Markets live chat transcript for the chat ending at 11:46 on 29 May 2008. Participants in this chat were: Sam Jones (SJ) Paul Murphy (PM)
SJ:
Morning all
SJ:
welcome to Markets Live
SJ:
This is FT Alphaville’s daily markets chat.
SJ:
Murphy will be joining shortly
PM:
We are still Hume-less.
SJ:
Murphy – please don’t use that limp pun.
PM:
PM:
We’ve got some BIG DEAL news this morning.
SJ:
But its not about Big Beer. 
PM:
Come back to M&A stuff in a mo.
SJ:
First we have got to talk about houses…
SJ:
SJ:
unpleasant news from Nationwide this morning
PM:
Whats that?
SJ:
Latest UK housing figs – down 2.5% in May, according to the nationwide house price index data out today.
PM:
Not far from the kind of declines we were seeing in 1992.
PM:
year i bought my first house
PM:
Now talk of double digit declines for the next two years.
SJ:
Helen’s has put together a post on it -
SJ:
Global Insight economist Howard Archer saying 7% fall in 2008 and 9% in 2009:
SJ:
Global Insight’s latest forecast is for house prices to fall by 7% in 2008 and 9% in 2009. However, it now looks more likely than not that house prices will suffer double-digit falls both this year and in 2009, given serious buyer affordability constraints, limited and often more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and reduced prospects for further interest rate cuts in the near term at least.
SJ:
Nasty stuff. Good news for me though, as I don’t own a house yet. Was thinking of buying in a couple years actually…
SJ:
The place im renting at the moment has had 200k knocked of its asking price in the past 6 months. Was ridiculously overpriced anyway.
SJ:
Serves the owners right for not fixing the leaky shower when I asked
SJ:
All these declines pretty similar to the Case-Shiller index in the US though
PM:
SJ:
Annnyway – i’m assuming all this has hit the builders hard this morning
PM:
Yep
PM:
BDEV off 2 per cent — another two per cent that is
PM:
was down 6.9% yesterday
SJ:
Nice opening gift for Bob Lawson – new non-exec chairman – joins the board this weekend.
PM:
Barratt’s off 7 per cent yesterday — what happened to that analysis that said “It cant just continue falling…”
SJ:
well anyway – was a big big dip at one point yest
SJ:
Citi offloaded a big chunk of BDev shares.
SJ:
around 14m quids worth
SJ:
Someone selling nearly 900,000 of them for around 190pence anyway
PM:
All the builders taking hits today
PM:
Persimon off 13.5 at 500p
PM:
Taylor Wimpey down 5.5 at 88
SJ:
SJ:
Taylor Wimpey not looking healthy – especially in light of downgrades from Fitch last week – BBB on neg watch. This one might be going to junk.
PM:
So while — the FTSE 100 is looking pretty perky this morning, the second liner are a mess
SJ:
got any analysts notes?
PM:
Some Kaupthing stuff this morning on Barratt:
PM:
…according to trade sources, Jones Lang, who are handling the proposed sale of Wilson Bowden Developments for Barratts, have received 80 inquiries amongst them British Land and Land Sits as ‘serious’ parties. A disposal at c£250m might not be such a remote prospect and would help chip into est’d end June net debt of c£1.7bn. The company also announces its successor to outgoing non-exec Chairman, Charles Toner, who goes (with the albatross of the Bowden acquisition around his neck) on 30th June. Bob Lawson, the amiable ex-Electrocomponents CEO and current Hays Chairman will be his replacement. Let’s also hope his CV lists ‘cleaning up’ amongst his interests.
PM:
SJ:
Just quickly on q’s below
SJ:
bsb – re the ABX
SJ:
we wrote some stuff on it last week i think ?
SJ:
new “penultimate” AAA tranche
SJ:
should see things tick up
SJ:
havent been following the past few days though
SJ:
credit markets in the US generally looking healthier in recent weeks though – notwithstanding Lehman
SJ:
countrywide CDS came down 98bp yesterday alone
PM:
Cheers Sam
PM:
SJ:
Now on to big M&A stuff.
SJ:
PM:
There should be a full post on the AV home page now.
PM:
And Helen is busy doing a backgrounder –strategy piece.
PM:
this has to do with the Reliance / MTN situation – across India and South Africa.
SJ:
Yes this is the deal to create a big big big emerging markets mobile phone firm.
PM:
$70bn big
PM:
And some people seem to have mis-understood what is going on.
PM:
Here’s the piece.
