ft.com/alphaville

Markets live chat transcript for the chat ending at 12:23 on 17 Mar 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM: Welcome to Markets Live.

PM:

PM: This is FT Alphaville’s daily markets discussion.

NH: Hi Murph

NH: not sure where to start this morning.

NH: so much going on

NH: rumours flying around

NH: about xx bank and xx bank being told not to trade with xx bank

NH: and on top of that we have a pre-market quote in Lehman

NH: - 20%

PM: I can report that I had a note from a friend in Dubai over the weekend. Here it is:

PM: Hi Murph

Bear Stearns is a GREAT story.

YOU ARE ALL GOING TO DIE!

NH: Oh, great, that’ll cheer everyone up.

NH: and lets just look at some of the damage in the banking sector already

Barclays (BARC:LSE): Last: 402.75, down 30.25 (-6.99%), High: 410.50, Low: 393.50, Volume: 34.20m

Royal Bank of Scotland Group (RBS:LSE): Last: 307.00, down 26.75 (-8.01%), High: 320.00, Low: 298.75, Volume: 51.30m

HBOS (HBOS:LSE): Last: 472.00, down 56 (-10.61%), High: 498.50, Low: 459.50, Volume: 31.79m

Lloyds TSB Group (LLOY:LSE): Last: 401.75, down 19.5 (-4.63%), High: 410.00, Low: 400.00, Volume: 18.89m

NH: AL.LSE

NH: down 60.5p at 452p

NH: down 11.8%

NH: and RBS was below 300p earlier!

NH:

PM: UBS down 11% at 25 euor

PM: Anglo Irish Banks off……………..

NH: complete carnage

PM: 19% fall

PM: QQuick recap

NH: Let’s just rattle thru what’s happened.

NH: The Footsie opened 100 points lower – largely as expected following the overnight news that JPMorgan is taking over Bear Stearns.

NH: We then had a bit of a recovery and then another serious sell off that took the Footsie straight on down through 5500

PM: Low of 5473.

NH: which is below the previous 52 week low

PM: Stabilised a bit abvoe 5500 — but turned south again in the last few mins

PM: Footsie is currently down 141.8 at 5489

NH: sorry our UBS quote above should have been in SWF not Euro

PM: (looks like im doing comments below — maybe another Murphy )

NH: But we have no confidence this morning. The flow of rumours has been truly scary

PM: Run us thru a few of them.

NH: Well first the ECB was supposed to be coming with an emergency cut.

NH: Then it was the Bank of England

NH: Then we got actual news that the Bank had pumped an extra £5bn into the money markets – trying to get libor down.

NH: Jittery statement from the bank saying it is closely monitoring market conditions.

NH: Then there were all these rumours about UBS – suggestion that no one wants to deal with the bank.

PM: Ooooh dear

PM: You know I still think the equity market is being slow to price in the new reality. We are in the midst of a very serious financial crisis.

PM: There was a nice little note out earlier from James Hamilton at Numis. I think he sums up the general mood.

PM: Wave 1 liquidity, funding and capital strength: See Bear or Northern Rock for details.

Wave 2 Tighten lending criteria and pass on funding costs: This has started but the impacts are yet to be felt. We expect prime borrowers to see the cost of their debt increase materially reducing their ability to spend or invest. For the less prime customers expect credit to be removed and where (mortgages) this is not possible expect a move from a discounted rate to SVR (4.5%-7.5%). This will place significant pressure on those least able to afford it increasing defaults and insolvency. Expect forced asset sales and deleveraging impacting asset prices. UK property prices remain 44% over valued we expect them to go to a discount to fair value.

PM: Wave 3 Higher impairment, recession lower loan demand and more saving: This is the traditional point in the cycle where banks see profitability decline. The surge in unsecured impairment eighteen months ago was linked to excessive indebtedness (which still remains) rather than the economy which was growing above trend with full employment. The household savings ratio is 3.4%, the 35 year average is
8.1% and the last cyclical peak was in 1992 at 11.7%. This is key to the UK’s economic performance as savings and consumption are inversely correlated and circa 70% of GDP is consumption. A return to the average savings ratio will drive recession with an increase in unemployment corporate and personal insolvency. If this drives the pound to PPP equilibrium 1.62 vs. the dollar inflation will be imported into the UK and this could drive the nightmare scenario where the BoE increases interest rates heading into recession.

PM: How much is priced in and what is the right investment strategy: We believe that much of the risk is now priced in but in many cases the situation is binary either the stocks are worth double or nothing. Bradford & Bingley (Target price 193p) has a leveraged balance sheet and is exposed to relatively risky assets. Cattles (Target price 215p) is the most exposed to a weakening macro picture. It does have a strong balance sheet (with significant liquidity risk in 2009) and a high ROE but its assets are entirely sub prime. Its customers (40% have mortgages) will be hit hardest by credit tightening, have a propensity not to pay even in good times and have a weak employment track record. Strategically we like HBOS (Target price 1007p) which has a 44% average LTV on its predominantly prime mortgage book, the strongest liabilities franchise of any UK Bank and is being valued at just 1.1x book.

NH: That’s an interesting point – that in many individual situations the choice is binary – the shares are either worth double – or worth zero.

NH:

NH: We should run thru the actual JPM takeover of Bear Stearns

PM: Assuming it does go through

NH: Well everyone thinks it is tremendous for JPM

NH: And everyone agrees that this is exactly what have happened with Crock back in the summer.

