Markets live chat transcript for the chat ending at 12:08 on 1 May 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hello – welcome to Markets Live
NH:
morning all
PM:
This is FT Alphaville’s daily markets chat.
PM:
Now we’ve felt its been a bit too quiet recent days.
PM:
Neil enjoyed yesterday’s chat, but there has been a bit of a sense of dearth of stories.
NH:
So we’ve been out news-gathering.
PM:
We have. In the tireless pursuit of quality content.
NH:
And this is what we’ve got
PM:
It’s a piece of Medium Rare.
NH:
This is not RAW. It is not untested market gossip.
NH:
But neither is it formally checked with felts etc.
PM:
It’s been informally checked. It’s good info.
NH:
So it’s medium rare. Easier to digest that pure Stock tartare.
NH:
And it concerns a company called ITV.
PM:
Some have tried to categorise ITV as being in danger of becoming a former broadcaster, but we are not so sure.
PM:
And we should quickly say here that anyone following ITV should read the full details we have – and not just the headline news.
PM:
Sorry – but we get nervous here about people running off with half a story.
NH:
Half a half story most of the time.
PM:
No, don’t want people running off with a quarter of the story – and then blaming us if and when they get their fingers burned.
NH:
Reader Beware!
PM:
Anyway, tell em what the story is Neil
NH:
Apax Partners are sniffing around ITV.
NH:
Well, specifically Stephan Grabiner, who runs the Apax media team, has been informally sounding out ITV about a takeover.
PM:
Yes, Mr Grabiner does not “sniff around”.
NH:
Was he at the Telegraph when you were there?
PM:
Yes. In Marketing Didn’t know him tho. Neil Collins was occasionally rude about him, but that was it.
PM:
Anyway, we should very quickly say that ITV is not playing ball.
PM:
There are NO TALKS here – as far as we can ascertain.
PM:
This was a VERY INFORMAL expression of interest.
NH:
But it was VERY recent.
PM:
What more detail can we offer?
NH:
Well, Apax want to split the business up – content and distribution.
PM:
And sell one bit?
NH:
Dunno. But you’d assume so.
PM:
What else do we know.
NH:
Well, we also know that Apax have mulled over the idea of buying Sky’s 17% stake in ITV.
PM:
PM:
What, and becoming some sort of activist investor?
NH:
Hmm. I think so.
NH:
But ive been scrolling thru the Apax site this morning – and it would seem to be very unusual for Apax to take stakes in listed companies.
NH:
I cant find any examples.
PM:
So there is a possibility here that if Michael Grade doesn’t like the full takeover idea he might be forced to to break the business up himself by Apax sitting on the shareholders register, pulling public strings.
PM:
That would be very aggressive – for a firm like Apax.
NH:
Hmm. We should repeat that this is all VERY informal, early stage etc etc
NH:
It is Medium Rare.
PM:
But it has a good bandit rating.
PM:
PM:
On one level it is obvious really. If Grabiner hadn’t looked at ITV you would wonder whether he was doing his job properly.
NH:
And of course, the world and her husband have already looked at ITV and at the Sky stake.
NH:
And nothing has happened.
PM:
So nothing is likely to happen here?
NH:
Who knows.
PM:
One to watch tho.
NH:
ITV shares unchanged at 66p
NH:
but there has been some movement in the CDS’s in the past day or so
NH:
spread has widened, which you would expect if a PE house was sniffing around
PM:
NH:
Monkey, it’s not bingo it’s house. get your terminology right
PM:
NH:
Right, Rank
NH:
shares have enjoyed a nice little pop this morning
NH:
stock currently up 5p at 94p
NH:
a rise of 5.5%
PM:
Strange occurance — rank going up
NH:
as Monkey points out below
NH:
it was all to do with an AGM yesterday
NH:
the Bingo Association AGM
PM:
Where was that — BLackpool?
NH:
nope, at the Queen Elizabeth II Conference Centre, London.
PM:
Who was speaking?
NH:
Gerry Sutcliffe, Minister for Sport and Tourism, and Parliamentary Under Secretary of State at the Department for
Culture Media and Sport.
Culture Media and Sport.
NH:
to give him his full title
NH:
and he pledged support to Britain’s beleagured bingo industry
NH:
he promised a written statement would be issued in the ‘next couple of weeks’ offering some good news for the bingo industry.
PM:
that’s very cryptic
PM:
any idea what will be in the letter
NH:
no
NH:
but analysts have been speculating
NH:
and
NH:
the consensus seems to be some relaxations on the numbers and limit on stake and prizes associated with category B3 gaming machines
PM:
and that would be good news?
PM:
cat B3 gaming machines
NH:
er, yes
NH:
here’s a note that might explain it
NH:
sent by a broker earlier this morning
NH:
Pre-1 Sept 2007, Rank had an average of 13 high value gaming machines in each club. Now they are entitled to four per site, limited to £1 stake (£500 prize). After the restrictions were introduced in September, Rank issued a significant profits
warning (estimates down c.50%) as admissions declined on the back of the
product withdrawal.
warning (estimates down c.50%) as admissions declined on the back of the
product withdrawal.
NH:
Our best guess on the statement is that average stake on
B3s will go up to £2, with a further possibility of machine entitlements going
back up to 10-12 per site (which may be implemented through a ‘percentage of
floor space’ or ‘in proportion to bingo seats’ entitlement).
B3s will go up to £2, with a further possibility of machine entitlements going
back up to 10-12 per site (which may be implemented through a ‘percentage of
floor space’ or ‘in proportion to bingo seats’ entitlement).
NH:
This would be a
variation on an amendment recently tabled by the Conservative shadow DCMS. The
content of the statement is too uncertain to try and estimate how material this
could be for Rank, but it will undoubtedly prove a major positive. AGM
statement due next Wednesday from Rank likely to show further evidence of
turnaround.
variation on an amendment recently tabled by the Conservative shadow DCMS. The
content of the statement is too uncertain to try and estimate how material this
could be for Rank, but it will undoubtedly prove a major positive. AGM
statement due next Wednesday from Rank likely to show further evidence of
turnaround.
