, Mr Gordon may well be considering the longer-term future of his family’s stake in the company. Mr Gordon is 77. However, he has been previously quoted in the press as saying he believes that this stake in Liberty International is the best inheritance he could possibly pass on to his family. In addition, Mr Gordon is a very hard negotiator and has demonstrated in interviews over the years that he values his family’s stake in Liberty well above the price attributed to it by the stock market.

NH:

NH: lots of comments below

NH: and one from Paul Murphy

NH: we are just checking to see if this is the REAL Paul Murphy

HT: don’t you think neil - that when people go on holiday they should actually, you know, go on holiday

NH: as regular readers will know our very own Handy Andy is at home this week working on some DIY projects

NH: yes I do

HT: the murphy household will not be looking much cop at this rate

NH: think people on holiday should not comment

HT: agreed

HT: I’ll just see if I can tweak the settings on our spam filter

NH: good idea

HT: moving on

NH:

NH: going back to a point mentioned yesterday on a grey market in Northern Rock

NH: have had one reply

NH: looks like Canto Spreadfair is quoting 33-34p in the former bank

HT: let’s move onto Aviva/Pru

NH: yep, this Ping An stakebuilding rumour is around again

NH: driven the shares up 30p to 632p

NH: and here’s why

NH: PING AN TO FOCUS ON ACQUISITIONS RELATED TO CORE BUSINESS
*PING AN `NOT WISE’ TO ONLY HOLD RMB ASSETS, CHEUNG SAYS
*PING AN MAY MAKE FURTHER BANK ACQUISITIONS, CHEUNG SAYS 2318 H
*PING AN’S CHEUNG `CONFIDENT’ ABOUT 2008 EARNINGS :2318 HK
*PING AN EARNINGS `NOT STRONGLY LINKED TO STOCK MARKET’
*PING AN MAY SELL SHARES IN OTHER OVERSEAS MARKETS, CHEUNG SAYS
*PING AN MAY SELL SHARES IN SHANGHAI, H.K. IN FUTURE :2318 HK
*PING AN CHAIRMAN DENIES RUMORS THAT FIRM WILL INVEST IN HSBC
*PING AN SEEKS MORE EURO-DENOMINATED ASSETS, CHEUNG SAYS
*PING AN EQUITY SALE WON’T AFFECT EPS, CHEUNG SAY :2318 HK
*PING AN HAS NO REFINANCING PLANS IN H.K., PRESIDENT SAYS

NH: March 5 (Bloomberg) — Ping An Insurance (Group) Co.,
China’s second-largest insurer, is seeking to invest in more
euro-denominated assets, President Louis Cheung said.
The Shenzhen-based insurer, part-owned by HSBC Holdings Plc,
was not wise to hold only yuan-denominated assets, Cheung said
during a shareholders’ meeting in Shenzhen. He didn’t provide any
more details.

NH: not sure that really adds much to the earlier rumours

NH: Ping An could be buying stock at the moment

NH: it could have a 2.9% holding

NH: neither would surprise me

NH: the Pru is attractive

HT: but Ping An’s shareholders have approved their capital raising right?

NH: i think so

NH: there was a worry last week that it was going to be scaled back or even pulled

HT: Here’s reuters

HT: SHANGHAI, March 5 (Reuters) - Shareholders in Ping An
Insurance (Group) Co <601318.SS><2318.HK> approved on Wednesday
its plan for an offer of new shares and convertible bonds that
could raise about $17 billion, official Chinese media said.
The approval came at a meeting of the second-largest Chinese
life insurer’s shareholders in the southern boomtown of Shenzhen,
reported www.p5w.net, the Web site of Shenzhen’s official
Securities Times.
Ping An’s planned issue of up to 1.2 billion new domestic A
shares, or 16 percent of its current share capital, plus
convertible bonds with warrants could raise some $17 billion at
the last market price of its A shares, making it the world’s
sixth-largest corporate fund-raising.

NH: interesting

NH: just checking the volume in the Pri

NH: 8.5m traded already

HT: what’s the average?