Readers may also know this former bank as Northern Rock.

PM: Yes, we should have had Lloyds, Northern & TSB – which a government safety net.

PM: Everyone would have squealed

NH: But then we wouldn’t have had about six months of fun and hi jinks with the former bank.

NH: But as for this former IB, Bear Stearns…

NH: This is from UBS

NH: Bear Acquisition = Great Deal for JPM Jamie’s patience, discipline, and “fortress balance sheet” mantra are paying off, as JPM gets Bear Stearns –
a decent strategic fit – for very attractive terms. JPM is only paying $2 a share (~$260mm) and is getting a $30bn non-recourse backstop facility from
the Fed to mitigate some of the risk it’s taking on.
.. Economic Terms Appear to Be Very Attractive The way we see it, JPM just paid ~$260mm for a company that was thought to have $11bn in
tangible book just last week (so 0.03x tang book or 0.25x expected earnings). Considering the transaction-related costs of ~$6bn pretax/~$4bn post
tax, we think JPM’s definitely getting paid for the risk & opportunity cost of this deal. The price compensates JPM for the risk it’s taking on, the
environment we’re in, and reflects the fact that JPM is one of very few firms that has the ability to take this on (especially over 1 weekend) – right place
right time.

NH: .. Nice Strategic Fit Too – Filling out Targeted Growth Areas 1) JPM becomes an instant player in prime brokerage without the pain & cost of
building; 2) Commodities: helps the ongoing build-out; 3) Adds to capital markets platform by retaining select teams (w/o having to also hand out
retention bonuses as had been typical of past IB deals); 4) Additive to asset mgmt & the private bank.
.. Valuation: Staying at Neutral While we think this is a great deal for JPM and its one of the best positioned banks we can see, given the environment
we’re staying at neutral on the shares. Estimates and price target, $43 based on 10x ’09 EPS, are unchanged.

NH: And this is Morgan Stanley

NH: Investment Conclusion: We stick with our Overweight
rating on JPM after its announced acquisition of Bear
Stearns. We estimate the deal is 4.1% accretive to 2008
JPM EPS, based on consensus estimates for BSC and
the deal closing at the end of 2Q08. Dimon negotiated
well, with the Federal Reserve providing up to $30 billion
in non-recourse financing for the riskiest assets.

NH: What’s new: JPM announced acquisition of Bear at $2
a share, or 0.05473 shares of JPM. The transaction is
expected to have an expedited close by the end of the
calendar second quarter 2008. The Federal Reserve,
the Office of the Comptroller of the Currency (OCC) and
other federal agencies have given all necessary
approvals.
Additionally, effective immediately, JPM is guaranteeing
the trading obligations of Bear Stearns and its
subsidiaries and is providing management oversight for
its operations.

NH: Where we Differ: Acquisition does not come without
risk. A $700 million decline in asset value, or 3.2% of
remaining risky assets (excluding $20B non-recourse
assets) eliminates the accretion in 2008. It takes
another 25% in target expense reduction to get back to
the original 4.1% accretion. So, there is meaningful
execution risk.

NH: What’s next: Accretion/dilution assumptions could
change based on more details on Bear’s on and off
balance sheet asset quality and JPM’s expectations for
target cost reduction

PM: And look at this! — noted below

PM: This is from the fixed income side of Lehman brothers – they’ve turned buyers of bank credits!

NH: Well someone has to step up to the plate!

NH:

PM: In recent weeks, financials, particularly banks and brokers, have traded off dramatically as systemic deleveraging accelerated. Liquidity conditions had become dire. As a result, we have seen both banks and brokers trade to spread levels not seen in decades. Furthermore, macroeconomic and fundamental news has provided little support; the U.S. economy appears headed for recession. In synthetic credit, concerns over structured credit unwinds and correlation desk hedging have provided constant pressure, while in the cash market, heavy supply and a significant supply overhang (both across investment grade and speculative grade markets) have been a challenge.
However, the recent run on Bear Stearns has at last driven policymakers to more aggressive confidence boosting action. We believe the regulatory authorities now understand that the time for half-measures is at an end. With today’s moves, the Fed has signaled a major campaign – and we believe the Fed will win the liquidity battle. In this context we believe the time has come to change our view on financials. We are maintaining our more negative views away from financials, as we expect the economy to continue to weaken and credit quality along with it.
While the Fed had been using a measured approach to stabilizing the financial markets, both through traditional monetary policy and through the innovative approaches mentioned above, in light of today’s PDCF announcement we believe that the period of a more conservative policy is at an end. The regulatory authorities are now effectively providing a liquidity backstop for a wide variety of investment-grade assets – an effective wall of liquidity.

PM:

NH: good Lex note out this morning

NH: on “Insecuritisation”

NH: When used cars fail to fly off the forecourt, salesmen resort to steep price discounts and slick patter. But no ruses seem to be working in asset-backed securities. Issuance of new paper has dried up since July and the secondary market is barely moving, even though spreads in many classes have more than doubled since the beginning of the year. Only very specialist pockets of ABS, such as insurance products like catastrophe bonds, seem unaffected.