NH:
and here’s note from Evolution Securities
NH:
Parliamentary debate confirms that Government considering help for bingo industry
EVO TAKE – We believe that the Government plans changes which would meaningfully help bingo. To give this some context, a 5% increase in UK bingo revenue this year would result in a 12% increase in our Rank EPS forecast.
DETAILS – Yesterday the Minister for Sport, Gerry Sutcliffe, said to the Bingo Association AGM that he expected to announce help for the bingo industry within the next few weeks. Protocol requires that this be first announced in Parliament and so we got no guidance on what form the help might take. We believe the Government has previously decided to allow bingo 20% of its gaming machines to be “B3”. Some variations being discussed by the industry included a number of machines based on the area of a club.
NH:
VALUATION AND RECOMMENDATION – In our recent note (South Pole Reached – be Amundsen, not Scott – 8 April 2008), we formulate a worst case, we estimate Rank’s financial performance at its worst (the 17 weeks post 1 September 2007) annualise it and add the £15 million cost savings . If we valued the resulting £19 million of annual earnings on 12x and added £60 million for the “cold” casino licences, Rank’s share price would be 73p which we take as floor level. Valued on 12x prospective 2009 earnings (to factor in growth and take-over prospects), the share price would be 150p. We continue to rate the shares Buy with a 150p target price.
Ivor Jones +44 (0) 20 7071 4380 ivor.jones@evosecurities.com
Ivor Jones +44 (0) 20 7071 4380 ivor.jones@evosecurities.com
PM:
Thanks for that.
PM:
Im rather touched by the news that Monkey is a bingo fan
NH:
i reckon he plays on line
PM:
Nah, more fun in the flesh
PM:
Clarence Pier, Southsea. Win a beer mug
PM:
NH:
How’s the Webby vote coming along?
PM:
Oh, its closed.
NH:
I thought you said it was today.
PM:
Closed at midnight last night – and now we can’t see how we were fairing in terms of share of the vote.
NH:
This is the Webbys – Internet equivalent of an Academy Award
PM:
Or a Pulitzer Prize.
NH:
Or a certain pay rise.
PM:
We’ve been nominated in the Best Business blog category. And many of you have been kind enough to vote for us.
PM:
But the voting is now over and we must wait for new on how we’ve done – due next week.
PM:
I am very nervous now.
NH:
Why?
PM:
Well I tried to look at the Webby site last night – and the server seemed to be constantly busy.
PM:
And my kids said: “You idiot, Dad. It will be like the X-Factor. Everyone leaves it to the last
NH:
So you think we will have been overwhelmed at the last moment? Mugabe style election rigging??
PM:
Hmm. I also think we missed a trick
NH:
What’s that?
PM:
We should have got Jeremy Warner on board from the Independent.
NH:
Of course, he’s the master of click fraud. We saw evidence of his dirty work back in the autmn when we were running Click or Clunk here – voting on City Editors a the local papers here.
PM:
Yes, should have got Warner onboard. Then we’d have the Webby in the bag – and free to plan out trip to the Big Apple.
PM:
Thank you FX, Baz etc
PM:
We WILL have a party if we get a gong
PM:
NH:
can we just take a quick look at the housebuilders
PM:
sure
NH:
sector getting beaten up again this morning
NH:
and here’s why
NH:
a really interesting note out of Dresdner this morning
NH:
they have got hold of some confidential industry data
PM:
Do share
NH:
prices are sliing, land values are down at least 40%
PM:
Yikes
NH:
here it is
NH:
Housebuilders’ sales reservations have collapsed by almost two-thirds y/y
during the critical Spring selling season, according to confidential industry
figures we have seen, prices are sliding, land values are down at least 40%
and company announcements have highlighted the perilous state of the
market. The question for us is not will there be land writedowns, but who
will be first and how large.
during the critical Spring selling season, according to confidential industry
figures we have seen, prices are sliding, land values are down at least 40%
and company announcements have highlighted the perilous state of the
market. The question for us is not will there be land writedowns, but who
will be first and how large.
NH:
The Home Builders Federation’s weekly survey of net reservations has been
running at 60 – 65% down y/y for at least the past two weeks – usually the
culmination of the Spring selling season. Net reservations are number of buyers
agreeing to buy (usually requiring a modest deposit) less cancellations
It is the cancellations rate due to lack of mortgage availabilty that is the real
killer, according to one of several housebuilders that volunteered the information
to us.
running at 60 – 65% down y/y for at least the past two weeks – usually the
culmination of the Spring selling season. Net reservations are number of buyers
agreeing to buy (usually requiring a modest deposit) less cancellations
It is the cancellations rate due to lack of mortgage availabilty that is the real
killer, according to one of several housebuilders that volunteered the information
to us.
NH:
The weekly internal survey is closely guarded but various industry sources
have approached us with the figures unsolicited .
However, in our view, actual completed sales could be down even more since
we believe that the cancellation rate is rising faster as lenders pull back from
new build flats in particular, strangling demand from the marginal first time
buyers and investors.
have approached us with the figures unsolicited .
However, in our view, actual completed sales could be down even more since
we believe that the cancellation rate is rising faster as lenders pull back from
new build flats in particular, strangling demand from the marginal first time
buyers and investors.
NH:
We have also heard of three well known industry figures privately comparing the
current crash not with the early 1990s but saying “it’s as bad as 1974″ – probably
the worst year for the housing market since the War.
current crash not with the early 1990s but saying “it’s as bad as 1974″ – probably
the worst year for the housing market since the War.
NH:
The Nationwide said that house prices fell for the sixth consecutive month in
April and are now 1% lower than a year earlier. We believe outlook for
housebuilders will be worse, since they are by definition more “forced sellers”
than secondhand. 10 – 20% falls are not out of the question we believe.