PM:
Ambani’s MTN control trick
Ambani’s MTN control trick
PM:
Indian billionaire Anil Ambani is ready to pay a “significant premium” to win effective boardroom control of MTN in the complex merger plan currently being negotiated by the South African mobile telecom group and Mr Ambani’s Reliance Communications, FT Alphaville has learned.
Stock market operators in Johannesburg and Mumbai may have misunderstood the terms of the putative deal – presented as an MTN takeover of Reliance, leaving Mr Ambani with a minority stake in the enlarged entity.
There are actually two options on the table. Here’s the nitty-gritty on a potential $70bn merger:
Stock market operators in Johannesburg and Mumbai may have misunderstood the terms of the putative deal – presented as an MTN takeover of Reliance, leaving Mr Ambani with a minority stake in the enlarged entity.
There are actually two options on the table. Here’s the nitty-gritty on a potential $70bn merger:
PM:
The 100 per cent take out
Reliance, code-named Rome in the talks, will make a straightforward cash and shares offer for MTN, code-named Madrid. Discussions on the mix have centred around a ratio of 65 per cent in Reliance stock and 35 per cent cash.
Phuthuma Nhleko, president and chief executive of MTN, would become chief executive of the enlarged company for at least three years, with MTN chairman Cyril Ramaphosa becoming co-chairman of the new group alongside Mr Ambani for a period of 12 months. Thereafter, Mr Ambani (code-named Apollo) would become sole chairman and Mr Ramaphosa would drop down to vice chairman.
The enlarged Reliance MTN would continue to be an Indian company, but with a secondary listing in Johannesburg.
Reliance, code-named Rome in the talks, will make a straightforward cash and shares offer for MTN, code-named Madrid. Discussions on the mix have centred around a ratio of 65 per cent in Reliance stock and 35 per cent cash.
Phuthuma Nhleko, president and chief executive of MTN, would become chief executive of the enlarged company for at least three years, with MTN chairman Cyril Ramaphosa becoming co-chairman of the new group alongside Mr Ambani for a period of 12 months. Thereafter, Mr Ambani (code-named Apollo) would become sole chairman and Mr Ramaphosa would drop down to vice chairman.
The enlarged Reliance MTN would continue to be an Indian company, but with a secondary listing in Johannesburg.
PM:
The 34.9 per cent structure
Alive to South African political sensitivities, the second merger plan under discussion would see MTN retain its South African identity.
MTN would acquire 51 per cent of Reliance from Mr Ambani, who currently controls about two thirds of Reliance, paying in paper. The exchange ratio set would incorporate a “premium deal price,” valuing MTN stock significantly above the Rand 146 level at which it was trading in Johannesburg on Thursday.
MTN would then make a cash tender offer for 20 per cent of the publicly-held stock in Reliance, a minimum requirement under Indian takeover rules. This is not expected to be at a substantial premium to the current Reliance market price.
Simultaneously, Mr Ambani would buy enough shares in MTN from existing holders at the agreed “premium deal price” to take his direct holding in the South African company to 34.9 per cent.
Crucially, a series of agreements would also be struck with key MTN shareholders whereby no third party was able to challenge Mr Ambani’s effective control of the group.
The Indian entrepreneur wants to put these control agreements in place without triggered an ‘acting in concert’ declaration from regulators.
While Mr Ambani will have economic ownership of little more than a third of the enlarged business, he is insisting on effective control in return for an as yet unspecified premium valuation on MTN.
In return, Phuthuma Nhleko. president and chief executive of MTN, has been told he would be asked to lead the enlarged company for at least a further five years, although Mr Ambani would have control over other senior executive appointments.
Respective stock market listings in New Dehli, Mumbai and Johannesburg would be maintained, with a secondary listing in London planned for the future.
The two companies this week began an exclusive negotiation period that will last up to 45 days. It follows the decision by Bharti Airtel, India’s biggest mobile operator, to walk away from a possible deal with MTN.
Related links:
MTN plans reverse takeover of Reliance – FT
Reliance woos elusive MTN – FT analysis
Neil.hume@ft.com
(As told to Paul Murphy)
Alive to South African political sensitivities, the second merger plan under discussion would see MTN retain its South African identity.
MTN would acquire 51 per cent of Reliance from Mr Ambani, who currently controls about two thirds of Reliance, paying in paper. The exchange ratio set would incorporate a “premium deal price,” valuing MTN stock significantly above the Rand 146 level at which it was trading in Johannesburg on Thursday.
MTN would then make a cash tender offer for 20 per cent of the publicly-held stock in Reliance, a minimum requirement under Indian takeover rules. This is not expected to be at a substantial premium to the current Reliance market price.