NH: Is the business model a write-off, or just badly dented? Bankers say they have learned their lessons from the asset-backed binge of recent years. Given their time again, they would insist on much better collateral – especially for residential mortgage-backed securities (RMBS), which account for about two-thirds of total global outstanding ABS – and more consistent and transparent disclosure. They would, of course, do away with some of the funky strains such as the “CDO squared.” The lenders who actually originated the loans will likely be forced to retain a meaningful piece of the riskiest equity tranche – a once-standard market practice that fell out of favour as investors showed they would swallow almost anything.

NH: The ABS model can be resurrected by going back to basics. And, US home loans apart, the underlying assets in ABS have, so far, performed broadly as advertised. But ultimately recovery depends on finding a new investor base. Before the crunch, around half of RMBS by volume were held by highly-leveraged special purpose vehicles – so-called SIVs and conduits – which are now thoroughly discredited and in many cases are being liquidated. Banks mopped up much of the rest, but are now in no condition to commit capital. That leaves real-money investors who for now may only be tempted by the lower risk categories of asset like credit cards and car loans. The ABS structure will survive, but the road back to respectability looks long and hard.

PM: Hmm

PM:

PM: Might also throw up this note from Meredith Whitney

PM: BSC Fire Sale to Cause Valuation Adjustment for All Financials: Banks at
Risk
OUTPERFORM
Lehman Brothers Holdings Inc.(LEH $39.26)

PERFORM
BAC(BAC $35.69)
JP Morgan Chase & Company(JPM $36.54)
Wachovia(WB $26.54)
Wells Fargo & Company(WFC $28.45)
Goldman Sachs Group, Inc.(GS $156.86)
Morgan Stanley(MS $39.55)

UNDERPERFORM
CITIGROUP INC(C $19.78)
BEAR STEARNS COS THE(BSC $30.00)
Merrill Lynch & Co.(MER $43.51)
UBS AG(UBS $27.76)

PM: Summary:
Sunday night, it was announced that Bear Stearns was bought by JP Morgan
for
$2 a share, a mere 2% of the stated book value at the end of the fourth
quarter. While we believe BSC’s case is unique, what will not be unique,
in
our view, is a resulting major negative revalution of financials. For
this
reason, we provide a detailed examination and explanation of why we
believe
financial stocks have further downside of as much as 50% based upon
1990/1991
mutiples of tangible book values.
* On the basis of book value, most banks do not appear expensive as they
trade
near price to book multiples of the 1990-1991 credit cycle. However on
the
basis of tangible book value, banks look expensive and are trading
well
above tangible book value.
* We argue herein that due to the adoption of purchase accounting in
2001,
goodwill has grown to unprecented levels on bank balance sheets. As we
believe we will begin to see goodwill writedowns during the first half
of
this year, we believe investors will focus more on tangible book value
and
stocks will quickly revalue to far lower levels.
* Merrill Lynch announced on 3/5/2008 that it was discontinuing the
mortgage
origination business at its subsidiary First Franklin and would
explore the
sale of the mortgage loan servicing unit Home Loan Services. The sale
of the
mortgage unit was due to the deterioration of the subprime market and
leaves
roughly $922 million or $1.12 per share in goodwill and intangibles at
the
end of 2007.

PM:

NH: right, got some more pre-market quotes for the US banks and brokers

NH: BSC $3.1… -89.6%
JPM $35.10…-3.94%
C $18.90…-4.45%
LEH $32.47…-17.3%
MER $41.05..-5.65%
GS $115.47…-7.26%

PM: Ah — BS trading thru the offer price!

NH: counter bid on the way obviously!!!!

PM: Who do you think the its from?

PM: Helen did an interesting post earlier about the deal running for 12 months potentially

PM:

NH: Still every cloud has a silver lining

PM: wot?

NH: well the demise of the Bear is going to cost Joe Lewis some serious money

NH: money that could have been spent on propping up the scum of North London

PM: He’s one of our readers to day — dont knock him

PM: what are you going on about?

NH: Spurs

NH: One of the their big backers is Joe Lewis

PM: Spurs 4 Arse 0

NH: that’s why they have been able to spend millions on players over the years without ever achieving any success

NH: and I don’t count the carling cup as success

PM: thanks for that

PM:

PM: Here’s the bank statement

PM: EXCEPTIONAL FINE-TUNING OMO
The Bank is today, at 11.00am, holding an exceptional fine-tuning Open Market Operation. The Bank will offer, at Bank Rate, Stg 5bn of extra reserves in a three-day repo maturing on Thursday, when the regular weekly short-term OMO will be held.
Stg 5 bn is equivalent to 25% of reserves targets. The range around reserves targets within which reserves are remunerated remains unchanged at +/-30%. The Bank will keep the range under review.
This action is being taken in response to conditions in the short-term money markets this morning. The Bank will take actions to ensure that the overnight rate is close to Bank Rate. Along with other central banks the Bank of England is closely monitoring market conditions.

NH:

NH: right, just going through all the questions below

NH: we don’t know where to start

PM: We could start with Capital & Regional — but not sure whether we have much to add

PM: Neil just on the phone….