April and are now 1% lower than a year earlier. We believe outlook for
housebuilders will be worse, since they are by definition more “forced sellers”
than secondhand. 10 – 20% falls are not out of the question we believe.
NH:
Virtually all land buying has stopped and the latest attempted land sale we have been told of was a South Eastern
site which was withdrawn when the only tentative interest was at a 40% discount to the double-digit price paid for
in early 2007. Housebuilders cannot accurately price land since they cannot predict house prices or rising material
and regulatory costs. Planning applications have fallen by over 40%.
Virtually all land buying has stopped and the latest attempted land sale we have been told of was a South Eastern
site which was withdrawn when the only tentative interest was at a 40% discount to the double-digit price paid for
in early 2007. Housebuilders cannot accurately price land since they cannot predict house prices or rising material
and regulatory costs. Planning applications have fallen by over 40%.
NH:
Corporate news has been increasingly negative in tone. Persimmon’s AGM statement was markedly more
downbeat than its outlook at the February results. AIM-listed Wren yesterday reported turnover of just £84,000
after failing to sell a single home in last six months. And in, for us, the most symbolic development so far, Inside
downbeat than its outlook at the February results. AIM-listed Wren yesterday reported turnover of just £84,000
after failing to sell a single home in last six months. And in, for us, the most symbolic development so far, Inside
Track, the “buy to let seminars” specialist went into administration. We visited one of these seminars in late 2005,
prompting our deep concern about a huge range of issues surrounding potentially sharp practices in the wider
industry for off-plan new build flats.
NH:
Next newsflow is Bovis’s AGM statement on 9 May, which we believe will not be much more downbeat than its
view at the results, and Barratt’s IMS on 14 May, which we believe will be considerably more negative than at its
interims.
PM:
That really is bearish
PM:
Prices?
Persimmon (PSN:LSE): Last: 561.50, down 18 (-3.11%), High: 584.50, Low: 558.00, Volume: 2.32m
Barratt Developments (BDEV:LSE): Last: 262.50, down 13.75 (-4.98%), High: 280.00, Low: 257.50, Volume: 2.43m
NH:
Taylor Wimpey down 4.5p at 124.5p
PM:
Price ticker is on the blink a bit
PM:
Trust us — the sector has been drilled
PM:
Noteworthy that the bearish stuff in the Bank of England’s FSR this morning was all on the property side
PM:
here’s some stuff from Alex Potter at Collins Stewart
PM:
Moving the debate past write-downs still show big risks
The FSR is a twice-yearly publication and is normally the sort of esoteric event that really excites banks analysts. This one is no different but is also now headline news and it attempts to move the debate (rightly) past write-downs etc towards more normal earnings streams in 2009 and beyond. It identifies key macro risks now as being i) commercial property, ii) leveraged non-financials, iii) highly-indebted households and buy-to-let, and iv) CEE emerging markets with major current account deficits
■ Four swift hits to HBoS; B&B and other domestics also impacted
HBoS, RBS and LLOY all have 8-10% of their loan books in commercial property and have been growing this at strong double-digit rates. HBoS also has a sizeable private equity-style business (leveraged finance), as do RBS and Barclays. On highly-indebted households, HBoS and Lloyds TSB have c.60% of their loan books in UK mortgages and unsecured (HBoS having done more lending later in the cycle), with A&L too. Buy-to-let remains untested in a housing downturn but our fears persist nonetheless – this points to HBoS and B&B. In short, the UK domestic banking sector has a pretty weak revenue and profit outlook into 2009, in our view.
■ BoE does indicate improving capital markets… and liquidity
The Bank believes that credit asset prices have lost touch with reality in many areas (it cites the ABX as implying 76% of US sub-prime households default with a 50% hit in the event of default – the current default rate is just 17.3%). As such, it feels the outlook for write-downs to be improving but notes that UK banks, as group, still have exposures of 1.7% of assets (totalling £192bn). The Bank feels that the improvement in the link between such markets and fundamentals in April should preface slowly-improving liquidity and more normal capital markets.
The FSR is a twice-yearly publication and is normally the sort of esoteric event that really excites banks analysts. This one is no different but is also now headline news and it attempts to move the debate (rightly) past write-downs etc towards more normal earnings streams in 2009 and beyond. It identifies key macro risks now as being i) commercial property, ii) leveraged non-financials, iii) highly-indebted households and buy-to-let, and iv) CEE emerging markets with major current account deficits
■ Four swift hits to HBoS; B&B and other domestics also impacted
HBoS, RBS and LLOY all have 8-10% of their loan books in commercial property and have been growing this at strong double-digit rates. HBoS also has a sizeable private equity-style business (leveraged finance), as do RBS and Barclays. On highly-indebted households, HBoS and Lloyds TSB have c.60% of their loan books in UK mortgages and unsecured (HBoS having done more lending later in the cycle), with A&L too. Buy-to-let remains untested in a housing downturn but our fears persist nonetheless – this points to HBoS and B&B. In short, the UK domestic banking sector has a pretty weak revenue and profit outlook into 2009, in our view.
■ BoE does indicate improving capital markets… and liquidity
The Bank believes that credit asset prices have lost touch with reality in many areas (it cites the ABX as implying 76% of US sub-prime households default with a 50% hit in the event of default – the current default rate is just 17.3%). As such, it feels the outlook for write-downs to be improving but notes that UK banks, as group, still have exposures of 1.7% of assets (totalling £192bn). The Bank feels that the improvement in the link between such markets and fundamentals in April should preface slowly-improving liquidity and more normal capital markets.
PM:
redit crunch nearing completion… but now a recession
This implies that write-downs should be more limited now (and raises the prospect of write-backs) but these have generally been seen as “book value” rather than “long-term valuation” events. The Bank continues to believe that gradual deleveraging needs to occur (in the UK and US, we feel) and this is weak outlook for UK domestic bank earnings. We are cautious in this area.