Simultaneously, Mr Ambani would buy enough shares in MTN from existing holders at the agreed “premium deal price” to take his direct holding in the South African company to 34.9 per cent.
Crucially, a series of agreements would also be struck with key MTN shareholders whereby no third party was able to challenge Mr Ambani’s effective control of the group.
The Indian entrepreneur wants to put these control agreements in place without triggered an ‘acting in concert’ declaration from regulators.
While Mr Ambani will have economic ownership of little more than a third of the enlarged business, he is insisting on effective control in return for an as yet unspecified premium valuation on MTN.
In return, Phuthuma Nhleko. president and chief executive of MTN, has been told he would be asked to lead the enlarged company for at least a further five years, although Mr Ambani would have control over other senior executive appointments.
Respective stock market listings in New Dehli, Mumbai and Johannesburg would be maintained, with a secondary listing in London planned for the future.
The two companies this week began an exclusive negotiation period that will last up to 45 days. It follows the decision by Bharti Airtel, India’s biggest mobile operator, to walk away from a possible deal with MTN.
Related links:
MTN plans reverse takeover of Reliance – FT
Reliance woos elusive MTN – FT analysis
Neil.hume@ft.com
(As told to Paul Murphy)
PM:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
SJ:
In full here – http://ftalphaville.ft.com/blog/2008/05/29/13414/ambanis-mtn-control-trick/
SJ:
The point here is that some people seem to have thought this would be a nil premium share swap.
SJ:
But in actual fact it is a full blooded attempted takeover by the Indians – and it is going to be pitched at rather more than the 140 rand that MTN has been trading at.
PM:
I notice MTN is way up in Joburg – Macquarie saying this is a good deal.
PM:
But I don’t think their analysts have got it quite right either.
PM:
MTN on my screen is up 4 per cent currently
PM:
But that is a delayed price
PM:
I also notice that Reliance is up in Mumbai — up 4 per cent also
PM:
I think Macquarie are telling people that Reliance does not have to raise finance to do this deal
PM:
I believe that may be wrong.
PM:
it will need a lot of finance
SJ:
well lets see how it pans out
PM:
Hmmmm
SJ:
moving on
SJ:
PM:
How’s the crude price doing today?
SJ:
Still falling…
SJ:
Brent is back below $130 in London currently.
PM:
Oh, that’s irritating.
SJ:
Why irritating? It’s good for the truckers, surely, with whom we have allied ourselves.
PM:
Well, Bryce just forwarded some interesting Bernstein research on…..
PM:
Global Integrated Oils: So What Happens if Oil Stays at $130?
SJ:
Okay – so you can still share.
SJ:
Just have to rename it: What happens if Oil goes back above 130 and stays there.
SJ:
PM:
What would the valuations and earnings of the global integrated oil companies look like under
commodity prices that followed the futures strip – around $130/bbl for oil and $11/mcf gas? Currently, it
appears that many of the integrated companies are discounting in oil prices in the $85-95/bbl range
(based on our valuation analysis), but at sustained higher prices earnings would rise, and there is a
potential that the stocks would be re-rated as returns remain above historical levels.
commodity prices that followed the futures strip – around $130/bbl for oil and $11/mcf gas? Currently, it
appears that many of the integrated companies are discounting in oil prices in the $85-95/bbl range
(based on our valuation analysis), but at sustained higher prices earnings would rise, and there is a
potential that the stocks would be re-rated as returns remain above historical levels.
In a high oil price environment, net production to the Majors can be hit by PSA effects, so reducing
overall production entitlement. Also, we envisage inflation in capital expenditure as commodity prices
rise. However, after taking these factors into account, under such a scenario we see a potential 39%
increase to target price estimates across our sector in response to higher EPS estimates alone.
Additionally, we assess the potential uplift in long term ROACE under the $130/bbl and $11/mcf ‘High
Price’ scenario, and estimate that it could increase the upside potential across the Integrated Oils in the
40-70% range relative to today’s share prices. Based on our lower current commodity price assumption
we still remain overweight on the group with a bias towards European names.
PM:
Under our High Price scenario, BP and ConocoPhillips show the greatest improvement in upside. Note
that BP has the highest E&P weighting in terms of contribution to earnings. However, ENI, BG and
Marathon show the weakest increase in upside under the High Price scenario. Marathon is relatively insensitive to movements in oil and gas prices since its E&P segment is relatively small in terms of
earnings contributions as compared to some of the others, however, going forward this will improve as
the company’s upstream sector expands.
that BP has the highest E&P weighting in terms of contribution to earnings. However, ENI, BG and
Marathon show the weakest increase in upside under the High Price scenario. Marathon is relatively insensitive to movements in oil and gas prices since its E&P segment is relatively small in terms of
earnings contributions as compared to some of the others, however, going forward this will improve as
the company’s upstream sector expands.
