FT Alphaville » Markets live transcript 26 Aug 2008

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Markets live transcript 26 Aug 2008

Posted by Paul Murphy on Aug 26 11:02.

Markets live chat transcript for the chat ending at 12:09 on 26 Aug 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH) Bryce Elder (BE)

PM:

Welcome

PM:

I can tell you what is back today

PM:

Tech problems

PM:

We are shutting down and rebooting

NH:

think I am in

NH:

I must be the kiss of death

NH:

had IT probs all morning

NH:

Paul is calling IT

NH:

who are engaged

NH:

his screens are now blank

NH:

a guy from IT is here now

NH:

apparently there are no network probs

NH:

but some patches were put in place over the weekend

NH:

anyway to some questions below

NH:

BSB – heard nothing more on Informa

NH:

and we have heard nothing on Partygaming ever

NH:

However, I will be making plenty of calls today as I attempt to get back up to speed

NH:

right we have some breaking news

NH:

a pre-conditional offer for Imperial Energy

NH:

here are the details

NH:

Under the terms of the Share Offer, Imperial Energy Shareholders will be entitled to receive 1,250 pence in cash for each Imperial Energy Share held, representing a premium of approximately:
* 61.9 per cent. to 772 pence being the closing mid-market price per Imperial Energy Share on 11 July 2008

NH:

right will try and find the conditions to the offer

PM:

Test

NH:

OVL has been through a lengthy and comprehensive due diligence process. Since 14 July 2008, when Imperial Energy first announced that it had received an approach, the Company has received approaches from third parties regarding their possible interest in the Company. The Board of Imperial Energy had not, as at 25 August 2008 (being the last practicable date prior to this announcement), received a definitive proposal from any third party. The Board of Imperial Energy believes that it is uncertain whether any other offer for Imperial Energy will be forthcoming. In all the relevant circumstances, the Imperial Energy Directors believe that the price of 1,250 pence per Imperial Energy Share represents an attractive premium to the Imperial Energy share price on 11 July 2008, being the last Business Day prior to the announcement by Imperial Energy that it had received an approach

NH:

PRE-CONDITIONS, CONDITIONS AND FURTHER TERMS OF THE OFFERS

NH:

The making of the Offers by the posting of the Offer Document and related Acceptance Forms will take place following the satisfaction or, to the extent permitted, waiver by OVL of the following pre-conditions:
1 approval, in terms reasonably satisfactory to Bidco, of the Governmental Commission of the Russian Federation, with respect to the Share Offer, having been obtained in accordance with Article 6.4 of the Russian Federal Law of 9 July 1999 No. 160-FZ “On foreign investments in the Russian Federation” and pursuant to the procedure established in Articles 9 – 12 of the Russian Federal Law of 29 April 2008 No. 57-FZ “On the procedure of making foreign investments in commercial entities of strategic significance for the national security of the Russian Federation”; and

NH:

PM:

I’m mystified — what is a “pre-condition”

NH:

approval, in terms reasonably satisfactory to Bidco, of the Federal Anti-Monopoly Service of the Russian Federation, with respect to the Share Offer, having been obtained in accordance with Article 28.1.8 of the Russian Federal Law of 26 July 2006 No. 135-FZ “On protection of competition”.
The Offers will not be made unless all the above pre-conditions have been satisfied or waived by 30 June 2009, or such later date as OVL may, with the approval of the Panel, determine. OVL shall be entitled to waive all and any of the above pre-conditions.

NH:

just checking the share price

PM:

Imperial stock down 5p at 12.36 on the back of tht

NH:

and that’s probably because of the conditions and the fact that Imperil have attempted to set up an auction

PM:

not the pre-conditions?

NH:

and no one else has bid

NH:

of course that could change, the Chinese have been doing DD for 5 weeks I am told

NH:

and with the Olympics over

NH:

could be in a position to move now

PM:

Hmm –

PM:

Thanks Neil

PM:

Sorry about those probs earlier

PM:

Neil of course is back from his hols – a two centre affair, I believe.

PM:

A little while pottering around the Norfolk broads, and then it was off to sunny Cornwall.

PM:

For a pasty and an ice cream – and few surfing lessons.

NH:

sunny, very wet

NH:

So what’s been going on while i’ve been away.

PM:

Don’t ask me

PM:

But look we’ve donie Imp Energy

PM:

What other corners of undiscovered value have you discovered this morning?