■ Prefer HSBC and StanChart… short-term switch to RBS though
The obvious preferences from here are for banks that offer greater levels of non-UK earnings (HSBC, StanChart) with an aside that the positive earnings benefits of the ABN acquisition are likely to mean RBS’s earnings stream. With HSBC Finance results due on 12-May, near-term profit-taking in HSBC ahead of writing cheques to RBS seems likely. Long-term, we remain buyers but in the short-run we would switch from HSBC to RBS.
This implies that write-downs should be more limited now (and raises the prospect of write-backs) but these have generally been seen as “book value” rather than “long-term valuation” events. The Bank continues to believe that gradual deleveraging needs to occur (in the UK and US, we feel) and this is weak outlook for UK domestic bank earnings. We are cautious in this area.
■ Prefer HSBC and StanChart… short-term switch to RBS though
The obvious preferences from here are for banks that offer greater levels of non-UK earnings (HSBC, StanChart) with an aside that the positive earnings benefits of the ABN acquisition are likely to mean RBS’s earnings stream. With HSBC Finance results due on 12-May, near-term profit-taking in HSBC ahead of writing cheques to RBS seems likely. Long-term, we remain buyers but in the short-run we would switch from HSBC to RBS.
PM:
Someone mentioned the link for the FSR below earlier
PM:
Spent much of the morning buried in the BoE’s website
PM:
Too much to read. Info overload.
PM:
Although the do do a nice line in charts.
NH:
Lovely charts – but can’t reproduce charts with this live instant messaging stream.
PM:
Here’s the main index for anyone who hasn’t seen the stuff.
PM:
One little thing that caught my eye was that the Bank has chosen to draw fresh attention to the memo of understanding
PM:
NH:
no more on the BDEV rights issue rumour, but I reckon there is a 50/50 chance they will go for one. balance sheet is very stretched.
NH:
like RBS with ABN, BDEV made a pricey acquisition right at the top of the market
NH:
referring to Wilson Bowden
NH:
which was sold by the controlling family
NH:
clearly they knew when it was time to sell
PM:
NH:
hedgehog, we think Kingifisher is being hit by a Goldman downgrade
PM:
Conviction sell apparently
PM:
Kingfisher also putting on ratings watch by S&P yesterday
PM:
Might lose its investment grade status
PM:
Which would be careless
NH:
Source of opportunity
In our view, Kingfisher’s premium to the other UK retailers on a multiples basis is unwarranted – we believe
that UK DIY spending is unlikely to recover (as evidenced by comments from Home Retail Group that trading
at Homebase has begun the year weaker than expected) and that French DIY spending is coming under
significant pressure. Kingfisher’s decision to avoid any significant disposals concerns us, given the group’s
highly levered balance sheet. Finally, although we expect a positive currency impact, we believe consensus
estimates remain too high. Thus, we downgrade Kingfisher from Neutral to Sell.
In our view, Kingfisher’s premium to the other UK retailers on a multiples basis is unwarranted – we believe
that UK DIY spending is unlikely to recover (as evidenced by comments from Home Retail Group that trading
at Homebase has begun the year weaker than expected) and that French DIY spending is coming under
significant pressure. Kingfisher’s decision to avoid any significant disposals concerns us, given the group’s
highly levered balance sheet. Finally, although we expect a positive currency impact, we believe consensus
estimates remain too high. Thus, we downgrade Kingfisher from Neutral to Sell.
NH:
Catalyst
We expect Kingfisher’s 1Q trading update on June 4 to be a key catalyst. We expect LFL sales in the three
main businesses (UK B&Q, Brico and Castorama) to have slowed materially since the group’s fiscal year end
in January. Another potential catalyst is the release of Banque de France data, scheduled for May 16. We
believe that this will demonstrate a continued slowdown of French DIY sales, in value terms.
We expect Kingfisher’s 1Q trading update on June 4 to be a key catalyst. We expect LFL sales in the three
main businesses (UK B&Q, Brico and Castorama) to have slowed materially since the group’s fiscal year end
in January. Another potential catalyst is the release of Banque de France data, scheduled for May 16. We
believe that this will demonstrate a continued slowdown of French DIY sales, in value terms.
NH:
Valuation
Although our 09E EPS forecast increases to 9.95p from 9.51p (due to a positive currency impact) our 12-
European Morning Summary May 1, 2008
Goldman Sachs Global Investment Research
month price target (now based on our Director’s Cut methodology, previously Director’s Cut and SOTP) falls
to 110p from 137p. Kingfisher currently trades on a FY09E P/E of 13.2x vs. UK retail on 10.0x and on a
FY09E EV/EBITDA of 7.6x vs. UK retail on 6.0x. While Kingfisher continues to trade at or near its historical
P/E, EV/EBITDA and EV/sales trough levels, declines in its EBIT margins and returns over past years
indicate that its underlying performance has deteriorated.
Key risks
Upside risks to our price target include significant asset disposals, short covering and/or a recovery in B&Q
margins due to a new pricing strategy.
Although our 09E EPS forecast increases to 9.95p from 9.51p (due to a positive currency impact) our 12-
European Morning Summary May 1, 2008
Goldman Sachs Global Investment Research
month price target (now based on our Director’s Cut methodology, previously Director’s Cut and SOTP) falls
to 110p from 137p. Kingfisher currently trades on a FY09E P/E of 13.2x vs. UK retail on 10.0x and on a
FY09E EV/EBITDA of 7.6x vs. UK retail on 6.0x. While Kingfisher continues to trade at or near its historical
P/E, EV/EBITDA and EV/sales trough levels, declines in its EBIT margins and returns over past years
indicate that its underlying performance has deteriorated.
Key risks
Upside risks to our price target include significant asset disposals, short covering and/or a recovery in B&Q
margins due to a new pricing strategy.
PM:
thanks for that
PM:
PM:
Wider market?
