Markets live chat transcript for the chat ending at 12:07 on 8 May 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hello – welcome to Markets Live
PM:
Well it was me actually
PM:
Just trying to sort out table at the Webbys
NH:
email not been working properly though
PM:
And I will publicly say thank you to Ien Cheng
NH:
it got a little bit too hot for our servers yesterday
PM:
he’s FT.com’s publisher, who has just escaped to Google
PM:
But before he goes he’s paying for our table in NY
NH:
so we won’t have to sit outside with a video link from the awards
PM:
Anyway — let’s get on
NH:
Vp, Minerva is moving this morning
NH:
shares up 12.2p at 113p
PM:
Thought property was dead
NH:
well, the bid could finally be in the building, so to speak
NH:
serious buying this morning
NH:
previously the bidder was said to have been LeFrac, a New York based real estate company
NH:
Volume good this morning, over a million shares traded already
NH:
rumoured price said to be 160p
PM:
interesting — though we have been burnt on this before
NH:
we have, but might just have been a tad early
NH:
often the way with these things – deals always take longer than one expects
NH:
Loads going on this morning
NH:
deals, joint ventures, a smattering of good results
NH:
and of course some RAW market info for your enjoyment
NH:
before we take a peak at Carphone
NH:
let’s have a look at Enodis
NH:
Illinois Tool Works have trumped the 260p bid from Manitowoc with an agreed offer of 280p
PM:
never knew deep fat fryers and ice makers were so valuable
NH:
the ITW bid is 100% above where Enodis were trading before the MTW approach
NH:
so much for efficient markets
PM:
any chance of a counter bid
NH:
well, the shares are 39.75p at 283.25p – a jump of 16%
NH:
so the market thinks there is a small chance
NH:
and I would go along with that
NH:
MTW needs to buy Enodis to better balance their business
NH:
basically they needs to get into the hot side of the food service business
NH:
but the question is can they afford it??
NH:
and I would say they will be pushed at this level
NH:
furthermore, MTW and their advisers must be kicking themselves that they did not raid the market for stock
NH:
I mean, they offered what was a huge premium at the time
NH:
they could have raided the market, picked up 20% and job done
PM:
assuming they had the financing in place
NH:
well, if they were making a cash bid one would think they did have
NH:
in fact I am continually surprised that bidders don’t raid the market for stock
NH:
would seem to be a belt and braces approach
NH:
and what’s the downside?
NH:
and worst, if you get outbid the gain on the stake should pay the investment bankers their fees
PM:
but the arbs are getting smart to this and they bid prices up so raids are unsuccessful
PM:
they want to keep the option of a counter bid open for obvious reasons
NH:
in fact, I was wondering why WPP did not raid the market for stock in Taylor Nelson Sofres
PM:
to recap, WPP has offered 230p a share for TNS
PM:
and that offer was in response to news of nil premium merger between GFK and TNS
NH:
yeah and it did make me laugh when WPP expressed outrage at not being given access to the TNS’s books
NH:
well, if you look at the small print of the offer
NH:
it may termed as a nil premium merger, but it will be transacted by way of acquisition of GFk by TNS
NH:
so TNS are not the company under offer
NH:
and therefore do not have to open a data room to any other bidders
PM:
interesting technical point
PM:
Sorrell wont like that
PM:
Actually — on Enodis — any analysts research?
NH:
got this from Merrill Lynch
NH:
ITW has reached an agreement to acquire Enodis for 280p per
share, paid in cash, plus 2p per share in lieu of the interim dividend. This is 8.5%
above the 260p per share recommended offer from Manitowoc.
On our estimates, the offer represents an annualised 2008 EV/EBITA of 14.2x
and P/E of 19.4x, a c.55% premium to the UK capital goods sector, and an
EV/sales of 1.3x, compared to average industry transaction multiples of 1.1x
sales.
The offer is similar to that of Manitowoc, in that it would be implemented by a
scheme of arrangement, and is conditional on obtaining anti-trust clearances no
later than 4 November. Completion date is given as 10 December, or 28 February
with the consent of the Panel.
NH:
ITW will pay a termination fee of $50m if it does not
agree to certain anti-trust remedies that may be required. Enodis must notify ITW
if it receives another approach and must pay £11m to ITW if management does
not vote in favour of the offer.
Enodis management has now withdrawn its recommendation of the Manitowoc
offer and will vote in favour of the ITW scheme.
We have a neutral recommendation on the shares.
NH:
and this is from arden partners
NH:
TW market cap $27bn, Manitowoc $5bn with Enodis. With the deal value over $2bn it is unclear whether Manitowoc will come back. Break fee would be £10.8m.
Exit PE of 20x highlights the value which companies with strong market positions have. We retain a neutral stance but do not expect Manitowoc to return and would switch out anywhere close to the 280p price.