PM:

Which a stocks are destined for the stars?
What’s going to rocket!?

NH:

What are you going on about Murph?

PM:

Life’s a bull market Neil! Stocks are great!

NH:

Eh?

PM:

Of course – you’ve been away.

PM:

In the meantime we’ve adopted a new mindset her on Markets Live. We’ve snapped out of that negative mindset that was really holding us back.

PM:

Someone referred to us as ApocalypseVille earlier in the month. That jolted us – now we think positively

PM:

The equity market here is already half full – and rising.

NH:

No it’s not. The FTSE 100 is off more than 100 points.

NH:

And don’t try and give me this perma-bull nonsense. All the years I’ve worked with you – and that’s a good number –

NH:

You’ve been a bear.

NH:

You don’t look for positive stories – you look for negative news. You like stocks that blow up in people’s faces. You like sudden and horrendous losses.

NH:

Market half full, my elbow.

NH:

And even if you had suddenly turned into a bull, today would not be the day to shout about it.

NH:

My screen’s a sea of red.

PM:

Oh, how disappointing.

PM:

So we actually have to wear these tin hat things?

NH:

Yes you do.

PM:

So how is the FTSE 100

NH:

down 105.5 points at 5,400

PM:

Nice round number — same its not 5500 tho

PM:

What’s the problem?

NH:

Bad news all round – especially overnight from Wall St

NH:

Latest spook news from over there is that JPMorgan have written down their holdings of Freddie and Fannie prefs – by 50%.

NH:

That will cost them $600m – but the point here is that now JPM have done it, all the other banks and brokers will be forced to follow suit.

PM:

And how much pref stock do that GSEs have?

NH:

A cool $36billion, I believe.

NH:

But it;s still generalised financial chaos on Wall St.

NH:

and on this pref stuff

NH:

some people seem to think that Zurich Financial could have a large exposure

PM:

That’s interesting

NH:

this email has been doing the rounds today

NH:

Last night’s JPM writedown on Fannie Mae holdings should echo loudly in Zurich this morning.
- Last Thursday, we observed that the jungle drums were suggesting that Zurich finally had to face up to reality and accept that it has $9.6bn worth of Fannie & Freddie exposure… – To be specific, $8.5bn FNMA, & $1.1bn of GNMA, NONE OF WHICH HAS BEEN WRITTEN DOWN, the bulk of which obviously needs to…. – The question then was, who blinks first, ZURN, the market or the auditor & whewn you notice that ZURN never really participated in Friday’s rally and was fairly muted yesterday, this is a rather worrying place for your money!

PM:

Goodness me — taht is a serious blow to Zurich

PM:

And reminds me of the thumping taken by AIG last week

PM:

Goldman had a serious blow

PM:

Looks like the write down story is spreading to the insurers properly now

NH:

actually the bad news is not all coming out of the US

NH:

seen the Ifo survey in Germany??

PM:

NH:

shocking

NH:

here’s a snap from the wires

NH:

– German business and consumer confidence fell more than economists forecast, heightening concern that Europe’s largest economy may be slipping into a recession.

NH:

The Munich-based Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to a three-year low of 94.8 from 97.5 in July. Consumer sentiment slumped to the lowest level in five years, according to Nuremberg-based market research company GfK AG. The euro and bond yields fell.

NH:

Germany’s economy contracted in the second quarter and may fail to grow in the third. While oil prices have receded from a record $147.27 a barrel, they’re still up 60 percent over the past year, crimping companies’ spending power just as the euro’s appreciation and the U.S. housing slump weigh on exports.

PM:

(Driss — paitence please)

NH:

“The economy will barely grow in the third quarter,” said Gregor Eder, an economist at Dresdner Bank AG in Frankfurt. “If oil prices remain at the current level or increase, we wouldn’t be able to avoid a recession in Germany.”

PM:

Currencies mentioned below…

PM:

In particular sterling

PM:

The former pound sterling

NH:

well, the Euro has been thumped after the Ifo

NH:

US dollar at si month high against Euro – 1.4597

NH:

as for the pound

NH:

2-year low again the dollar

NH:

$1.8345

PM:

off almsot 2 cents today

NH:

when we went to collect our Webby award in June it was around $2

NH:

to some questions below

NH:

Gazprom was mentioned

NH:

had plenty of calls this morning on the stock today

NH:

apparently it has been rubbish

NH:

and aside from the falling oil price and the situation in Gerogia no one seems to know why

NH:

graph looks horrible

NH:

if anyone has any views please post below

NH:

Well, there are just a handful of blue chip risers this morning

NH:

and within that bunch the standout performer is Liberty International

NH:

shares up 46.5p to 991p on news of more stakebuildinig

NH:

Friday, we got news that Simon Property Group, the largest real estate company in the US, had built a 3.5% stake

PM:

NH:

it has announced an increased holding of 4.2% this morning

NH:

and I am told it has been buying more stock today

NH:

and that the stake is now 5%

PM:

Also news this morning that Westfield, the Australian property group, has built a stake of just under 3%

NH:

so, its game on them

PM:

Sounds like it

NH:

yep, Liberty is in play

NH:

but of course what happens next lies in the hands of Donald Gordon

PM:

He’s the boss of Liberty

NH:

and owns 21% of the company. so any deal will need his backing

PM:

and what about Westfield, what’s the background?

NH:

well it’s the world’s biggest shopping mall owner by market value

PM:

so it could afford to take tilt at Liberty

NH:

on the face of it

NH:

although I have not looked at the company’s balance sheet

NH:

but here is a recent note from Deutsche Bank

NH:

on Westfield

NH:

actually it came out over the weekend

NH:

High quality assets, track record of delivery, capital flexibility. Buy
WDC benefits from diversification, intensive management & a portfolio of tightly
held malls with high productivity & barriers to entry. With high quality assets, a
track record of delivery & capital flexibility to take advantage of opportunities, we
maintain a Buy. Comp results demonstrate the resilience of quality regional malls

NH:

We expect WDC will confirm operating segment EPS growth at c.6% (constant
currency) & DPS of 106.5c FY08 (Dec year end). FY08 is underpinned by CPI+2%
reviews in Aust & development leasing at c.90%. Our FY09 forecasts show EPS
growth rates slowing by c.4% (constant currency) to 1.5% EPS growth due to
reduced US occupancy, lower development mgmt fees, higher financing costs &
lower initial return on Westfield London

PM:

Market cap is £27bn — US

NH:

Consequently FY09 distribution forecast
is 104c/security due to EPS revisions (refer 18th June 2008). We expect WDC’s
payout ratio to decline progressively to c.90% of operating earnings during FY10-
FY11 with DPS broadly stable at current levels. If WDC moved to c.70% payout
ratio in-line with global peers, the retention of capital for re-investment may
generate EPS growth up to c.8% level. In our opinion distribution policy is unlikely
to significantly change in the absence of a corporate restructure.

NH:

Prominent locations attract tenant demand
USA projects under construction & due for completion 2008 are greater than 90%
leased & Westfield London is due Oct 08 (88% leased). A$4b of development is
due to commence in 08, including Stratford (London) & Sydney (Pitt St). Positive
news flow recently includes agreements to facilitate commencement of work
adjacent to the 2012 Olympics site, including the provision of infrastructure,
utilities & services. Pre-leasing at Pitt St, Stratford & US project commencements
remains a key focus. Marginal development starts may be pushed back, however
we expect prominent locations to generate leasing demand.
PT $20 in-line with SOTP valuation adopting cap rates 6.25%

NH:

PT $20 in-line with SOTP valuation adopting cap rates 6.25% Aust, 6.5% USA
In our view WDC’s capital & strategic positioning is significantly stronger now as
compared to the 04 merger. WDC has successfully reduced gearing, improved
asset quality & lifted recurring earnings. WDC has a well capitalized balance sheet,
c.$7b liquidity plus resources & experience to take on potential acquisitions during
a downturn. Downside risks include tenant bankruptcy & project leasing. Pg 7.

PM:

But how about Liberty — got any research on them

NH:

er, hang on

NH:

most of it fails to cover the stake building by Westfield

NH:

these notes look more at the implications of the stake building by SPG

NH:

this is from Credit Suisse

NH:

Liberty International

SPG declares a 3.45% holding: On Friday 22nd August, SPG disclosed a
3.45% (12.46m shares) interest in Liberty International. Although we doubt
this will imminently materialise into anything more predatory, it will certainly
provide support to the shares as speculation over what happens next will be
rife.

NH:

We expect SPG to slowly increase its interest, probably when sentiment
is worst, in order to buy a seat at the table over the next 12-24m should an
opportunity arise. In light of this possibility, we upgrade to Neutral (from
Underperform) and our target price by 100pps to 850p (from 752p).

NH:

Good timing, slow creep.

NH:

We consider the purchase to be well timed as
Liberty’s operating environment is set to worsen and capital values fall, over
the next 2yrs ensuring the value proposition moves in SPG’s favour.

Pricing and net asset value: The shares traded up to a high of 969.5p (c.
+10.5% from the opening price of 876pps) on Friday which, within 5% of our
FY08 NAV estimate of 1019pps, seems plenty high enough, unless an
imminent offer at a premium to a falling NAV is about to emerge, which we
doubt. Our estimated NAV low is in FY10 at 822pps, factoring yields for the
UK regional shopping centre portfolio to average c. 6.25% (c. 25bp above
the long run UK high) and ERVs to turn –ve in 2009/10 by -2%.

NH:

Valuation: As we have said above, with a FY08 NAV forecast of 1018pps,
the shares have probably moved up far enough on the news, although we
believe there is more yet to unfold. With an estimated FY09 NAV of 892pps
and FY10 NAV of 822pps, we raise our target price to 852pps, which
although still relatively expensive when compared to the sector, seems a
reasonable mid-point of support should SPG be back for more.

NH:

and this is from JP Morgan

NH:

and their highly rated analyst Harm Meijer

NH:

Liberty International Underweight
Why Simon Property’s stake building should be
taken seriously

NH:

• US Property company Simon Property disclosed this morning a
3.45% stake in Liberty Int, which boosted Liberty’s share price by
around 8% (at 14:30 hours) and the sector by 4%. Although we
believe that Liberty is one of the most expensive stocks in our
universe, we believe that Simon’s stake in combination with the
significant short interest in the stock (>10%) would provide
support to the stock, at least in the short-term. It may also be that
as a result, other shopping centre players, such as Westfield,
consider building a stake too.

NH:

• Not much detail is known, but we believe the stake building should
be taken seriously and underpins our view that UK property
stocks own generally high quality assets with (long-term) value
creation prospects. Yesterday also GIC disclosed a stake of 5% in
our preferred play British Land.

NH:

• Not a short-term transaction. We believe one possible way of
looking at this is that Simon Property’s stake is not a short-term
(trading) transaction and may (eventually) result in a takeover bid.
Neither company, however, has made comment either way on this.
We come to this potential conclusion because: (1) Liberty is one of
the most expensive property companies in Europe in our view, (2)
our economists believe that the $ may rise further against the £, (3)
Simon’s management is well regarded by our US colleagues and
industry, (4) Simon Property has a strong balance sheet and may
see strong value creation opportunities in Liberty’s shopping
centre portfolio, as it could for example bring in international
retailers and shopping centre knowledge, (5) Liberty’s portfolio is
hard to replicate and Simon may see this as the only way to get
access to the UK and would be happy to pay a premium for that,

NH:

(6) We believe Liberty needs a new strategy and Simon’s move
may fit in this.

• Why now and why not a takeover bid? The main questions
remain why now and why not a straight takeover bid? We can
think of two possible theories, although we must emphasise again
that none of the companies mentioned have made comment. First,
former chairman Mr. Gordon may not be willing to sell his 22%
stake, but Simon gives a signal to Liberty that it is serious.
Secondly, another company (like for example Westfield) may.

NH:

so Mr Meijer thinks Westfield could bid

NH:

and I would also note, there had been plenty of shorting of Liberty before I went on hols

NH:

presumably those positions will have to be closed

NH:

PM:

On Informa, source has come back from holidays and said:

PM:

I’m not telling you guys anything. It’s more than my job is worth. You caused such a stewards. I am not telling you anything else on the matter.

PM:

So we have no more info on Informa — and we do not expect to get any

PM:

Sorry if people are desperate — but you will have to follow your own judgement

PM:

Informa has give up a bit of last week’s gains

PM:

own 5.5 at 424

PM:

down, even

NH:

PM:

Where now?

NH:

back to the construction sector?

PM:

Ah yes, how abotu Taylor WImpey

NH:

before we do that Bryce Elder has just sent me a very interesting comment on Liberty and the stake building

NH:

it’s the latest note from Mr Mejier

NH:

and note that Simon Property and Westfield have worked on takeovers before

NH:

Westfield declares 3% stake in Liberty, increases takeover chance. After Simon Property disclosed a 3.45% stake in Liberty on Friday, today Westfield announced a 2.96% stake. We believe this increases the takeover chance for Liberty, as Westfield and Simon have worked together on other takeovers before, notably: Rodamco North America, (failed attempt for) Taubman and last year on Mills. Another theory, which we regard a lower chance, could be that Simon Property is acting as a white knight for Liberty, after they found out that Westfield owns a stake. Although the parties could still join forces, it also leaves the option open of a stand-off between Liberty, Simon and Westfield. None of the companies involved have commented so far. Based on our European Valuation Model we estimate a potential takeover price between 1,150p and 1,200p, assuming 3% rental growth in 09 and 10, 5% thereafter and 40bp reduction in WACC.

NH:

right back to Taylor Wipeout

NH:

stock has been all over the place this morning

PM:

traded as high as 53p

PM:

now 3p higher at 48p

PM:

This was on the back of a piece in Building Magazine

NH:

yes, just trying to get the piece now

NH:

internet proving very slow this morning

NH:

right, our web connection has crashed so here is what one of the wires put up earlier

NH:

The recent improvement in share price has enabled housebuilder to relax its lending covenants without need for new cash

Taylor Wimpey is due to announce a relaxation of its lending covenants without the need for fresh equity, according to sources close to the talks between the housebuilder and its lenders Building can reveal

NH:

It is understood the company has struck the refinancing deal due to the recent improvement in housebuilders’ share prices and the fact Barratt recently clinched a similar agreement. Barring any last-minute hitches, it is expected to outline the deal at its results for the six months to 30 June 2008 next week.

The company has £1.7bn of debt and was expected to breach loan to value covenants in February. Last month it failed to raise £500m via a share placement after one investor backed out on the eve of the deal.

NH:

A source close to the talks said: “It looks like they have conjured something quite good and resolved their issues. The most likely outcome now is an all-debt solution among the lenders.”

Last month it appointed Rothschild to secure a similar deal to the agreement reached between Barratt and its lenders in July. The deal, revealed by Building, saw covenants relaxed without the need for fresh cash.

The source added: “Interest cover covenants will be turned into cashflow covenants in similar fashion to Barratt. The fact Persimmon called the bottom of the market on Thursday was also significant.”

Taylor Wimpey was unavailable for comment.

The group had reportedly been in discussions with four private equity groups about taking a 30% stake in the company, an option which has now been put on hold according to sources close to the talks.

A source close to one of the interested private equity groups said: “The message coming out of Taylor Wimpey in recent days is that it’s quite comfortable without the need for private equity cash.”

PM:

So what do we hmake of that

PM:

the fact that the rally in TW has run out of steam

NH:

I must admit I am sceptical

NH:

are the banks really going to relax the covenants just because of a spike in share prices?

NH:

I don’t think so

NH:

that said, I am not surprised the stock has spiked given the size of the short position

PM:

Here’s the buidling mag piece

PM:

Recent improvement in share price has enabled housebuilder to relax its lending covenants without need for new cash

A source close to the talks said: “It looks like they have conjured something quite good and resolved their issues. The most likely outcome now is an all-debt solution among the lenders.”

Taylor Wimpey was unavailable for comment.

The group had reportedly been in discussions with four private equity groups about taking a 30% stake in the company, an option which has now been put on hold according to sources close to the talks.

NH:

hmmm. thanks for that

NH:

One detail is wrong. Taylor Wimpey have H1 results tomorrow

NH:

and we are being guided not to expect any BIG BANG announcement

NH:

agreed Rahodeb, this Partygaming is stuff is very dull and not all funny

NH:

we will investigate blocking any mention of the company or gaming stocks in general

NH:

perhaps the ADVFN invasion will then stop

NH:

I mean, great wit like Smelly Lemmy. How we laughed here at the FT.

NH:

banning IP addresses could be possible

NH:

there are all AOL or MSN accounts

NH:

Right time for some RAW market info

NH:

and with many people still on Hols

NH:

it is pretty quiet

NH:

there was a bit of a buzz around in Morgan Crucible earlier this morning

NH:

stock spiked 10% and then went into an auction

NH:

bid rumours then followed

NH:

but no one seems to be taking it really seriously

NH:

and from what I have been told it looks as if there is a black box trading system in their hovering up lots of stock

NH:

and this seems to have squeezed the stock higher

PM:

How interesting

NH:

in fact the shares are now up just 2.25p at 224.5p

NH:

having been as high as 241.25p

PM:

NH:

and there have been some whispers around in Tullett Prebon

PM:

Ah yes

NH:

How’s Tullett doing?

PM:

Stock is off 15p at 417. – drop of more than 3%.

NH:

Ah, ive got a story on that.

NH:

What I’m hearing is that its merger talks with GFI of the US are in trouble.

PM:

Hang on hang on!

PM:

Remember you’ve been on holiday.

PM:

You cant just turn up here and spouting the sort of RAW that might give someone food poisoning.

NH:

What do you mean?

PM:

Well if youd kept yourself up to date you would know that this utterly negative, Old AV Skool bear story on Tullett’s has been quietly checked out.

NH:

Who by?

PM:

NH:

And?

PM:

Well, I’m assured by various people who profess to be familiar with the matter, etc, etc….

PM:

That talks are very much on going. In fact there were a number of articles last week detailing all the cost savings – and also the executive line up.

PM:

Basically this Mickey Gooch guy who runs GFI would become chairman of the new entity and cuddly Terry Smith would be chief executive.

NH:

Hmm. Well I’m talking to people who believe rather seriously that these merger talks are in trouble.

PM:

No no no.

PM:

There may be a slight delay – but that’s for a very good reason.

PM:

Mickey Gooch is this week on a yacht with George Bush Snr – sailing off the coast of Maine.

PM:

In fact I put a picture of the boat up on the AV home page earlier – and very impressive it is too.

PM:

So if there is any delay it’s because Mickey was getting ready for his sailing holiday with former president Bush – which is kinda understandable.

NH:

Hmm. Carefully managed stories in the press saying here’s the cost savings and here’s the executive line up…

NH:

Then a nice little picture story for you after the bank holiday…

NH:

Sorry to be AV Old Skool, but that all sounds a bit too cute for me.

NH:

I’m going to go with my people rather than your people familiar with the matter.

PM:

So you reckon yours are more familiar than mine.

NH:

Er, okay, although that does sound a bit bearish – and therefore at odds with our new mood here in Markets Live.

PM:

So we reckon the Tullett / GFI deal could be in trouble after all.

NH:

We think – but we don’t know for sure either way. Remember this is RAW.

NH:

actually there is a more positive story doing the rounds on Collins Stewart this morning

NH:

shares up 3p to 95.5p

NH:

on the back of this email, which has been doing the rounds this morning

NH:

Further to the 6th & 22nd August story, its seems it just won’t go away…just to remind you… This was the first version…

NH:

- This would effectively allow Terry Smith to realize cash and still own/chair
a larger player in the form of GFI/Tullet. – His approach as CLST LN has been of ‘absentee landlord’, so this removes an unwanted impediment.
- As boutique banks/Stockbrokers are still in vogue (amazingly) & with
Maquarie bank starting in London, Hitchens gone to Indians etc,
Collins is still a worthy prize, which includes Hawkpoint, which in itself is very sale-able for when deals happen again. We said Buy at 80p, Buy at 90p & at 95p, we’re not changing our mind!!!

NH:

of course, there are a couple of real deals out there this morning

NH:

Axon, an IT company which specialises in Sap systems

NH:

has recommended a 600p a share offer from Indian group Infosys

NH:

now the shares are trading through the terms of the offer

NH:

up 105p at 607.5p

NH:

a rise of 21%

PM:

So is a counter likely???

NH:

traders seem to think it is possible

NH:

they reckon this is not a knock out offer

NH:

after all Axon shares were trading at 900p in November

NH:

so although Infosys is able to talk about a 30% premium to the share price over the past three months

NH:

the offer is not too generous

NH:

that said, there are some irrecovables

NH:

18.1%, with the irrevocables from the three founders (amounting to 12.6%) being binding even if a higher competing offer is made for the company.

NH:

so that will make things difficult

NH:

but another offer has to be likely

NH:

it is quite clear that corporate buyers are looking to take advantage of the current bear market to pick rivals up on the cheap

NH:

Adecco has tried to do it with Michael Page

NH:

and Xstrata with Lonmin

NH:

anyway

NH:

here’s some analyst comment

NH:

from Altium Securities

NH:

Recommended cash offer at 600p Yesterday Indian IT services vendor Infosys announced an agreed offer for Axon for 600p per share, including an interim dividend
of 2.25p.

NH:

The offer values Axon at £407m and represents a premium of 19.4% to the closing share price prior to the offer and of 31.7% to the average share price over the past three months.

Infosys has irrevocable undertakings from management and others
totalling 18.1%, with the irrevocables from the three founders (amounting to 12.6%) being binding even if a higher competing offer is made for the company.

NH:

Not a knockout bid We have long touted Axon as a potential candidate in the ongoing consolidation in the software and IT services sector, so yesterday’s offer hardly came as a surprise. That said, given that Axon continues to perform well, as evidenced by its strong interim results this morning, and is widely recognised as a
global leader in its field, we believe this offer leaves room for a counterbid closer to 700p.

NH:

The 600p offer values Axon at just over 13x FY 2009E earnings and 8.1x FY 2009E EV/EBITDA, significantly lower than the recent takeover of fellow consultancy Detica.

Although Axon is a much more cyclical business, this morning’s interims (see below) suggest that management’s strategy of focusing on defensive sectors has been successful and is likely to continue to be.

NH:

Interims ahead of estimates This morning’s H1 results to 30 June came in slightly ahead of our estimates at both top and bottom line. A cautious but optimistic outlook statement also suggests that our full year forecasts are likely to prove conservative.

We will leave them unchanged for now but will revisit them should the bid fall away.

Hold out for a higher offer Axon has taken pleasure in giving many of its larger global competitors such as IBM, Accenture and Deloitte bloody noses over the past couple of years.

We would therefore not be surprised to see a counterbid from one of
the above, or indeed from any number of global IT services vendors, in order to prevent Axon getting into the hands of another relative upstart like Infosys.

Hence we see little merit in committing to this offer at this stage and see something approaching
700p or above as a better reflection of Axon’s strategic worth.

NH:

and this is from Landsbanki

NH:

Axon (Software & Computer Services, Not Rated) – Axon receives cash offer SAP implementer Axon has received a cash offer at a 19.4% premium to its closing price on Friday from Indian outsourcer Infosys.

The deal values the company on over 13.6x its 2009 earnings (600p, market cap of just under £400m). This deal means that approximately 43% of the companies we track within UK IT services have been taken out by a mixture of commercial and industrial buyers (Axon, Civica, Detica, IBS, Northgate Xansa and Vega).

We regard Morse as the most likely company to benefit from read through from the deal with its Diagonal SAP consultancy being the most obvious attraction. Morse has weakened significantly in recent months due in part to its focus on consulting to the financial services sector, and now trades on a 2009 P/E of only 5.6x, albeit with a market cap of only £50m. Innovation group and Anite continue to look cheap and vulnerable to overseas acquirers, and on the product side, we would mention Kofax and SDL are possible bid targets.

BE:

Sorry to crash in

PM:

Hello Bryce — what you got?

BE:

But it’s worth sharing a note from KBC Peel Hunt on Axon

BE:

We had heard rumours that Fujitsu had walked away from the negotiating table earlier this year having found a
price of 700p unacceptably high. The 600p offer from Infosys represents an exit P/E of 15.5x 2008E earnings, a
rating not out of alignment with many of the acquisitions seen in the sector this year. Bearing in mind potential
weakness going forward, shareholders would be wise to accept the offer from Infosys. Particularly as we are
hearing of staff retention issues in light of the business being up for sale.

PM:

Thanks for that

BE:

I suspect it’s the Fujutsu link that has the shares trading through the offer at the mo.

PM:

Hmm

PM:

Right — we are now done. Sorry if that session was a tad chaotic

NH:

I need to get back to match fitness

PM:

nah – -there was plenty in there

NH:

should have been subsituted after 30mins

PM:

Thanks for (most) of the comments below

PM:

and thanks for joining

PM:

Obviously, everyone is welcome, though we don’t really discuss many penny punt stocks here.

PM:

And please dont abuse other commenters

PM:

We will be back tomorrow at 11am

NH:

when we will be on the ball

NH:

see ya

This entry was posted by Paul Murphy on Tuesday, August 26th, 2008 at 11:02 and is filed under Uncategorised. Edit this entry.

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Markets live transcript 26 Aug 2008

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