PM: Sounds like we haven’t heard anything further that is concrete

PM: Takeover remains RAW info

PM: Tho we could add that the stock is up just 1.5p at 533p currently

NH: right, word in the market this morning is stake building

NH: a few names floating around

NH: and of course there were reports this weekend that the nexy Laxey Partners fund had taken a a large stake in Shaftesbury

NH: in fact they are said to have paid 600p for 11%

NH: and will now push the company to break itself up

NH: or else it will bid

PM: Hmmm

PM: But to re-iterate this all remains completely RAW

NH: will report back if we get some names

PM:

NH: Spurs is entirely self funding - very funny

PM: Lehman Brothers denies report DBS halted activity, has strong liquidity

position
LONDON (Thomson Financial) - Lehman Brothers denied reports that the
Development Bank of Singapore (DBS) has halted its activity with the bank and
stressed that it has a very strong liquidity position, according to Anne Lui,
Vice President, Corporate Communication in Asia told Thomson Financial News.
“DBS in fact have been transacting with us,” Lui told Thomson Financial
News.
“They continue to deal with us and we are just executed a $20 mln kiwi
/trade FX trade with them,” she added.
patrizia.kokot@thomson.com

PM: this link v v funny also:

PM: http://img215.imageshack.us/img215/9470/techfl5.gif

PM: Thank you for that Andy Pandy!

PM: Intriguing comment from germanbanker below

PM: Suggests he/she might know something….

PM:

PM: of course not everything is going down this morning

NH: no, a couple of things have managed to crawl into positive territory

PM: such as ….

NH: British Energy

NH: actually it is well in positive territory

NH: shares have jumped 61.5p to 633p on confirmation of our story on Sat

PM: for those of you who missed it

PM: here are the top few pars

PM: Britain’s leading energy suppliers have been approached by government advisers to sound out interest in its 35.2 per cent stake in British Energy, which is valued at £2bn-plus.
The government has mandated UBS to help with a potential sale process, while British Energy has appointed NM Rothschild as its adviser. Eon and RWE of Germany, Électricité de France, Iberdrola of Spain and Centrica of the UK have all been asked if they would be interested in acquiring part of the stake, people close to the situation said.
Under takeover rules, any company that buys the whole stake would automatically be forced to make a full takeover bid for British Energy.
The government declined to comment, but one insider said: “Of course, we would look at any offer carefully.”

NH: that was by Lina Saigol, our M&A editor

NH: and it prompted this response from the company

NH: The Board of British Energy Group plc notes the recent speculation about a
possible transaction involving the Company. The Board announces that the Company
is in discussions with interested parties in the context of its future and its
plans to take a pivotal role in any new nuclear programme. These discussions
could lead to a business combination or an offer for the Company, although there
can be no certainty that any offer will be made.

PM: So British Energy is in play

NH: yep

NH: and as you can see from Lina’s story there will be a number of people interested

NH: basically if you want to get involved in building the next generation of nuclear power stations in the UK

NH: then you have to deal with BE

NH: if for no other reason than you can’t build a nuclear power station anywhere else

PM: fair piont

PM: but surely a partnership is the most likely outcome here

PM: somebody like RWE taking 29%

PM: the govt keeping a stake

PM: because there is no way the nuclear industry can end up in the hands of a foreign company

PM: even in the UK we have to draw the line somewhere on foreign ownership

NH: fair point

NH: After all there have been at least ten parties involved in active discussions about building new stations in the UK

NH: ten or more new stations are needed to meet the governments targets

NH: anyway have some analyst comment

NH: this is from Evo Securities

NH: BRITISH ENERGY NOW IN PLAY, INCREASE TARGET TO 650p
Merger and take-over talk resulting from new nuclear prospects

EVO TAKE - Government wants to sell its 36% stake as soon as possible to get the money. Possibilities are, in order of likeliest outcome: a split sale to British Energy’s (possibly two) partners in new nuclear; a single sale paving the way to a take-over or merger (although it is difficult to see Government wanting to face the political difficulties of placing the entire UK nuclear industry in the hands of a single foreign company); and at a lower probability, than the other two possibilities, a cynical manipulation by Government ahead of placing its stake in the market. Irrespective of outcome, the benefits of new nuclear will accrue to existing British Energy shareholders.

NH: DETAILS - British Energy has announced that it is in talks with interested parties with regard to new nuclear investment. The company says these discussions could lead to an offer or a business combination, although there is no certainty an offer will be made.

The Government sent a press email over the weekend saying it has appointed UBS to advise it on the “commercial and financial aspects of the strong and growing interest in nuclear”. The FT reported over the weekend that a number of companies have been asked if they would be interested in acquiring part of the stake. The companies named are five of the six vertically integrated UK utilities, excluding SSE: EON, RWE, EdF, Iberdrola and Centrica.

We regard a placing of the stake in the market as a lower probability outcome as British Energy is talking of “business combination” and “offer” and the company would not lend itself to such Government manipulation, if any.

NH: VALUATION AND RECOMMENDATION - As we have been trailing in the past few weeks, we are increasing our price target from 600p to 650p. This comprises 525p from existing assets and 125p from new nuclear. This assumes the current forward curve on electricity prices, whilst keeping our long term price assumption on electricity prices at the same level of £44/MWh real, which is based on $55/Bbl real crude prices. Our valuation for new nuclear is around 200p, which we discounted for risk to 100p (see our note “Output and New Nuclear are Key to Value” of 30 January 2008). With recent events we have now reduced the risk discount, giving 125p for new nuclear.

We remain BUYERs on the back of our existing arguments: high electricity prices; improving perception of plant operational capability; and new nuclear value coming into the price. In the event of a full bid our price target would increase to take account of the full benefits of new nuclear.