NH:
got one more piece of info on the deal
NH:
brokers I am talking to
NH:
tell me that UBS – advisers to MTW – sounded investors out about a raid this morning
NH:
they decided against it
NH:
and if the prices falls, they may move to pick up stock
NH:
and most traders reckon MTW will walk
NH:
well, when they agreed the offer with Enodis
NH:
Enodis signed a non-solicitation claus
NH:
(i) it shall not directly or indirectly solicit, initiate, encourage or
otherwise seek to procure any initial or further approach to any other person
with a view to a Third Party Transaction taking place; and
(ii) it shall not directly or indirectly entertain any approach from, or
enter into or continue discussions and / or negotiations with any other person
with a view to a Third Party Transaction taking place other than to the extent
that the Enodis directors conclude, having taken appropriate legal and financial
advice, that compliance with the obligation or restriction in question would, or
would reasonably be likely to, constitute a breach of their fiduciary duties as
Enodis directors.
NH:
Furthermore, Enodis has agreed to notify Manitowoc of any approach that is made
to it with a view to its entering into negotiations of the type above and if it
receives any request for information from any third party pursuant to Rule 20.2
of the Code.
If Enodis receives any request for information pursuant to Rule 20.2 of the
Code, Enodis has agreed (i) not to supply any additional information to any
third party other than to a party that has made the Rule 20.2 request and (ii)
(other than information to which that party is entitled under Rule 20.2 of the
Code) only to the extent that such information is also provided to Manitowoc at
the same time.
NH:
so basically that says, if it receives another approach it has to tell MTW
NH:
and give them time to respond
NH:
so they knew this counter bid was coming
NH:
and as they have said nothing this morning, we can assume no counter offer is likely
PM:
Spooked at the outset no?
NH:
yeah but it has recovered somoewhat – now off 12 points at 6,249
PM:
Everyone spooked by Wall St, which in turn was spooked by this SEC guy.
PM:
Basically saying there is going to be a price to in the wake of Bear Stearns in terms of tougher supervision and capital controls.
PM:
I put some extracts from the speech up earlier.
PM:
Think this is the relevant takeaway – from Marc Ostwald at Monument:
PM:
A couple of quick observations:
a) this should really have not come as a surprise. It is well within the
parameters set out by many central bank and regulatory officials in recent
weeks (e.g. the recent speech by BoE’s Jenkinson on 24th April, see the
attached copy of our comment), and is again a reminder that the
‘laissez-faire’ approach of recent years is recognized as one of the key
components contributing to the credit bubble, along with the palpable
weaknesses of Basel I.
b) Eminently the sell-off was a timely (?) ‘reality check’ in the wake of
the recent rally in financials (equities and credit), with the scrappy
bidding at yesterday’s 10-yr Treasury and the overnight 10-yr JGB auctions
also a reminder that liquidity remains poor, and that banks still need to
improve solvency levels, i.e. raise capital, and as such their ability to
hold risk remains severely impaired.
NH:
but what about interest rates. isn’t the market on hold ahead of that?
NH:
we should have the usual competition
PM:
yeah — but everyone will be a winner “No change”
NH:
not sure about that, I reckon we could get a cheeky 25bps reduction
PM:
Oooh
PM:
Anyone else with Neil?
NH:
Right, a lot of people want to talk about Carphone Warehouse and this deal with Best Buy
PM:
you deserve a pat on the back for this one
PM:
you have been banging on for weeks about a demerger / jv l with BestBuy
PM:
And it has actually happened!
PM:
Not that im surprised or anything
NH:
as soon as Carphone moved to separate reporting lines for its two divisions
NH:
it was pretty clear something was happening
NH:
and the amount of noise around the stock, suggested that a deal was afoot
PM:
So what are the details? And what does the market think?
NH:
the market is a bit confused
NH:
it is not the straight forward demerger/bid they were hoping for
NH:
and they seemed to be worried about the earnings dilution next year
NH:
rather than looking further out about the benefits of a tie-up with Best Buy
PM:
OK, so what are the details??
NH:
Best Buy is going to pay £1.1bn for 50% of Carphone’s retail business
NH:
BB will then use this as platform to expand in Europe
NH:
so look out DSG International
NH:
the deal puts a valuation on the retail biz of £2.2bn
NH:
or 7 times 2008/09 EBITDA
NH:
which looks to be slightly above what most analysts thought the division was worth
NH:
Looks like Carphone will pocket £600m on the disposal, which it will use I suspect to be for the UK operations of Tiscali
NH:
first round bids were due in for Tiscali UK today
NH:
now if Carphone succeeds in buying this business it will make the biggest ISP provider in the country
PM:
So what does this deal mean for Carphone’s ISP business
NH:
well it puts EV on the business of £1.4bn
NH:
and to give you an idea Tiscali has the same EV but 20% fewer subscribers
PM:
so why have the shares not rallied?