NH:
another action packed session
NH:
following Monday’s 1 point decline, Tuesday’s 1 point decline
NH:
and yesterday single digit loss
NH:
up 8.1 points at 6,095
NH:
interesting that it has been very volatile intra-day this week but the index closing little changed
NH:
given the big run up in April – best April since 2003- one might have expected a little profit taking
NH:
but no
NH:
nobody seems to have a clue what to do
NH:
NH:
breaking news
PM:
Smith & Nephew have problems
PM:
Uncovered certain unacceptable sales practices
PM:
This is at a business called Plus that it bought not too long ago
PM:
taking decisive action etc
PM:
100m dollar hit to sales
PM:
In the meantime investors taking decisive action of their own
NH:
just scanning the statement
PM:
Shares are down almost 6% currently
PM:
Off 37.5p at 618
NH:
and it looks like S&N have issued a profits warning for the year aheed
PM:
dropped below six quid momentarily
NH:
based on the problems at Plus and the changes they are going to make
NH:
Outlook
Global market conditions continue to be favourable driven by underlying
demographic trends which are creating strong demand for our products.
The outlook for the year has been impacted by the changes we are making to
harmonise the Plus sales practices with Smith & Nephew policies.
NH:
e have undertaken a thorough investigation of these practices which has made
significant progress, but is not yet fully complete. We currently expect
revenues, in a full twelve month period, to be reduced by about $100 million.
Much of the reduction in sales relationships has been experienced in quarter one
and we expect some further reductions over the next two quarters, therefore we
expect the reduction in 2008 to be close to the twelve month level.
significant progress, but is not yet fully complete. We currently expect
revenues, in a full twelve month period, to be reduced by about $100 million.
Much of the reduction in sales relationships has been experienced in quarter one
and we expect some further reductions over the next two quarters, therefore we
expect the reduction in 2008 to be close to the twelve month level.
NH:
We expect
about 70% of the reduction in revenues to be in the Reconstruction business, and
about 30% in Trauma. A large part of this issue relates to Greece where
pro-forma 2007 revenues were $60 million. We do not expect to recover these
lost revenues, but we see no ongoing impact on the continuing robust growth of
the business, including the Plus revenues unaffected by the changed sales
practices.
about 70% of the reduction in revenues to be in the Reconstruction business, and
about 30% in Trauma. A large part of this issue relates to Greece where
pro-forma 2007 revenues were $60 million. We do not expect to recover these
lost revenues, but we see no ongoing impact on the continuing robust growth of
the business, including the Plus revenues unaffected by the changed sales
practices.
PM:
it’s a profits warning
NH:
We expect the lost profit from the reduced sales to be at the Group net margin
once we have worked through the changes. In the short-term we expect to see a
somewhat higher impact on profit as it takes time to adjust the cost base, and
as we are bearing some additional costs associated with the investigation.
once we have worked through the changes. In the short-term we expect to see a
somewhat higher impact on profit as it takes time to adjust the cost base, and
as we are bearing some additional costs associated with the investigation.
We expect that our Reconstruction business in the US will continue to grow at
above market rates. We believe that the actions that we are taking in our
Trauma business will lead to revenue growth returning to the market growth rate
by the end of the year. In Clinical Therapies we continue to expect to be
impacted by the declining market growth in the US.
NH:
n Endoscopy we continue to expect to grow slightly behind the market in 2008,
with visualisation revenues continuing to be volatile. Advanced Wound
Management, excluding NPWT, is expected to grow close to the market rate for the
full year. We are pleased with the NPWT launch and expect sales to grow
materially through 2008 and beyond.
with visualisation revenues continuing to be volatile. Advanced Wound
Management, excluding NPWT, is expected to grow close to the market rate for the
full year. We are pleased with the NPWT launch and expect sales to grow
materially through 2008 and beyond.
Except for the temporary impact of the harmonisation of sales practices in
Europe, our Earnings Improvement Programme continues to be firmly on track.
Although this has been a challenging quarter in parts of our business in Europe,
we have taken firm action and we are confident that the overall business is in a
strong position for continued strong sustainable profitable growth.
NH:
the division in question is
NH:
Plus Orthopedics Holding
NH:
private Swiss orthopaedic company
NH:
acquired last year
NH:
for a total of CHF* 1086 million
($889 million) in cash, including assumed deb
($889 million) in cash, including assumed deb
NH:
here’s what they said at the time
NH:
The acquisition of Plus has compelling strategic logic;
NH:
* this increases Smith & Nephew’s share of the global orthopaedic
reconstruction market to around 12%, taking Smith & Nephew to global number 4
reconstruction market to around 12%, taking Smith & Nephew to global number 4
* doubles Smith & Nephew’s share of the European orthopaedic
reconstruction market
* brings a highly complementary product range
NH:
is highly synergistic, bringing good opportunities to leverage the
combined sales force in Europe and Asia and cost opportunities from increased
manufacturing leverage and capacity utilisation as well as better use of the
combined marketing and sales infrastructure
combined sales force in Europe and Asia and cost opportunities from increased
manufacturing leverage and capacity utilisation as well as better use of the
combined marketing and sales infrastructure
* is expected to be broadly EPSA** neutral in 2007 and accretive in 2008
and beyond, and to exceed the Group’s cost of capital in the third full year
following acquisition
NH:
Sir Christopher O’Donnell, Chief Executive Officer of Smith & Nephew plc,
commenting on the acquisition said “We are delighted to bring on board this
leading European orthopaedics business which we have been following for a number
of years. The acquisition of Plus marks a step change in our European presence
and strengthens our portfolio of products. Our orthopaedics reconstruction
business will have increased scale and scope as a result. We welcome Plus’s
employees to Smith & Nephew and we look forward to building on their
capabilities, especially in Europe and Asia.”
commenting on the acquisition said “We are delighted to bring on board this
leading European orthopaedics business which we have been following for a number
of years. The acquisition of Plus marks a step change in our European presence
and strengthens our portfolio of products. Our orthopaedics reconstruction
business will have increased scale and scope as a result. We welcome Plus’s
employees to Smith & Nephew and we look forward to building on their
capabilities, especially in Europe and Asia.”