PM: thanks for that

PM: any more?

NH: not at the moment

NH: might have some more by the end of the session

PM:

PM: FLASH

PM: LEHMAN -35% PRE-MKT!!!

PM:

PM:

NH: OMG

NH: quick market update

NH: down 142.5 points at 5,489.2

PM: Biggest footsie fall is A&L, down 11.6%

PM: Monkey — noticed you posted on that earlier — do expand!

PM: No libor fix as yet

PM: James — probably another murphy

PM: We breed like rabbits

PM:

PM: Anything else in the blue this morning?

NH: well, Whitbread was earlier. up for most of the morning. but has faded since we have been on air. now down 21p at £11.68

NH: which is still not a bad performance considering what is going on elsewhere

NH: anyway all follows reports that Whitbread is in talks to buy rival budget hotel chain Travelodge

NH: now Travelodge is owner by Dubai International Capital

NH: and the deal would see DIC inject Travelodge into Whitbread presumably in return for cash and stock

PM: i see

NH: I think the market likes the deal because of the potential for cost savings

NH: and remember Whitbread bid for TL when it was acquired by DIC in 2006

NH: although both operations are pretty lean

NH: that said, if the deal goes through it would create a market leader in budget hotels

NH: it would have 850 hotels and over 50,000 beds

PM: so it could face some regulatory scrutiny

NH: I would think so

PM: do we have any figures on the likely cost savings??

NH: yep

NH: right from Whitbread’s last figures

NH: we know there were “other costs” of £91m in Premier Inn

NH: let’s say that 30% of those are stripped out through a merger

NH: that gives a synergy of £27m

NH: which is12% of the combined EBITDA of the businesses (£223m)

NH: actually here is a note from Cazenove that goes into greater depth on the cost savings

NH: We see a strong logic to the combination of the two companies (and believe that Whitbread’s management do too, given that they bid for Travelodge when it was last sold in 2006):

The combined business would have over 53,000 rooms in the UK, well ahead of the number three player in the market (Holiday Inn Express with c10k).
Fig 1 Budget hotels – number of rooms operated

NH: Year end: February 2001 2007 CAGR (%) latest 2011 target CAGR (%)
Premier Travel Inn 23,300 32,603 5.8 32,603 45,000
Travelodge 11,600 17,700 8.8 20,000 33,700
Holiday Inn Express 5,900 10,180 11.5 10,180 13,902
Ibis 4 4,000 6,350 9.7
Source: Cazenove, IHG *Based on published pipeline

NH: We believe there would be substantial synergies to unlock. Premier Inn reported “other costs” of £91m in FY07. Assuming that 30% of this could be saved gives a synergy of £27m. This is 12% of the combined EBITDA of the businesses (£223m) which does not seem unreasonable.

The combined business would be able to grow faster, pooling the development sites of the two companies. Whitbread already has plans to reach 45,000 rooms by FY2011.
Ultimately, we would expect the enlarged Whitbread to focus on the rapidly growing budget hotels business, making a sale of Costa likely. We note that Whitbread has recently combined the management structure of its Premier Inn and pub restaurant divisions, leaving Costa as a standalone entity. This suggests it wishes to retain flexibility to sell Costa at a future date. We believe the resulting pure-play hotel business would be strongly positioned in an attractive segment of the market.

NH: We would make two caveats to the supporting points above. The deal would clearly be subject to competition clearance; on the wider market definition of the hotel market this does not seem to be a barrier to a transaction. There are 710k hotel rooms in the UK and the combined business would have a market share of c.7.5%. Clearly on the more limited market share definition of limited service or economy hotels the market share is much higher, but we believe it would be difficult to define this narrow market.

The key strategic difference between the two companies is their approach to assets. Travelodge is asset-light following a number of sale and leaseback transactions. To date Whitbread’s management has rejected the strategic option of sale and leasebacks, prefering a securitisation to release value from the estate. It is not clear whether they would find Travelodge less attractive as a result. Conversely, if the combined business was run on the Travelodge model, future asset sales could unlock a substantial cash return to shareholders.

NH: Valuation and conclusion

In 2007 Dubai Capital paid £675m for the Travelodge, which made £38.8m of EBITDA in 2005, the year immediately prior to the transaction – the historic multiple was therefore 17.4x. Travelodge subsequently reported £46.2m of EBITDA for 2006, implying a forward multiple of 14.6x.

Clearly, the most important variable is the price attached to Travelodge and the Sunday Times article made no mention of valuation. At a minimum of £675m (presumably the value agreed would be somewhat higher), and assuming £30m of synergies, the acquisition would be c. 2% enhancing to Whitbread’s EPS. We will assess the possible financial impact in more detail and provide further analysis.
Overall, our standalone sum of parts on Whitbread suggests a fair value of 1810p and we see attractive upside. The synergies in a combination with Traveodge could be worth an additional c.150p per share and enhance an already strong investment case, in our opinion.

NH: and this is from Panmure

NH: In talks to acquire Travelodge?
According to the weekend press, Whitbread is in preliminary talks to acquire
Travelodge from Dubai International Capital for a mixture of cash and equity.

At this stage, there is little financial detail, but the deal is likely to highlight
Whitbread’s current undervaluation. Our stance remains Buy.