NH:
well, a lot of hot, hot money piled into Carphone yesterday
NH:
nearly 30m shares were traded by the end of the day
NH:
and the price rose nearly 7%
NH:
I reckon the hot money is banking profits this morning
NH:
Once the process is complete and the analysts and investors have had time to digest the deal and listed to the spiel from Charles Dunstone
NH:
and remember there is still a huge short position in Carphone
NH:
30 per cent short interest in the free float
NH:
and you would not want to be standing in the way when the bears decided to cover that
NH:
this is from Mark James at nomura
NH:
With 30% short interest in the free float, valuation estimates likely to go up and the route to full demerger more advanced, we remain buyers of CPW.
NH:
£600m profit, no tax. JV to be deconsolidated
There will be a £600m or so profit on disposal with little or no tax. Interestingly, Best Buy will consolidate the 50/50 JV with CPW taking it as an associate. We have asked for details on dividend policy of the JV. We believe the deconsolidation by CPW is likely to be seen as a route to eventual complete exit.
NH:
Attention to turn to the value of CPW telco
With valuation of the 50/50 JV crystallised, attention will divert to the valuation of CPW’s telco arm. This is where CPW bulls and bears diverge. Backing out CPW Retail from today’s £2.7bn market cap. places an implied value (allowing for £0.9bn net debt) on CPW telco of £1.4bn. As an indication, Tiscali has a similar Enterprise value yet has around 20% fewer customers. It is also, in our view is a lesser business given that CPW has pursued full unbundling and should have a lower cost base as a result. Our valuation of CPW telco remains unchanged at £1.7bn and we note that the telco arm retains a long-term agreement for distribution through the JV’s 2,400 (and rising) stores.
NH:
this is from Landsbanki
NH:
Carphone Warehouse (General Retailers, Reduce, Mkt Cap £2.7bn, SP 299p) -
Announcement of European JV with Best Buy (Reduce)
Carphone has announced the creation of a joint venture with US retailer Best
Buy to “accelerate the development of CPW’s retail proposition and introduce
Best Buy stores across Europe”.
NH:
The company intends to grow its existing
distribution business in Europe and expand further into electronics using
the advantage of Best Buy’s sourcing. For a price of £1.088bn Best Buy will
purchase a 50% stake in the CPW’s distribution business. The valuation
implies 7.9x and 11.9x our FY 2009 EBITDA and EBIT respectively. The company
intends to use the proceeds from the sale to pay down debt (FY 2008e of
£850m) and invest further in the telecoms business.
NH:
We believe this is a positive move. We saw the distribution business as
facing significant challenges and the value, once working capital outflow is
factored in at significantly below this current price. Whilst this does not
eliminate these problems and we believe that the move into consumer
electronics is unlikely to offer the same returns as the existing handset
distribution business (see our DSG comments) this does effectively reduce
the downside valuation risk.
NH:
It also reduces debt, which we think was
becoming problematic and frees up capital to invest in telecoms business. We
believe this will increase speculation about a bid for Tiscali. Again we
still believe the company faces significant challenges in getting returns
from this business and that the implied £1.5bn valuation remains aggressive.
The company has guided that the deal will be 10-15% dilutive. Based on
consensus FY 2009 earnings of 24.5p this would imply 21.4p (we are at 21p
already) and that the shares are trading at 14x. This still represents a
significant premium to both the general retail and telecoms sector, for a
business that, while this transaction will lessen strategic issues, still in
our faces the problem of making a return in the telecoms business and a core
mobile phone market that is getting tougher. We continue with our reduce
recommendation.
NH:
And finally, this is from Investec
NH:
Carphone Warehouse has announced that Best Buy will take a 50% stake in its
retail division for £1.1bn in cash. At 7.7x EV/EBITDA, this is a strong premium
to peers and current valuation. The transaction will be 10-15% dilutive to EPS
for CPW if it pays down debt, but we would expect it to be reinvested in new
opportunities (e.g. Tiscali UK). With current implied valuation on the telecoms
division at only 4.6x EV/EBITDA, we reiterate our BUY stance.
NH:
Carphone Warehouse has announced that it will carve off the retail business to
form a new JV with Best Buy. Best Buy will pay £1.088bn for a 50% stake in the
new company, into which CPW will put all its retail assets. This values the
Distribution business on our forecasts at 7.7x FY09E EV/EBITDA, a strong
premium to retail peers.
This entry was posted by Paul Murphy on Thursday, May 8th, 2008 at 11:02 and is filed under Uncategorised.
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