NH: just checking

NH: reuters slow today

NH: very slow

HT: chug, chug, chug

HT:

NH: here it is

NH: 90-day avg volume is 16m

NH: so half way there already

NH:

NH: right. let’s have a look at these UBS Alt-A rumour

NH: what do we make of them??

HT: UBS shares were up about 1.25 per cent on the back of rumours that it has offloaded a $20bn portfolio of Alt-A mortgage securities to Pimco

NH: well I don’t think there’s any doubt that UBS would like to get shot of this stuff – as would most banks

HT: the story is saying they’re keen to the tune of 70c on the dollar

HT: their Alt-A exposure, of about $27bn, was part of the new bad news in their Valentine’s Day results

HT: which I seem to remember was someone’s birthday. Monkey maybe?

NH: yes anyway….UBS?

HT: yes, so alt-A is considered bad news – same reckless lending as in subprime with ARMs, piggy-back loans etc

HT: and securities backed up by the same rosy default assumptions that did for subprime backed securities

HT: according to Bill Gross, founder and CIO of Pimco

NH: ah, so he’s not keen on this stuff

HT: no – so says his latest newsletter – and this isn’t just an opportunity to get plastic surgery into Markets Live

HT: and the card game Old Maid – Bill Gross really likes his metaphors

HT: here we go - extracts

HT: Old Maid now has a second life mimicking our financial markets, and at PIMCO we’ve played it frequently in our Investment Committee over the past several months. “Who’s got the ‘Old Maid’?” we ask over and over again – not to make us feel good that we don’t – but to make sure we won’t draw it when its holder tries to pass it on. This shunned lady in asset form was originally identified as a subprime mortgage, aggregated into levered financial conduits which in turn were guaranteed to be AAA hotties either via their securitized structures or the solemn pledge of monoline insurance firms. No Old Maids in those hands, investors were assured; they were Babes with a stacked deck. Ah, but Father Time has a way of exposing plastic surgery and there have been implants aplenty in recent years. Most of the silicone to be sure involved mortgage-related assets – first the subprimes, then the Alt As, and now perhaps even levered primes. Yet those that claim that the Old Maid necessarily resides in a deck composed of mortgage loans are missing the larger point. This parlor game is best defined by leverage and not the assets that have been dealt out to more than willing players over the past decade. That subprimes have garnered the headlines is only because they were the asset class that failed first. Now as the U.S. economy slows to what Alan Greenspan labels “stall speed,” levered structures holding commercial loans, and auto and credit card receivables are the new Babes in waiting – waiting to be exposed for what some of them could be: Old Maids with collagen carelessly injected by Moody’s and S&P.

HT: further down he concludes

HT: PIMCO wants to sit at this more attractive return table – to provide an attractive return on your money (no matter what the asset class) as well as a return of your money. No Old Maids. No silicone AAA ratings. And ladies – no crotchety old bachelors either. The game, as well as the name of the game, is changing. It’s no country for Old Maids anymore.

NH: right, so no fan of the Alt-A MBS

HT: but the rumour-monger has gone as far as making their numbers add up

HT: at the end of Q4, UBS had a total of $26.6bn in Alt-A, on which it had taken a 2bn writedown

HT: so the total at an average of 70c on the dollar would be $20bn

NH: why an average?

HT: I rattled through the numbers earlier - also see sam’s post

HT: within that pool of $27bn, UBS took the bulk of their writedown on the higher risk stuff – on which they had a smaller exposure

HT: at the end of Q4, they were already marking that stuff down to 80c on the dollar

HT: the other, higher quality exposure, was on the books at 96 cents after losing value in the last few days of Dec

NH: so the numbers work

HT: almost too conveniently

HT: have values deteriorated enough this year for the lot conceivably to go for 70c? – yes

HT: does UBS want rid and need cash? maybe, can’t rely on SWFs indefinitely

HT: would Pimco be interested in this stuff? doubtful

HT: in fact, I don’t see it

NH: ok – thanks

NH: you have made your view clear

HT: one more thing

HT: if / when I’m wrong - and it turns out that UBS have flogged this stuff to Pimco or anyone else, let’s resist the classic “is this a floor” rubbish

HT: It’s not.