As a 100% leasehold budget accommodation operator, Travelodge was sold for 14x
EV/EBITDA in August 2006. Its rating must have fallen subsequently, even though
earnings grew by 30% in 2007, with growth prospects remaining strong.

Nevertheless, the valuation differential in this transaction to Whitbread.s 7.7x
EV/EBITDA appears difficult to justify given that Premier Inn is 80% freehold and
accounts for 70% of Whitbread.s earnings. Of Whitbread.s other assets, pub restaurants are 100% freehold and offer a big turnaround opportunity and Costa is 100% shortleasehold but is in rapid growth.

Given its EV/EBITDA valuation (at a discount to that of the pub operators) and ongoing growth prospects (55% of Premier Inn.s custom is business), we reiterate our Buy recommendation.

NH:

NH: searching for a LIBOR quote

NH: nothing up yet on our screens

PM: In the meantime I have some important news for the US media and also the FT team in NY…..

PM: The story of JPM taking over Bear was first revealed in the Sunday telegraph

PM: Seriously

PM: This is from today’s telegraph:

PM: The deal, news of which was first revealed in The Sunday Telegraph, sees Bear’s shares valued at $2 each, with JP Morgan exchanging 0.05473 of each of its shares for one Bear share.

PM: And i thought i read it on Friday night

NH: silly you

PM: Libor — slight spike in sterling 3m

NH:

PM: Nice to see the readers quicker than us

NH: so we have 3-month sterling Libor ticking up slightly

PM: 5.95875 was 5.93188

PM: no overnight figs as yet

NH:

NH: right, have a very interesting notes from ABN Amro

NH: titled “The Great hedge fund unwind”

NH: some very interesting stats on margins being charged

NH: Hedge funds: The great unwind
The recent demise of the Peloton Partners ABS fund could be the beginning of the
protracted round of unwind of credit arbitrage hedge funds, in our view. Our
March 2006 Prime Brokerage report, Better the devil you know (28 March 2006,
attached) highlighted the risk not just of financial leveage (ie borrowing ) but
importantly economic leverage from investing in structured assets (eg
subordinated tranches of ABS/RMBS/CDO/CLOs).c

NH: edge funds: The new paradigm
A June 2007 Fitch survey (Hedge Funds: The Credit Marketls New Paradigm,
attached) of prime brokers servicing credit-oriented hedge funds highlighted the
following conclusions and echoed some of our earlier views:
1. Hedge funds’ influence on credit markets had accelerated making up some 60%
of CDS trading volumes
2. Hedge funds’ willingness to employ leverage and invest in more leveraged,
risky areas of the credit markets magnifies their importance as a source of
liquidity. Leverage levels were indicated to be up to 20x, with a typical
5-6x.
3. A credit downturn could involve more sudden, correlated declined in asset
prices as hedge funds and prime brokers seek seek to unwide their positions
in a more risk-averse market. Arguably, the latter event is happening as we
speak with the well-flagged issues at a number of hedge funds.

Please email us for a detailed list of hedge funds currently under `stress’,
according to press reports.

NH: What has changed?
As well as a continued decline in asset prices across the credit markets,
tighting standards seem to the the proverbial `nail in the coffin’. Indeed, in
its letter to investors, Peloton was reported to have made the following
statement: “‘Credit providers have been severely tightening terms without regard
to the creditworthiness or track record of individual firms, which has
compounded our difficulties and made it impossible to meet margin calls’.

Indeed, typical haircut/initial margin levels have increased significantly as
highlighted at a recent LSTA conference that we attended: AA corp bond (10% in
March 2008 from 0-3% in March 2007), BB lev loan (50%, from 10%), BB high yield
bond (40%, from 5%), Equities (30%, from 15%), IG CDS (5%, from 1%), AAA CLO
(30%, from 4%), AAA RMBS (30%, from 20%) and AAA CDO of ABS (not applicable
collateral, from 4%).

NH: Moreover, banks such as UBS have balance sheet reduction initiatives in place
with potentially repo assets potentially representing `low hanging fruit’ given
its short duration. In other words, banks can create their own cycle.

NH: Who is most exposed?
To put into context, the IMF Global Financial Stability Report (April 2006)
suggested that end-2005 credit-oriented hedge funds exceeded $300bn which
at 5-6x leverage equates to $1.5-$1.8 trn of assets deployed in the credit
markets. Since then, credit strategies have been one of the fastest growth
areas for hedge funds.

Although Citigroup, Bear Stearns and JPMorgan dominate the industry with over
three-quarters market share (refer to Table 18P of attached Lipper HedgeWorld
report), we would not rule out exposure at the major European capital market
banks (Credit Suisse, Deutsche Bank and UBS) which have expanding in this space.
Moreover, fixed income repo desks across the Street may have provided
financing.

PM: Yikes!

NH: Investment conclusion:
We continue to avoid the major capital market banks notably UBS and Deutsche
Bank as well as Barclays. Against this, Dexia, ISP KBC and HSBC should provide a
relative hedge on the basis of relative balance sheets strength.

NH:

NH: right, top broker has been on

NH: he is trying to figure out what deals could be in trouble

PM: Good theme eh?

PM: Look at financing being pulled

NH: i was thinking Mitchells & Butlers

PM: And who else?