However, when oil prices rise, there is more to worry about than PSA and capex inflation trends alone.
History shows us that some governments tend to start re-nationalizing assets as oil and gas revenues
claimed by outside investors start to climb, and others liberally apply windfall taxes, all of which may
serve to reduce any potential additional returns to shareholders for the Integrateds.
SJ:
anymore on oil? I think the readers would like as much as possible…
SJ:
good topic this one
PM:
Ok ok
PM:
Bryce!
PM:
Right — he’s send some stuff from RBC cap markets
PM:
This is on the coming hurricane season
PM:
Be prepared…
PM:
Forecasts are Calling for Another Active Year
• Current expectations call for an active Atlantic hurricane season, with 14
named storms and 7 hurricanes (3 of which are expected to reach Category
3 status or higher). This compares to the 5-year average of 15 named storms
and 8 hurricanes (4 intense) and the longer-term normal of 11 storms and 6
hurricanes (3 intense). Historically, just over half of the Atlantic storms
make their way into the GOM.
• Last year, there were 15 named storms and 2 intense hurricanes, which was
close to the consensus forecast of 15/4. However, most of the storms either
tracked along the east coast or south into Mexico.
• Existing conditions and recent trends point to a normal to above-normal
hurricane season. The lingering, but weakening, La Nina in the tropical
Pacific will promote storm development early before weakening to a neutral
phenomenon by mid-season. Additionally, expectations of above normal
temperatures over the mid-to-northern Atlantic Ocean will encourage storm
development. However cooler waters in the southern Atlantic and
Caribbean may limit the formation of longer duration, GOM-bound storms.
• Current expectations call for an active Atlantic hurricane season, with 14
named storms and 7 hurricanes (3 of which are expected to reach Category
3 status or higher). This compares to the 5-year average of 15 named storms
and 8 hurricanes (4 intense) and the longer-term normal of 11 storms and 6
hurricanes (3 intense). Historically, just over half of the Atlantic storms
make their way into the GOM.
• Last year, there were 15 named storms and 2 intense hurricanes, which was
close to the consensus forecast of 15/4. However, most of the storms either
tracked along the east coast or south into Mexico.
• Existing conditions and recent trends point to a normal to above-normal
hurricane season. The lingering, but weakening, La Nina in the tropical
Pacific will promote storm development early before weakening to a neutral
phenomenon by mid-season. Additionally, expectations of above normal
temperatures over the mid-to-northern Atlantic Ocean will encourage storm
development. However cooler waters in the southern Atlantic and
Caribbean may limit the formation of longer duration, GOM-bound storms.
PM:
We’ll Keep You Posted As Storms Develop
• Hurricane season starts June 1, and we monitor activity by providing
up-to-date maps and assessment of the companies most vulnerable based
upon projected storm paths when they occur.
Where Gulf of Mexico Production Is Focused
• Natural gas production in the offshore GOM is approximately 8 Bcf/d or
15% of total U.S. lower 48 production. By location, approximately 73% of
GOM production is in the central GOM (Mississippi and Louisiana) and
20% is in the Western GOM (Texas). During 2H07, the ramp of
Independence Hub added an additional ~1 Bcf/d of natural gas production.
The hub has been shut-in since early April due to a leak in the associated
Independence Trail pipeline. Production is expected to resume by mid-June.
• Crude oil production in the offshore GOM is approximately 1.3 MMbbls/d
or 31% of total U.S. lower 48 production. By location, 88% of GOM
production is in the central GOM (Mississippi and Louisiana) and 12% is in
the western GOM (Texas).
• Hurricane season starts June 1, and we monitor activity by providing
up-to-date maps and assessment of the companies most vulnerable based
upon projected storm paths when they occur.
Where Gulf of Mexico Production Is Focused
• Natural gas production in the offshore GOM is approximately 8 Bcf/d or
15% of total U.S. lower 48 production. By location, approximately 73% of
GOM production is in the central GOM (Mississippi and Louisiana) and
20% is in the Western GOM (Texas). During 2H07, the ramp of
Independence Hub added an additional ~1 Bcf/d of natural gas production.