HT: One idiosyncractic seller, one buyer – doesn’t make any sense to start drawing conclusions about the entire marketplace

NH: ok, ok – calm down – bad as me and football

HT:

HT: moving on

HT:

HT: wider market?

NH: FTSE 100 currently up 46.4.5 points at 5,814.1

NH: but that’s a bit misleading because today is a huge ex-dividend day

NH: Loads of big names gone ex, and they have taken around 30 points off the index

HT: details pls

NH: going ex today we have

NH: Barclays, Lloyds, RBS, Thomas Cook, Diageo, BAT, RSA, British Energy, Persimmon and Tui Travel

HT: so that’s why the banks are all so weak

NH: yep

HT: see emap conversation also below

Royal Bank of Scotland Group (RBS:LSE): Last: 357.50, up 13.35 (+3.88%), High: 358.50, Low: 345.00, Volume: 21.94m

Barclays (BARC:LSE): Last: 446.00, up 11.75 (+2.71%), High: 449.25, Low: 435.00, Volume: 20.16m

Lloyds TSB Group (LLOY:LSE): Last: 430.50, down 9.75 (-2.21%), High: 431.00, Low: 421.00, Volume: 14.80m

HT: hang on then - what about HBOS

HT: they’re up - 25p

HT: what’s that all about?

NH: Bargain hunting I think

NH: HBOS has been annihilated since the figures last week

NH: fallen from 700p

NH: and that has prompted a few brokers to come this morning and say the sell off has been overdone

HT: who?

NH: Cazenove

NH: and ABN Amro

NH: Here are the notes

NH: HBOS - Valuation over-states risks [HBOS LN HBOS.L], 544p, Outperform, sector - Neutral
We reduce HBOS estimates to reflect higher Corporate impairment charges, lower investment realisations and slightly lower banking margins. We have adopted a more cautious view of 2009, particularly on corporate realisations and impairment (both Retail and Corporate) despite little evidence of deterioration to date.

NH: After a sharp increase in impairment in H2 2007, we expect Corporate Banking losses to return to levels seen in 2002-3 when UK GDP growth was at a similar rate to that forecast over the next two years. The strong growth (22%) in commercial property lending in H2 is notable, but raises concerns over the medium term impairment outlook rather than the immediate future.

Like other UK banks, HBOS is experiencing higher wholesale funding costs which will cause its net interest margin to decline further in H1 2008. Significantly, we believe the repricing of mortgages will have a beneficial impact in H2 so the rate of attrition will slow.

NH: We expect continued strong growth in deposits (+12%) in 2008, which we estimate will fund 5% loan growth and also replace some of the maturing secured term debt (£12bn in 2008). HBOS’ short term (<3 months maturity) wholesale debt should therefore remain steady at £110-115bn. If funding conditions deteriorate from here, we expect management to slow asset growth further.

HBOS trades on 1.1x tangible book and 5.7x 2008E earnings. The valuation is similar to RBS, yet it shares none of the specific risks facing that bank (relatively weak capital position, ABN Amro integration and reliance upon capital markets earnings). We maintain an Outperform rating on HBOS, believing the valuation discount will narrow as fears of significant treasury write-downs and divergent wholesale funding and impairment performance prove unfounded.

NH: that was Caz

NH: and this is ABN

NH: BOS: Upgrade from Sell to Hold entirely on valuation grounds (leaving our EPS &
Target Price unch at 92p & 545p). Whilst we expect 1H08 EPS and B/S results to
be extremely uncomfortable (= sustainable share price recovery unlikely until
3Q08 at the earliest), the stock now trades at 1.1x FY08F tangible common equity
(1.0x if one strips out the 32.3p divi next Wed), which should limit further
downside. We see further downside from here if HBOS is forced to start selling
some of its GBP81bn treasury assets (of which GBP18bn is marked to model), given
that current market prices are significantly lower than book value.
Val 08F: 1.1x p/TCE, 9.1x div yield and 5.8x PE.