NH: even though the Punch proposal is all share

NH: they debt would have to be renegotiated

NH: Resolution is a good one - thanks Chopsticks

PM: Big one mentioned by the shrewdy earlier…

Scottish and Newcastle (SCTN:LSE): Last: 779.00, down 6 (-0.76%), High: 783.00, Low: 778.50, Volume: 6.10m

PM: Suposedly Lehman providing big finance for the deal

PM: Others….

NH: Expro, Xstrata, Biffa, Nestor Healthcare, GCAP Media

NH: Mapeley as well

PM: oh course

PM:

PM: To a couple of comments below

PM: Carlo — you know you can use the City Index price to the right here — Wall St rolling bet is effectively a Dow future

PM: As for number of comments…. Im relaxed… but Neil is very happy

NH: we were also asked a while back about Xstrata

NH: and what news there was on the talks with Vale

NH: and we are hearing from the Brazilian press the following

NH: alor Economico business newspaper said the three CEOs (XSTRATA, VALE, GLENCORE) had agreed to
elaborate and present new proposals for a new round of negotiations in the
next couple of weeks

NH: VALOR says price is still a
stumbling block along with a marketing rights dispute between trading house
Glencore and Vale.

NH: Agencia Estado news agency quoted a source as saying that while most
differences remained, Glencore has become somewhat less ambitious in terms
of demands for marketing rights in the combined company.

NH: olha de Sao Paulo, said Friday that Vale and
Glencore had overcome difficulties in talks on marketing rights, and that a
probable deal would entail Glencore retaining marketing rights for the
combined company’s nonferrous metals and coal for five years.

NH: hope that all helps

PM: ta for that

PM:

PM: Re VP — we are happy to do another ML if things do deteriorate from here….

NH: sorry we forgot to put in a Xstrata price

Xstrata (XTA:LSE): Last: 3,823, down 115 (-2.92%), High: 3,908, Low: 3,788, Volume: 3.19m

PM:

PM: right lets have a bit more doom and gloom

NH: good idea

NH: results from Wolseley

NH: which got whacked last week after several analysts said it might need a rights issue to bolster its balance sheet

NH: the company has moved to ease fears on that front

NH: debt is line with expectations

NH: and the company says that it has committed and undrawn banking facilities of around £1 billion at 31 January 2008.

NH: nonetheless, the shares are still down

NH: off 27p at 505p

NH: their lowest level in six years

NH: no, what’s done the damage this morning

NH: is not debt

NH: or the results

NH: but a very, very gloomy outlook statement

NH: even more gloomy than analysts were expecting

NH: and they were very pessimistic

NH: as result they have taken the red pen to forecasts again

NH: take a look at this

NH: it’s from Caz

NH: Interim results look in line.
Debt £2,894m, in line with expectations. Construction loans have reduced to £272m, with no comment on customer bankruptcies being significant.

Outlook: Expects business conditions in a number of markets to become more challenging. US Commercial & Industrial market expected to soften in 2H calendar 08.

Further significant cost reductions to come in 2H.
Dividend increase +3.7% to 11.25p (our est +5%).
Highly selective approach to acquisitions and use of capital.
Borrowing covenants: confident will remain fully in compliance with these.

NH: Overview
At first sight this looks more solid than the market was fearing. However the outlook is cautious and we anticipate reducing estimates by c.-5% (08E) and c.-10% (09E).
On financial condition, our view remains that on our bear case WOS approaches its first banking covenant but may well not reach it (depending on consumer loan write-offs), and even if it did so we would expect banks to be quite supportive. Reducing debt by equity issue or disposal would be beneficial (giving acquisition funding) but not critical.

We feel investor perceptions of the length of US housing and other construction markets downturn will still tend to be extending, and do not sense an inflection point here. Remain InLine.

NH: and here is a very interesting note from Kaupthing

NH: WOLSELEY ~ reported numbers consistent with trading update and confirms the damage has been confined thus far to Stock in the US (90% new housing biased) and France (internal issues more than market related). Sales in the 6 months to end Jan were £8bn +2%, EBITA £300m -24%, clean PBT -29% at £233m (our est £228m) and EPS 26.7p -31% (our est 25.2p). The DPS is lifted 4% to 11.25p. Encouragingly Ferguson still posted EBIT and margin gain in the half (note group margins fell from 5% to 3.7%), the Nordic businesses held solid and UK was ahead but regionally held in check by Ireland.

NH: Management have sought to defuse the fears on covenant breach and B/sheet (end Jan debt £2.9bn, gearing 84% and interest cover 4.3x) by expressing confidence that there is no foreseeable scenario in which it will breach and has £1bn of facility headroom. However it is fair to say that the outlook statement is more cautious again. The statement flags US housing falling further and dragging in the RMI sector now whilst it expects Comm/Ind (Ferguson’s key market) to dip away from calendar H2. Europe is softening too but is expected overall to see marginal growth in demand.

Consensus numbers for the CY look maybe OK at £556p/61p (my est is higher at £590m/64p) but the greater worry must be 08/9 when consensus still suggests a stable even rising profit (I’m on £550m/60p) which seems very unlikely now and consensus could slip back to EPS of c50p. The annualised 08e rating is c8.5x PE, sub 0.4x EV/sales, yield 6.4% and now a price/book of 1x. Ordinarily against a trough cycle eps of say 45-50p this would represent excellent recovery/long term value, but short term the stock must battle weak sentiment in the US and downgrades. We see clear value at 500p level and would buy for long term.