PM:
Does hip and knee implants — so if we are talking about questionable sales tactics it sounds rather alarming
NH:
it does
NH:
what have they been doing??
PM:
“We’ll just take your knee cap out…”
PM:
NH:
Maxmimus, just had an interesting note arrive from Citi on market volatility
NH:
April European Volatility Update
NH:
Conclusions
Buy index vol and skew – The striking conclusion from this analysis of skews, term structures, market performance and correlation is that index volatility is low and skew is flat both in terms of historic comparisons and versus what we believe the fundamental situation warrants. We believe that the market is now approaching a dangerous level of complacency and that these positions will prove profitable on any negative surprise from the upcoming macroeconomic data.
Buy index vol and skew – The striking conclusion from this analysis of skews, term structures, market performance and correlation is that index volatility is low and skew is flat both in terms of historic comparisons and versus what we believe the fundamental situation warrants. We believe that the market is now approaching a dangerous level of complacency and that these positions will prove profitable on any negative surprise from the upcoming macroeconomic data.
NH:
Index movements
Risk appetite returns – Markets globally are much higher after April. All are up 5% or more with the NKY up 10% in the month!
Stable at previous ‘pause’ level – Interestingly, these moves have totally erased the most recent leg down and taken all market back to Jan/Feb levels. Only the IBEX has managed to push higher than this previous pause level.
Risk appetite returns – Markets globally are much higher after April. All are up 5% or more with the NKY up 10% in the month!
Stable at previous ‘pause’ level – Interestingly, these moves have totally erased the most recent leg down and taken all market back to Jan/Feb levels. Only the IBEX has managed to push higher than this previous pause level.
NH:
mplied vol crushed – For the major indices, implied vol fell sharply, down 3% or more, and even more when including the skew impact in a rallying market. ATM vols were down 5-6% as a combined result. No index was more or less impacted by the broad-reaching decline in risk pricing.
NH:
erm structures normal finally – For the first time in many months, term structures are now typically upward sloping – and with moderate steepness. The exception is Japan where a normal term structure is very rare due to structured products issuance supplying vega for long maturities. Even there, term structure is less steep than a month ago and shows signs of further flattening.
NH:
kews sharply lower also – The 25-delta skew for the FTSE, STOXX50E and SPX were all sharply lower during April. In fact skews have now decreased to levels last seen before the August downturn. These represent VERY attractive levels in our view given a continuing likelihood that the financial problems will increasingly become economic problems for western countries.
NH:
Longer-dated skews – As we expected, longer-dated skews have fallen sharply also as a result of structured products issuance returning. The sale of knock-in puts continues to be a supply/demand imbalance in longer-dated skew and we expect this skew to continue to flatten back toward the lows of early last year where they represent very good fundamental value as the global downturn worsens.
NH:
Stock vols
NH:
tock vol crash – Rarely before have we seen vols on single stocks fall so sharply in a month with our Top 20 list starting at -8% and running to a maximum vol decrease of 22.6% for Umicore. Almost all of the top moves are financials and insurance stocks and combined with the rally back the skew-UNadjusted (ATM vols) moves are even more significant.
Mostly catch up, not an opportunity – We see most of this sharp decline as a catch up to the index vols that have been coming off sharply for some time. At currently levels the interplay between stock and index vols implies about 50-55% correlation which is realistic but usually priced much higher. For this reason we prefer index vol exposure at these levels.
Mostly catch up, not an opportunity – We see most of this sharp decline as a catch up to the index vols that have been coming off sharply for some time. At currently levels the interplay between stock and index vols implies about 50-55% correlation which is realistic but usually priced much higher. For this reason we prefer index vol exposure at these levels.
NH:
PM:
TheWord has news below on Clive Cowdry
PM:
New acquisition vehicle
PM:
Confusingly — apparently — he is going to call his new business…
PM:
Resolution
PM:
The last one having been resolve i guess
PM:
This is from CityWire
PM:
Clive Cowdery has set out his plans to build a new business under the Resolution banner.
Although the existing Resolution businesses have been sold to Hugh Osmond’s Pearl Group Cowdery has retained the brand and is to launch a new ambitious investment programme.
Cowdery said that the new Resolution would accelerate the ‘inevitable restructuring of financial services’. The remarks were made after the FSA finally approved the existing firm’s takeover by Pearl.
Cowdery, who founded Resolution ,walks away from the deal with over £100 million and the Resolution brand after Pearl agreed a 720p all cash offer.
Resolution shares were suspended from dealing on the London Stock Exchange earlier this week.
Cowdery said stake building will be key to his new strategy. He said he will partner with partner with public companies to co-invest for specific M&A and growth opportunities, own and restructure financial services groups, and lead the consolidation and roll up of attractive financial asset classes.
Cowdery said: ‘Resolution will accelerate the inevitable restructuring of financial services in the coming years in a way that bridges the gap between public and private equity. This approach enables Boards and shareholders to manage actively value release.’
PM:
PM:
let’s take a look at the leaderboard
PM:
British Airways flying high this morning
NH:
rubbish pun
NH:
stock up 8.75p at 235p
NH:
and the follows yesterday’s late news of “co-operation” talks with American Airlines and Continental
PM:
Hmm
PM:
does this mean a merger is on the cards
NH:
probably not
NH:
that would be pushing it
NH:
but what is clear is that now Heathrow has been fully opened up to competition under Open Skies
NH:
BA is looking at ways to protect its position
NH:
so what I reckon is happening
NH:
is that BA and its friends will seek antitrust immunity for a full joint venture or code-sharing agreement
NH:
in time that could lead to a merger
NH:
and one has to think that such a JV has a chance of success
NH:
the high oil price is killing the industry, regulators know that so might be prepared to look more kindly on these sort of ties ups
NH:
and the US DOT backed the JV between Air France-KLM, Delta
and Northwest on the North Atlantic
and Northwest on the North Atlantic
NH:
all of this is likely to take time
NH:
but the pieces are starting to move
NH:
here’s some quick analyst comment
NH:
this is from Collins Stewart
NH:
by Andrew Fitchie
NH:
BA, American and Continental in talks
BA has released a brief statement confirming it is in talks with American and Continental. According to BA there is nothing more to say at this stage. Under Stock Exchange rules, following speculation in the US about a host of possible merger scenarios, they were bound to advise the market that discussions were underway. However, at this stage, it’s largely ‘talks about talks’.