NH: Detail
* Worst earnings, balance sheet and outlook from results season of all large UK
banks. For FY08F we are on 92p op EPS, GBP5.00 tangible common equity (TCE) per
share and 49p flat divi. This assumes a further GBP750m Available for Sale write
downs direct to equity.

NH: BP42bn ABS (GBP7.1bn Alt-A, GBP6.6bn CDO & GBP3.3bn -ive basis exposure) and GBP16bn
FRN disclosure implies substantial further treasury write down risk if credit
spreads continue to widen. Write off ratios booked FY07 appear uncomfortably
low vs peers, especially given that GBP18bn is “marked to model”. The fact that
debt market prices may be exaggerating the quantum of future credit losses
does not avoid the fact that HBOS’s reported Tangible Common Equity is
flattered vs peers. Every GBP1bn pre tax treasury write down = 51p per share.

NH: 59% of HBOS’s wholesale funds mature < 1 year, implying GBP136bn FY08F. Every
10bp extra cost here = GBP140m, 2.4% group PBT. At 130bp, HBOS's 5 yr CDS is
105bp wider than the FY07 average 26bp. Of course, only some maturing debt
will be termed out, and over time loan margin repricing will compensate: but
in the short term at least, this quantifies the potential drag on HBOS's
margin. Also, expect the issuance of more preference shares to boost reported
tier 1 ratio to drag further on EPS.

NH: e expect regulatory capital ratios to deteriorate through FY08F, even with
the benefit of Basle 2. Equity tier 1 ratio fell from 6.1% FY06 to 5.5% FY07.
This will lead to a growing concern over the likilihood of new equity issuance
in order to support even the restricted loan growth ambitions set out for
FY08F (high single digit).

NH: HBOS is down 45% since we downgraded from Buy last October. For FY07, it now
trades at 1.1x TCE of GBP4.77, 9.1% div yield and 5.1x PE. For FY08F, it trades
on 1.1x TCE of GBP5.00, 9.1% div yield and a 5.8x PE. EPS FY08-09F op EPS we
forecast 92p flat. Assuming flat dividend and no further AFS writedowns post
FY08F, TCE should rise from GBP5.00 to GBP5.45 FY08-09F.

NH: Unless HBOS is forced to start selling treasury assets at current prices
(which would undermine the argument that they are in a strong enough position
to hold to maturity, and so largely ignore current market prices), TCE should
act as something of an anchor for the share price. This implies limited
further absolute downside from here, even though we remain of the view that
the financial outlook is bleak, with no sign of improvement expected until
H208F at the earliest.

HT: thanks for that

HT:

HT: anything else moving?

HT: any raw for us today?

NH: yep a couple of bits

NH: Inmarsat

NH: satellite communications group

NH: Biggest shareholder with 29% is a US hedge fund called harninger

NH: they can be quite activist

NH: as the board of the New York Times can testify

NH: anyway, rumour this morning that harbinger are set to bid 550p a share

NH: and merge ISAT with some of their existing telco/satellite assets

HT: what do you think

HT: does this come with a bandit rating?

NH: yes

NH:

NH: it could happen

NH: I presume harbinger have not bought 29% for nothing

NH: and they do have investments in the sector

Inmarsat (ISAT:LSE): Last: 491.50, up 7.25 (+1.50%), High: 500.00, Low: 480.00, Volume: 1.19m

HT:

HT: anything else of a raw nature?

NH: Nestor Healthcare

NH: provides out of hours GP services

NH: stock collapsed last week

NH: on rumours takeover talks had ended

NH: company then rushed out a statement saying it was still in talks

NH: However shares did not rally

NH: as no one believed the company

NH: now, my sources tell me that what happened was that 3i, which was granted a period of exclusivity, ran out of time and could not bid

HT: so they’re still interested?

NH: I believe so

NH: but they are no longer the front runner

NH: another private group is

HT: Who??

NH: Cinven

NH: this went up on Reuters a little earlier

NH: Private equity firm Cinven Ltd [CINV.UL] is eyeing an approach for British healthcare services firm Nestor Healthcare Group Plc , traders said on Wednesday, driving the shares up 13 percent.