NH: Extracts from Cantos interview with Steve Webster FD:

NH: Q. Gearing is at 84 per cent. Interest rate cover is 4.3 times. Are you comfortable with that?
A. Yes, absolutely. That still remains within our range of comfort, within our normal range of financial targets, so very comfortable with that gearing and interest cover.

NH: Q. But are you as close as you appear to be to breaching your banking covenants?
A. We think we have plenty of headroom here, either in banking facility availability or in terms of the covenant. One of our policies is to maintain at least 20 per cent headroom in terms of facilities available, compared with the peak borrowing requirement. We’re in that position now and we expect to continue to be in that position.
Obviously in looking at this, one has to do a lot of scenario planning to look at the downsides of what may happen. And in no credible scenario that we can come up with, can we see a breach of our borrowing covenants, so we are in good shape. And we expect to remain fully in compliance with all of our covenants.

NH: Q. What about the liquidity rumours that I read about your company?
A. Well there are rumours all the time about everything, really. And I think it’s a question of don’t believe all you read in the press. We’re confident of our position. We’re confident we will remain fully in compliance.

Q. Will there be a rights issue in the next 12 months?
A. There’s absolutely no reason for a rights issue or any other funding. We are in a very strong financial position, have lots of headroom compared with our facilities, have a very strong and bankable balance sheet. So rights issues are not on the radar screen.

PM: Thanks for all that

PM:

PM: Some very funny comments below

NH: market update - 150 up

PM: date

NH: or rather down 151 at 5,481.1

PM: Gold trading at 1020

NH: right, just had a chat with Paul

NH: if we get real carnage this afternoon will be back on

NH: i reckon the FTSE needs to be off 200 points to justify another session

NH: and Lehman off at least 15%

NH: other than that an emergency rate cut would also see us back on

PM: ok

PM: Seen the Shanghai index btw?

NH: Yes, its well down.

NH: They’ve got a real sell off going on there.

NH: Shanghai Compsite closed 142 points lower at 3820 – that’s a fall of 3.6%.

PM: Index is now down 37% from its peak.

PM: And investors in Shanghai presumably don’t even know that people are being mown down in Tibet.

PM: Right — we done for now!?

NH: can we sign off with this very bearish note from Sandy Chen at panmure

NH: Blame the Markets
Recent events – and the continued deterioration of underlying asset quality –
lead us to expect higher impairment charges, lower margins and now, given
Bear Stearns, concerns about capital cushions. Downgrade A&L and HBOS
to Sell.

NH: Amidst the maelstrom of commentary, it seems to us that Bear Stearns collapsed from
two key vulnerabilities – (1) exposure on asset side to troubled hedge fund counterparties
and problem structured credits, and (2) dependence on wholesale funding, so that a
US$17bn capital cushion could disappear within 24 hours as banks and other lenders
withdrew their funding.

NH: The 25bp Fed weekend rate cut - the first weekend cut in three decades - and more
importantly the widening of the Fed discount window to accept primary dealers, are
indicators of the severity of this current crisis - we interpret this as a clear indicator that
other firms may be vulnerable. More rate cuts are expected as early as today, but they
won’t help, in our opinion - this is not a liquidity crisis anymore, it’s an insolvency crisis
(which is a frankly unwelcome confirmation of our views from way back in the pre-history
of Summer 07).

NH: So, what to do now? Sell your banks. Banks themselves must be tightening their credit and
risk models even further, leading to even greater pressure despite any further rate cuts.
This means two things - higher funding costs and higher impairment charges, with the
added concern that capital cushions could quickly disappear if funding concerns result in
massive withdrawals. One thing to watch will be LIBOR, which we expect will rise even
further – and the 68bp LIBOR-BR gap is wide enough as it is already.

NH: We have had the UK banks on underweight, and most of those banks on Sell since
August 2007; if anything, we think the situation has worsened even beyond our bearish
expectations. Accordingly, we add A&L and HBOS to our Sells, despite having long
defended the strength of their deposit franchises and their solid capital ratios. We cut our
price target on A&L from 490p to 450p, and cut our 2008E PBT forecast from £120m to
£51m with 2008E EPS going to 4p on both higher impairment charges and lower
margins, and for HBOS we cut our price target from 600p to 450p, with forecast 2008E
EPS going from 73.3p to 49.8p. Maintain Sells on BARC, RBS, B&B, HSBC and STAN,
maintain Hold on LLOY.

NH: hang, Chen is looking for 4p of earnings at A&L now

NH: that’s down from 61p last year

PM:

PM: Right — taht’s it

NH: thanks for all the comments. we have smashed the previous record, which was subject to a stewards inquiry anyway

PM: Amateurs HT and RO

NH: Oh, some Lehman flashes

NH: *LEHMAN SAYS `LIQUIDITY FRAMEWORK’ IS `COMPETITIVE ADVANTAGE’
*LEHMAN LIQUIDITY `CONTINUES TO BE VERY STRONG,’ FIRM SAYS
*LEHMAN COMMENTS IN E-MAILED STATEMENT :LEH US
*LEHMAN SAYS LIQUIDITY POSITION `STRONG’ :LEH US

PM: uhoh — didnt we hear something similar from another IB last week?

NH: indeed, BS had $17bn of liquidity last week

NH: and it disappeared in one night

PM:

NH: we could see you later

PM: Seeya !

PM: Footsie off 159….

PM: /ends