The hub has been shut-in since early April due to a leak in the associated
Independence Trail pipeline. Production is expected to resume by mid-June.
• Crude oil production in the offshore GOM is approximately 1.3 MMbbls/d
or 31% of total U.S. lower 48 production. By location, 88% of GOM
production is in the central GOM (Mississippi and Louisiana) and 12% is in
the western GOM (Texas).
SJ:
cheery stuff
PM:
And some good recommendations below — thanks for those links
PM:
SJ:
so where are we jumping to next?
PM:
Well, are you ready for the big churn?
SJ:
Which big churn?
PM:
The MSCI May 30 changes.
SJ:
Do educate me.
SJ:
PM:
On Friday, after the close, the Morgan Stanley indices go thru a final transition to what are called the new GIMI indices
PM:
There’s also the results of MSCI’s half yearly constituents review.
PM:
It will lead to a cool $36bn of stock being on the move as various index trackers change their weightings etc.
PM:
Here, Ive got a bit of explanation from ABN Amro:
PM:
Overview of MSCI changes
■ MSCI is adding 98 stocks and removing 179 stocks at half their market
capitalisation as a result of the transition to the new indices.
■ At the same time, 48 stocks will be added and 54 stocks will be removed at their
full market capitalisation as a result of the Semi-Annual Review.
Investors have been aware of the changes resulting from the transition to the new
GIMI indices since May 2007. Changes resulting from the Semi-Annual Review were
announced by MSCI on 6 May 2008.
Estimated impact
The transition to the GIMI indices is a significant event. Two-way index turnover in
the MSCI World index is 5.9%, with MSCI index trackers needing to trade an
estimated US$36bn to implement all of MSCI’s changes.
■ MSCI is adding 98 stocks and removing 179 stocks at half their market
capitalisation as a result of the transition to the new indices.
■ At the same time, 48 stocks will be added and 54 stocks will be removed at their
full market capitalisation as a result of the Semi-Annual Review.
Investors have been aware of the changes resulting from the transition to the new
GIMI indices since May 2007. Changes resulting from the Semi-Annual Review were
announced by MSCI on 6 May 2008.
Estimated impact
The transition to the GIMI indices is a significant event. Two-way index turnover in
the MSCI World index is 5.9%, with MSCI index trackers needing to trade an
estimated US$36bn to implement all of MSCI’s changes.
PM:
Examining the performance of the stocks being added/deleted as a result of MSCI’s
Semi-Annual Review, we note that the additions have significantly outperformed the
deletions since MSCI’s announcement on 6 May.
The basket of additions and deletions resulting from the transition to GIMI portrays
a slightly different picture. While the additions have largely outperformed, the
outperformance has been less pronounced.
Investors have been aware of the changes occurring as a result of the transition to
the GIMI methodology since 3 May 2007, and have been able to implement the new
indices since 5 June 2007. The performance of stocks affected by the GIMI transition
may therefore indicate evidence of MSCI rebalancing.
Semi-Annual Review, we note that the additions have significantly outperformed the
deletions since MSCI’s announcement on 6 May.
The basket of additions and deletions resulting from the transition to GIMI portrays
a slightly different picture. While the additions have largely outperformed, the
outperformance has been less pronounced.
Investors have been aware of the changes occurring as a result of the transition to
the GIMI methodology since 3 May 2007, and have been able to implement the new
indices since 5 June 2007. The performance of stocks affected by the GIMI transition
may therefore indicate evidence of MSCI rebalancing.
Given the outperformance in the lead-up to the first phase of the transition in
November 2007, trackers have had greater reason to move early in the second and
final stage. Flows may therefore be much smaller this time round and the impact of
MSCI’s changes could be much smaller than expected.
Country and sector flows
■ We estimate France, Italy and Germany will have the greatest net buying. The
UK, Norway and the Netherlands are estimated to have the greatest net selling.
■ We expect the greatest demand in the Financials sector. Index trackers will need
to reduce their holdings in Industrials and Information Technology.
SJ:
So, lots of technical factors to keep an eye out for next week.
PM:
Certainly will be.
PM:
SJ:
BREAKING NEWS!
PM:
29 May 2008
Sportingbet plc (‘Sportingbet’ or ‘the Group’)
Turkey update
The Board of Sportingbet has become aware that a number of detentions have been made by authorities in Turkey of people that have been related to Superbahis, the Group’s Turkish facing business. In particular, the Board is aware that individuals related to Maslin Properties Limited, the Group’s ex-marketing partner in the region, along with a number of their associates have been detained. Additionally, the detainees include 2 UK based Sportingbet employees who are Turkish nationals who had been in the country on vacation.
Sportingbet has received no formal clarification of events from the Turkish authorities, and until more information is received the Board is not in a position to comment on this situation further.
In order to build a more balanced geographic risk profile for the business, the Group has, over recent months, been gradually reducing its reliance on this market. For the third quarter ended 30 April 2008, Net Gaming Revenue from Turkey accounted for approximately 14% of Group Net Gaming Revenue, compared to approximately 26% in the second quarter. Additionally, since 1 March 2008, Net Gaming Revenue from Turkey has accounted for approximately 9% of Group Net Gaming Revenue.
The Group continues to trade into the Turkish market. The Board remains confident of meeting market expectations for the fourth quarter and the year ending 31 July 2008.
Sportingbet plc (‘Sportingbet’ or ‘the Group’)
Turkey update
The Board of Sportingbet has become aware that a number of detentions have been made by authorities in Turkey of people that have been related to Superbahis, the Group’s Turkish facing business. In particular, the Board is aware that individuals related to Maslin Properties Limited, the Group’s ex-marketing partner in the region, along with a number of their associates have been detained. Additionally, the detainees include 2 UK based Sportingbet employees who are Turkish nationals who had been in the country on vacation.
Sportingbet has received no formal clarification of events from the Turkish authorities, and until more information is received the Board is not in a position to comment on this situation further.
In order to build a more balanced geographic risk profile for the business, the Group has, over recent months, been gradually reducing its reliance on this market. For the third quarter ended 30 April 2008, Net Gaming Revenue from Turkey accounted for approximately 14% of Group Net Gaming Revenue, compared to approximately 26% in the second quarter. Additionally, since 1 March 2008, Net Gaming Revenue from Turkey has accounted for approximately 9% of Group Net Gaming Revenue.
The Group continues to trade into the Turkish market. The Board remains confident of meeting market expectations for the fourth quarter and the year ending 31 July 2008.
PM:
Stock has dipped a penny or so to 37p on that
PM:
getting to be the case that you cannot leave the country if you work for a British bookie
SJ:
PM:
Nothing to laugh Sam! — if you work for sportingbet in Turkey
SJ:
bookies doing business in religious countries is a bad idea
PM:
true
PM:
PM:
Lets try and go to some of the comments below
PM:
Dumbo wondering abotu the criticisms on Libor
SJ:
ongoing saga this one
PM:
Been around for a few weeks — more in the US press this morning
SJ:
I think likely a little bit of storm in a teacup
PM:
Sam did a funny post on this some time ago — “Now its our fault”
PM:
Seems that so much issued paper is linked to Libor that getting rid would take decades
SJ:
WSJ keen on blaming limeys for world’s financial ills
SJ:
first it was SIVS…
PM:
The Americans are feeling a bit sore at the moment of course
SJ:
really?
really?PM:
We’ve see similar stuff relating to Anheuser Busch
PM:
SJ:
ahah – I see you’ve cleverly steered us all the way back to big beer
PM:
ve had a belly full of this InBev Anheuser story
PM:
Funny to see US press
PM:
Suggestion somewhere this morning that InBev would find the deal difficult to do cos they would have to translate their numbers into US GAAP — adn this would be a big job
PM:
I mean!
PM:
Do they know how big/sophisticated InBev is??
PM:
Then again, the idea of some Brazilian managers taking over such an iconic US brand — and sacking thousands along the way must be a bit uncomfortable
SJ:
any more research come out on this?
PM:
Yes, constant flow
PM:
here’s the latest from Goldman Sachs
PM:
What happened
In light of increased speculation regarding further sector consolidation
(Financial Times; InBev’s potential offer for Anheuser-Busch), we are
removing SABMiller from the Conviction Sell List but retain a Sell rating.
We believe that upside risks exist in the short term and therefore move to
an M&A-driven valuation to derive our SABMiller price target. Our 12-
month price target increases to 1,194p from 1,000p. Since being added to
the Conviction Sell List on January 25, 2008 the shares have risen 13.1%
vs. the FTSE World Europe’s 6.0% gain. Over the past 12 months,
SABMiller’s shares are up 10.5% vs. the FTSE World Europe’s fall of 4.4%.
In light of increased speculation regarding further sector consolidation
(Financial Times; InBev’s potential offer for Anheuser-Busch), we are
removing SABMiller from the Conviction Sell List but retain a Sell rating.
We believe that upside risks exist in the short term and therefore move to
an M&A-driven valuation to derive our SABMiller price target. Our 12-
month price target increases to 1,194p from 1,000p. Since being added to
the Conviction Sell List on January 25, 2008 the shares have risen 13.1%
vs. the FTSE World Europe’s 6.0% gain. Over the past 12 months,
SABMiller’s shares are up 10.5% vs. the FTSE World Europe’s fall of 4.4%.
PM:
Current view
We remain concerned about input cost inflation and the outlook for the
South African operations, which we expect to remain under pressure in a
worsening economic environment. However, we recognise that M&A
speculation in the sector prompted by InBev’s potential offer for Anheuser-
Busch is likely to be an important driver of the share price in the near
future. Severe industry headwinds (rising input costs) may encourage beer
operators to look for enhanced size, scale of operations and increased
emerging markets exposure. In this context, we expect the market to
re-appraise the value of assets of potential strategic importance. In turn,
this leads us to reassess the strategic value of SABMiller’s assets in a
consolidating brewing world. Based on average transaction multiples in
the sector (10.7x EV/EBITDA), we value SABMiller at 1,194p. This is the
basis of our new 12-month price target.
Downside risks to our view and price target include a sudden change in
market sentiment with regards to sector consolidation, as well as a
deterioration of the economic outlook in South Africa and Colombia.
Upside risks include softer input cost pressure than anticipated and/or
SABMiller being approached as a potential takeover target.
We remain concerned about input cost inflation and the outlook for the
South African operations, which we expect to remain under pressure in a
worsening economic environment. However, we recognise that M&A
speculation in the sector prompted by InBev’s potential offer for Anheuser-
Busch is likely to be an important driver of the share price in the near
future. Severe industry headwinds (rising input costs) may encourage beer
operators to look for enhanced size, scale of operations and increased
emerging markets exposure. In this context, we expect the market to
re-appraise the value of assets of potential strategic importance. In turn,
this leads us to reassess the strategic value of SABMiller’s assets in a
consolidating brewing world. Based on average transaction multiples in
the sector (10.7x EV/EBITDA), we value SABMiller at 1,194p. This is the
basis of our new 12-month price target.
Downside risks to our view and price target include a sudden change in
market sentiment with regards to sector consolidation, as well as a
deterioration of the economic outlook in South Africa and Colombia.
Upside risks include softer input cost pressure than anticipated and/or
SABMiller being approached as a potential takeover target.
PM:
That’s on SABMiller of course
PM:
Ive heard that SAB are telling City folk that this is all an irritating distraction
PM:
And that they have not got an approach from InBev
PM:
I think we have been making it clear all along that any contact between InBev and SAB has been at an ultra arms length, under the radar level
PM:
What we can say with confidence is that every one of the big drinks cos is looking at merger options in every direction
SJ:
will keep us busy for months to come
PM:
SJ:
Murphy – just thinking about those MSCI changed you mentioned….
SJ:
are there any FTSE changes?
PM:
There are — June 11 i believe
PM:
hang on — v v helpful broker has some stuff on this
PM:
Estimate of potential changes….
PM:
In the relegation zone: A&L and Persimmon
PM:
Up for promotion: Invensys and Drax
SJ:
how about the 250?
PM:
Knew you wuld ask that
PM:
PM:
Relegation: marshalls, Helical Bar, EAGA , cap & regional
PM:
Collins Stewart (!)
PM:
Assura, Findel and AGA
PM:
Promotion: Heritage oil, BH Macro, Salamander Energy, etc
PM:
PM:
Quick note to finish — apparently short sterling is getting murdered again
SJ:
changed interest rate expectations
PM:
Yep — meaning changed profit expectations for certain hedge funds, i suspect
PM:
Lots and lots and lots of pain in short sterling recently
PM:
Good investment tip from Prometheus below
PM:
We are abotu done for today
SJ:
another shorty
PM:
Still struggling with this multi-taking
SJ:
tasking
PM:
Not too short tho
PM:
leave you with this note from Keefe Bryyette & Woods
PM:
On stagflation and banks
PM:
Living with stagflation
Our analysis shows that stagflation (a period of low GDP growth and highinflation) would present significant challenges for the banks, although less so than deflation. Under stagflation, opportunities to maturity intermediate
disappear and banks’ margins suffer. Cost growth outstrips revenue growth and banks’ operating profitability declines. Asset quality deteriorates and provisions increase. As a result, net profit growth is weak and capitalisation suffers as
internal capital generation lags asset growth. If you had to be invested in the sector in this environment, pick banks that are liability-sensitive, have low operating leverage, good capitalisation, high levels of NPL coverage and high
provisions. In our opinion, these would include the Greeks, Mediobanca, HSBC, Santander and BBVA.
Our analysis shows that stagflation (a period of low GDP growth and highinflation) would present significant challenges for the banks, although less so than deflation. Under stagflation, opportunities to maturity intermediate
disappear and banks’ margins suffer. Cost growth outstrips revenue growth and banks’ operating profitability declines. Asset quality deteriorates and provisions increase. As a result, net profit growth is weak and capitalisation suffers as
internal capital generation lags asset growth. If you had to be invested in the sector in this environment, pick banks that are liability-sensitive, have low operating leverage, good capitalisation, high levels of NPL coverage and high
provisions. In our opinion, these would include the Greeks, Mediobanca, HSBC, Santander and BBVA.
PM:
Margins suffer, but loan growth is robust. Stagflation creates an inverted yield curve, traditional maturity intermediation stops and interest margins decline. In the US stagflation period between 1970 and 1982, interest spreads fell 1.2pp to 1.4%.
Absolute and real loan growth were a healthy 12.0% and 4.2% per year, respectively.
Cost growth outstrips revenue growth. The sector’s revenue growth during the period was a strong 12.6% per year, driven by loan growth. However, banks’ absolute cost growth during the stagflation period was a poor 13.4% per year driven by wage and other price pressures. The sector cost-income ratio rose 4pp to 69% in the period.
Asset quality deteriorates and provisions rise. Absolute loan-loss charges grew 26.2% per year in the period (18.5% inflation adjusted) on the back of the high levels
of interest rates, slow GDP growth (two recessions) and high unemployment. The sector LLC/loans jumped from 24bp in 1970 to 68bp in 1982.
Net profit growth weakens and capitalisation deteriorates. Absolute net profit growth during the period was 10.2% (2.4% real). Banks kept ROE stable (11.9% in
1970 and 11.6% in 1982) by allowing their capitalisation ratios to deteriorate (equity to assets fell from 7.12% in 1970 to 5.87% in 1982).
Bank share prices. Bank share prices underperformed. Using the Nasdaq indices, banks underperformed the composite index by 32% over this period.
Where to hide? If you do not have to be invested in the sector, do not own any banks.
If you have to be invested in the sector, pick banks that have the following characteristics: liability sensitivity, low operating leverage, good capitalisation, high
levels of NPL coverage and provisions. In our opinion, these include the Greeks, Mediobanca, HSBC, Santander and BBVA.
What is different this time around? Outsourcing and offshoring activities allow banks to rein in wage inflation. Technology-driven efficiency gains are likely to continue and pricing regulation should be more benign this time around; however, increased consumer gearing could lead to higher NPLs in a future stagflation environment.
Absolute and real loan growth were a healthy 12.0% and 4.2% per year, respectively.
Cost growth outstrips revenue growth. The sector’s revenue growth during the period was a strong 12.6% per year, driven by loan growth. However, banks’ absolute cost growth during the stagflation period was a poor 13.4% per year driven by wage and other price pressures. The sector cost-income ratio rose 4pp to 69% in the period.
Asset quality deteriorates and provisions rise. Absolute loan-loss charges grew 26.2% per year in the period (18.5% inflation adjusted) on the back of the high levels
of interest rates, slow GDP growth (two recessions) and high unemployment. The sector LLC/loans jumped from 24bp in 1970 to 68bp in 1982.
Net profit growth weakens and capitalisation deteriorates. Absolute net profit growth during the period was 10.2% (2.4% real). Banks kept ROE stable (11.9% in
1970 and 11.6% in 1982) by allowing their capitalisation ratios to deteriorate (equity to assets fell from 7.12% in 1970 to 5.87% in 1982).
Bank share prices. Bank share prices underperformed. Using the Nasdaq indices, banks underperformed the composite index by 32% over this period.
Where to hide? If you do not have to be invested in the sector, do not own any banks.
If you have to be invested in the sector, pick banks that have the following characteristics: liability sensitivity, low operating leverage, good capitalisation, high
levels of NPL coverage and provisions. In our opinion, these include the Greeks, Mediobanca, HSBC, Santander and BBVA.
What is different this time around? Outsourcing and offshoring activities allow banks to rein in wage inflation. Technology-driven efficiency gains are likely to continue and pricing regulation should be more benign this time around; however, increased consumer gearing could lead to higher NPLs in a future stagflation environment.
PM:
That is it for today
PM:
Thanks for joining — and thanks for the comments
PM:
We will be back tomorrow at 11am
SJ:
cya