Nestor, which said on Friday it was still in talks with a number of suitors and may get a takeover offer, has been linked with private equity groups CVC Capital [CVC.UL], and 3i , according to the Sunday Times.

Cinven was not available for comment. A spokesman for Nestor declined to comment.

NH: Nestor shares up 7p at 55.5p

HT: so you believe it

NH: I do

NH: but apart from Cinven I hear there is also a trade buyer interested

NH: and Nestor could go out over 70p

HT: Thanks

HT: Politics Live raging below

HT: your view neil?

NH: am with sam - VC does not have a clue

NH: best of very bad bunch

NH: so that’s not saying a lot

NH: let’s get back to some markets stuff

NH: got some interesting stuff on the BHP/Rio deal

HT: go on

NH: it’s from a new broker called Liberum

NH: which has just launched

NH: they have recruited some top people from Cazenove

NH: sorry Jay, I only do CNBC at the moment

NH: anyway, Liberum have been looking at the spread on the BHP/Rio deal

HT: and?

NH: well

NH: in the last couple of days it has started to to trade at a small (0.35%) discount to the formal 3.4:1 BHPB offer terms (see chart below).

HT: so what is that telling us

NH: Hang on will get the note from Liberum

NH: This could imply three things:

NH: 1) The market does not expect another ‘bump’ will be needed to secure the deal. Earnings momentum has possibly been better for BHPB in February after a poor January (iron ore and aluminium favoured RIO in Jan and it had less exposure to SA power issues and Australian coal disruptions) on rampant coking coal pricing and resurgent nickel. This more even momentum may negate the need to bump materially, but a top up is still needed in our view. Interestingly, our contacts in the arbitrage community are still very much expecting a bump from BHPB within the next month or two as it attempts to seek an agreed bid prior to going into Phase II EU anti-trust negotiations. With the EU submission still not made, a Phase I ruling is at least a month away, implying no imminent news. However, BHPB is reported to be attempting to close a $55bn debt financing package now. Terms are reported to be at 55-60bp above LIBOR, an aggressive level given credit default swaps for BHPB are at 80bps above LIBOR.

NH: 2) The chances of completion of the deal are falling because of shareholder feedback/antitrust concerns/a competitive offer. There has been no new news on antitrust issues save for the fact that the Chinese have jurisdiction over the deal when their anti-trust legislation comes into force in the summer. Chalco have remained silent on their intentions regarding their stake build as have other potential partners such as Shenhua and Anglo American. In addition the Australian government has made it clear a sovereign led bid will face very tough hurdles from the FIRB. Shareholder sentiment pro the deal does seem to be wavering in some quarters, with BHBB shareholders resisting the further dilution that may be required to complete the deal set against RIO shareholders demanding much more for a take-out.

NH: 3) There are technical factors pulling in the spread – specifically arbitrage funds unwinding long RIO/short BHPB positions in the face of reduced credit availability or, worse, the imminent wind up of a large fund. We have reason to believe this third factor is weighing on the spread.

NH: Valuation update
The table below shows the current valuation metrics based on our base case assumptions and a marked to market basis. It is clear that both stocks are very cheap here, with BHPB shading it on base case assumps, more on marked to market basis. We feel both stocks remain excellent value whatever the outcome of the deal. Contrasting the valuation of RIO to that of another bid tareget Xstrata is interesting – the consensus EV/EBITDA multiple for Xstrata is 7.6x in 2008 and more like 6x on a marked to market basis. These ratings are at 33% and 46% premia to RIO’s respective EV/EBITDA multiples. Whilst RIO probably has a lower probability

HT: interesting stuff

HT: Rio up 79

NH: i think the point on the fund unwinding is interesting

HT: indeed

NH: and BHP?