BA has released a brief statement confirming it is in talks with American and Continental. According to BA there is nothing more to say at this stage. Under Stock Exchange rules, following speculation in the US about a host of possible merger scenarios, they were bound to advise the market that discussions were underway. However, at this stage, it’s largely ‘talks about talks’.
NH:
Any deal likely be delayed by regulatory and competition concerns
It’s clearly too soon, with the situation too preliminary, to assess any sensible valuation impact of the announcement; it is entirely possible that the discussions will be fruitless. History tells you that even if talks were to progress beyond the current stage, the regulatory negotiations would be protracted and there would be an immense amount of noise generated by competitors and unions in an attempt to scupper any deal.
It’s clearly too soon, with the situation too preliminary, to assess any sensible valuation impact of the announcement; it is entirely possible that the discussions will be fruitless. History tells you that even if talks were to progress beyond the current stage, the regulatory negotiations would be protracted and there would be an immense amount of noise generated by competitors and unions in an attempt to scupper any deal.
NH:
Antitrust Immunity deal could be worth 20p – 40p a share
Willie Walsh’s comment at Investor Day about the 2001 16 slot-pair price being too high perhaps gives you a scaling of the value of a BA/AA Antitrust Immunity deal, ie roughly 20p-40p a share. Clearly the inclusion of Continental and/or a deeper merger could yield greater value.
Willie Walsh’s comment at Investor Day about the 2001 16 slot-pair price being too high perhaps gives you a scaling of the value of a BA/AA Antitrust Immunity deal, ie roughly 20p-40p a share. Clearly the inclusion of Continental and/or a deeper merger could yield greater value.
NH:
Could lead to talks amongst European majors
Consolidation moves in the US could precipitate a scramble for talks amongst the European majors; we believe BA’s position at Heathrow will make it a sought after partner and provide leverage in any situation.
Consolidation moves in the US could precipitate a scramble for talks amongst the European majors; we believe BA’s position at Heathrow will make it a sought after partner and provide leverage in any situation.
NH:
Unique strategic value keeps BA a BUY
BA shares have suffered as the market has factored in a weakening macro economic environment and high fuel prices. Notwithstanding these short-term pressures, we have maintained our positive stance on BA due to its unique strategic value; moves towards industry consolidation will see this value crystallised. Our 370p price target and BUY recommendation reflect this.
BA shares have suffered as the market has factored in a weakening macro economic environment and high fuel prices. Notwithstanding these short-term pressures, we have maintained our positive stance on BA due to its unique strategic value; moves towards industry consolidation will see this value crystallised. Our 370p price target and BUY recommendation reflect this.
NH:
and here are the thoughts of the mighty Goldman Sachs
NH:
Analysis
While this seems like “talks about talks” at the moment, the distress in the US industry exacerbated by the high oil price is making regulators soften their stance on consolidation, which is seen as at least a partial solution.
While this seems like “talks about talks” at the moment, the distress in the US industry exacerbated by the high oil price is making regulators soften their stance on consolidation, which is seen as at least a partial solution.
With Open Skies now in operation on the North Atlantic, the landscape has changed and Heathrow is fully open to competition. US carriers including Continental have been able to buy or lease slots.
NH:
Market definition is key for any proposed JV (e.g. will it be defined as Heathrow to the US, London to the US, or UK to US?). Any application for antitrust immunity for any combination (full JV or code-share) will take time
and Heathrow, despite Open Skies, remains a politically charged topic. If BA, American and Continental apply for antitrust immunity then we would expect other US and UK airlines to object, but with Skyteam
already having a favourable opinion for their JV it is debatable how strong their objections would be while the
Star Alliance could also apply for a similar JV to the Skyteam one.
and Heathrow, despite Open Skies, remains a politically charged topic. If BA, American and Continental apply for antitrust immunity then we would expect other US and UK airlines to object, but with Skyteam
already having a favourable opinion for their JV it is debatable how strong their objections would be while the
Star Alliance could also apply for a similar JV to the Skyteam one.
NH:
Until a full application is made, it is too early to start pricing in significant benefits to BA, and our price target is therefore unchanged. There is likely to be opposition to any proposed code-share or JV and the approval process would take time.
There could be required slot give-ups as a price for approving a deal. All of this
makes quantifying upside difficult but we believe BA is losing nothing by entering into these talks at a time when the industry is under huge pressure.
PM:
thanks for that
NH:
u are welcome
PM:
No — i was talking to the readers below
PM:
PM:
Ok — pack it in
PM:
When we were testing Alphaville before launch we were able to beat the profanity filter in the space of 5 minutes
PM:
But that is not an invitation to you to try
PM:
We will get unplugged
PM:
The editor gets particuarly exercised about use of swearing in the paper
PM:
PM:
PM:
No libor numbers out as yet
PM:
Note that ICAP are planning their own breakaway US number
PM:
In the WSJ this morning
PM:
PM:
any update on Anheuser Busch
NH:
yep
NH:
stock was lively again last night
NH:
closed at $49.20
NH:
which was a touch down on the day
PM:
so what’s the latest thinking??
NH:
well as far as this rumours about interest from Inbev goes
NH:
we think the following
NH:
inbev would love to get their hands on BUD
NH:
but apparently the Busch board does not want to sell
NH:
and they are in control
NH:
and as far as we know at the moment the Inbev board does not have the stomach to launch a huge cross-boarder hostile bid
PM:
OK
NH:
but at some point in the future there may be a deal or a move
NH:
Now, there is a also a rumour flying around that SABMiller will try to sell off Miller to MolsonCoors and then buy Anheuser.