HT: up 10p

HT: somehow politics and football have got intertwined below

HT: worst of all worlds

HT: neil’s just looking for a nugget for you

HT: on fund unwinding

HT: spare a thought for this lot

HT: Focus Capital, the London-based Emerging Markets Asset Manager

HT: sent round this earlier

HT: clarification that there are two companies sharing the same name
with no links to each other -

Given recent press reports regarding Focus Capital, the Swiss/US hedge fund manager, please note that there are two companies sharing the name Focus Capital. Focus Capital, the independent specialist emerging markets asset manager headquartered in London has no links to the Swiss/US hedge fund.

Launched in October 2006, Focus Capital, headed by John Cleary, who has more than 20 years investment experience, looks at global emerging markets from a different perspective, investing exclusively in emerging markets by allocating between equity, bond, cash and hedge funds through a fund of funds approach.

HT: happy to help clear that up

HT: follows the story that Focus - the swiss/US one - is liquidating positions after missing margin calls

HT: set to become a theme

HT: banks brining shutters down

NH: indeed

HT:

HT: Neil - someone was slapping you on the back earlier

HT: well through cyberspace

HT: we need to have a look at FKI

NH: er yeah

NH:

HT: explaining to do?

NH: remind mind never to try and write stuff over the weekend

NH: anyway, I must admit I have amazed Melrose have come back with a higher offer

NH: they are prepared to offer 85p in a mixture of cash and shares, subject to a string of conditions

NH: these are: finalisation of debt and equity financing documentation;
(ii) the final FKI dividend with respect to the financial year ending 31 March
2008 not exceeding 3 pence per FKI share as announced by FKI earlier today;
(iii) completion of due diligence satisfactory to the Board of Melrose; and (iv)
final approval by the Melrose board

NH: Now on point iv I should point out that FKI has opened its books to Melrose

HT: I see

NH: but make no mistake this is an audacious move

NH: Because Melrose are planning to finance the cash portion of the proposed offer with a rights issue

NH: I estimate that FKI will result in Melrose’s issued share capital tripling

HT: wow

NH: and remember this is a company that pays a 4.5p dividend

HT: So they have 133m shares in issue at the moment

HT: and that would rise to over 400m

NH: and every single one would require a 4.5p dividend

NH: On top of that Melrose would also be taking on FKI’s debt

NH: which stood at £350m at the end of September

HT: what’s the market cap of Melrose?

NH: £203m

HT: I see what you mean

NH: on top of that they have to find someone to underwrite the cash call

HT: so its no wonder that FKI shares are trading at a big discount to the mooted price

HT: hang on

HT: currently up 4.25 at 77p

NH: that said, the management team at Melrose are highly impressive

NH: all ex Hanson people

NH: and they went on to create Wassall, which they sold to private equity for a tidy sum

HT: not to be underestimated

NH: no

NH: and given the returns they have made on the Dyncast and Mckennie deals

NH: and I also note that they signed up Cazenove as house broker a while ago

NH: and that should help get a rights issue off the ground

NH: however, they are big risks with this deal and that’s why the shares are unlikely to trade close to 85p

HT: any comment?

NH: yep

NH: this is from Evolution Securities

NH: FKI has given Melrose due diligence with an offer at c85p which includes the 3p final dividend. In our February note ‘running some FKI scenarios’ we ran through some possible scenarios of what a deal might look like and the shape is pretty near our core scenario.

NH: The basics are threefold: 1) assuming just £10m of synergies the new group would be capable of 19/20p in the first year; 2) the deal produce a radically different strategy to FKI which has the scope to deliver the value we all know is within FKI; and 3) the paper element provides the opportunity for FKI shareholders to participate in the value realisation.

NH: DETAILS - The fact that FKI has given Melrose access suggests that Blackstone is not there. The most critical element of the Melrose proposition over a straight cash bid is providing FKI shareholders with the opportunity to participate in the unlocking of FKI’s value. 40p cash and 0.277 new Melrose for each FKI share plus the 3p dividend puts FKI at c85p.

NH: Post the deal, there would be 452m shares in issue which would value Melrose at £680m so puts it back into the mid cap indexes. Combined net debt would be £300m and interest cover 4.3x and net debt ebitda 1.8x so comfortable financially.

VALUATION AND RECOMMENDATION - This is a real opportunity for both Melrose and FKI shareholders. Melrose can sort out the debt structure and employ a different strategy to the current one which was to sell the two weaker businesses into a falling market. Melrose is in no rush and has Dynacast to play to give it further momentum. The big plus is that Melrose can run Hardware and Logistex through the cycle and realise maximum value in the process. A track record of a compound total shareholder return of 18% pa in the form of Wassall between 1988 and 2000 and a 95% return in the current form of Melrose highlights the opportunity. 10x 20p in Newco points to 200p and we suspect that there is much more than this to come.

NH: and this is from Andrew Carter at Landsbanki

NH: Melrose (NR) has announced this morning that it has made a revised
indicative 85p offer for FKI (H). The approach appears friendly - as
evidenced by FKI offering due diligence access. The offer is an improvement
on the original 70p, which we had speculated would be no more than an
opening shot.

The indicative 85p splits 43p cash (including 3p in lieu of
dividend) and 42p in Melrose shares. It is not entirely clear how Melrose
would finance the £252m cash portion - the group reported having only £32m
of cash balances at end December with its results today.

NH: While the approach appears friendly, we still believe FKI’s Board will struggle to recommend a takeover at only 7.8x calendarised 2008E earnings, a significant discount to the UK Capital Goods sector on 11.3x, when any sensible sum-of-parts
calculation would result in a price of 100p or more. We still think there
must be a significant risk that the Board chooses instead to raise fresh
equity, possibly on very unattractive terms, rather than pass so much value
to Melrose. Might today’s news be designed to flush out any other bidders?

The Independent wrote on 11th February 2008 that Blackstone is “considering
its options” on a potential bid within the 90-95p range. We continue to see
FKI as a very difficult one to call and retain a Hold recommendation.

HT: thanks

HT: now what were you just investigating?

HT:

NH: sorry just the FTSE 100 index change next week

NH: just been looking to see who will go in and out

HT: any answers?

NH: looks like Yell, Rentokil and Taylow Wimpey are going

NH: and coming in will be ENRC

NH: First Group and Tate & Lyle

NH: however, there could be a problem with ENRC

HT: Kazakh metals group

NH: this company has a free float which is less than 25%

NH: usually that means you can’t list on the main market of the LSE

NH: but somehow they got around it

NH: now some people think that FTSE will prevent them from entering the FTSE 100 on that basis

NH: however, the company’s PR people say it will not be a problem

NH: and that ENRC will just have a tiny investibility weighting

HT: why make the exception?

NH: need to check that with FTSE as all the changes are subject to approval by a steering committee

NH: index changes will be based on next tuesday closing prices

NH: and additions, relegations will come into force a few weeks after

NH: ENRC up 18p at £11.23

NH: company has a staggering market cap of almost £14bn

HT: Kazakhmys owns a chunk of ENRC don’t they?

NH: they do

NH: trying to get hold of the share register now

HT: then the government has another big holding

NH: as Reuters don’t have any info on it. not bad for a company likely to join the FTSE 100

NH: FXTrader, i keep hearing that story on Yell but the price keeps sinking

NH: this company could breach its banking covenants

HT: maximus - glad to see someone remembers our caviar express

HT: we might have to revive our train service

NH: which they have never disclosed

HT: are we done neil?

NH: VP - is Dragon Oil and Aim company??

NH: yep am done now

NH: see you all tomorrow

NH: when we have BoE rate decision

HT: do start posting your predictions here

NH: and you can start now

HT: we’ll do the now traditional tally during tomorrow’s chat

NH: in that case VP, Dragon all could be in the running, although as you correctly point out FTSE seem to have some opaque rules

HT: thanks maximus for kicking us off

HT: I’m a no change

NH: me too

HT: someone must think something else?

NH: anyone else

HT: we’re looking sheep like

HT: independent thinkers welcome

HT: blackswan - and monkey - thanks

HT: for the effort

NH: and what about the ECB??

HT: oh no - not them

HT: we’re wrapping up

HT: until tomorrow

HT: bye

HT: do keep putting up your forecasts

NH: that’s it for today

NH: see u all tomorrow

HT: bye neil

NH: bye