NH:
of course SAB has already folded its US assets into a jv with Coors
NH:
but again this seems slightly ambitious
NH:
so the bottom line is
NH:
a deal looks unlikely in the near term, but it cannot be ruled out
NH:
because Inbev does want Bud
PM:
Hmm. Thanks for that. V interesting
PM:
PM:
and is there any update on the BG bid for Origin Energy down under
NH:
closed at AUD$14 last night
NH:
against BG’s offer price of $14.70
PM:
so no signs of a counter bid yet, judging by the price
NH:
nope but there are mutterings in the market
PM:
Really?
NH:
yep
NH:
if you ask me, it looks a knock out price and that’s why BG shares were so weak yesterday
NH:
fears of them overpaying
NH:
but
NH:
the word in the market is that ORG will probably get Macquarie, its adviers to scour the world for a competing bid
NH:
and Origin is bound to be of interest from other big oil companies
NH:
so someone like ConocoPhillips could join forces with a local company such as Santos – which operates in the same basins at ORG – and bid
NH:
and if they did they would be synergies
NH:
then they could find another party to take ORG’s retail business
NH:
someone like Babcock and Brown or TRUenergy
NH:
BG shares currently up 51p to £12.83
PM:
okay
PM:
PM:
Time for us to put on our tin hats
NH:
yes, not our finest hour
NH:
capital & regional
NH:
PM:
NH:
we highlighted bid rumours a while back
NH:
which seemed very real at the time
NH:
stock off 42p at 391p – a drop of 10% – this morning
PM:
Ouch 
NH:
JP Morgan are worried that RBS – CAL’s banker – might start to play hard ball
NH:
and in the worst case scenario might force the company to sell assets
NH:
into a falling market
PM:
Uh-oh
PM:
that does not sound good
NH:
it isn’t
NH:
and those of a nervous disposition should look away now
NH:
because here is the note from JP
PM:
Im getting behind the sofa
NH:
The recently announced capital raisings by RBS and HBOS have
caused us to review our high risk call on C&R. The Mall fund is key
to C&R, because of its contribution to NAV, which we estimate at
417p ps. However, we believe the 60% LTV covenant has become
an issue, as the announced £300m disposal has not yet transpired,
LTV has reached 57%, while RBS could play ‘hardball’ on a
breach. We are downgrading our April-09 probability based PT for
C&R from 675p to 465p (-31%) and its rating from OW to N. We
cite four reasons for our concerns:
caused us to review our high risk call on C&R. The Mall fund is key
to C&R, because of its contribution to NAV, which we estimate at
417p ps. However, we believe the 60% LTV covenant has become
an issue, as the announced £300m disposal has not yet transpired,
LTV has reached 57%, while RBS could play ‘hardball’ on a
breach. We are downgrading our April-09 probability based PT for
C&R from 675p to 465p (-31%) and its rating from OW to N. We
cite four reasons for our concerns:
NH:
• 1. Potential breach of 60% LTV. We estimate the 60% LTV limit
in the Acquisition/CapEx facility (manager RBS) and inter-company
loan related to The Mall may be breached if values drop by 5%,
potentially triggering an uncertain situation for C&R and forced sales
in a worst case. We calculate a max facility withdrawal of £257m.
in the Acquisition/CapEx facility (manager RBS) and inter-company
loan related to The Mall may be breached if values drop by 5%,
potentially triggering an uncertain situation for C&R and forced sales
in a worst case. We calculate a max facility withdrawal of £257m.
NH:
• 2. Increased credit tightening. C&R’s main lenders are RBS and
HBOS. Both banks have recently announced equity raisings totaling
£16bn and we believe will take a tougher stance on covenant
breaches going forward. Our UK Banks team estimates that RBS
alone needs £110bn of loan contraction to address its capital shortfall.
We have increased C&R’s WACC by 100bp.
HBOS. Both banks have recently announced equity raisings totaling
£16bn and we believe will take a tougher stance on covenant
breaches going forward. Our UK Banks team estimates that RBS
alone needs £110bn of loan contraction to address its capital shortfall.
We have increased C&R’s WACC by 100bp.
NH:
• 3. No news on £300m disposal. C&R announced at its FY results it
would soon sell, for £300m, shopping centres from The Mall fund.
This disposal has not been confirmed to date.
would soon sell, for £300m, shopping centres from The Mall fund.
This disposal has not been confirmed to date.
NH:
• 4. Forced sales in weak market. We believe that C&R may be
forced to dispose of properties to de-gear and comply with bank
covenants. This may result in unattractive prices and disposal of key
assets. In our view, The Mall and Junction fund need to have the
highest priority. We estimate -15% capital growth in 08.
forced to dispose of properties to de-gear and comply with bank
covenants. This may result in unattractive prices and disposal of key
assets. In our view, The Mall and Junction fund need to have the
highest priority. We estimate -15% capital growth in 08.
PM:
Think we ahve seen enough of that
PM:
NH:
On the subject of Boris for Mayor. His brother is the new head of Lex, for those of you who did not know.
PM:
Jo Johnson
NH:
not sure he is in the country at the moment though
PM:
Think he is still in India
PM:
Looks like we don’t have any fans of cuddly ken below
PM:
All rightwing scientists
NH:
NH:
Good comment from SFB
NH:
Can’t see Man Utd winning in Moscow
NH:
if I were them I’d fly in on the day of the match
NH:
certainly would not recommend an overnight stay before the match
NH:
could be like Spurs and the dodgy lasagne
NH:
as for Arsenal
NH:
not sure what to make of this news
NH:
perhaps it will be good news
NH:
but then again if the boardroom is divided again it could open the way for the Uzbek sea monster to take over
PM:
Cheers Neil
PM:
What have we kicked off below
PM:
We have to go now.
PM:
Neil has work to do. Ive “got a meeting”
NH:
see ya
PM:
Right closing down now — you can use the transcript if you want to continue the conversation!
PM: