Markets live chat transcript for the chat ending at 12:02 on 28 Nov 2008. Participants in this chat were: Paul Murphy (PM) Bryce Elder (BE)
PM:
Welcome to Markets Live – FT Alphaville’s regular stock chat that fills some time up before lunch.
PM:
it is friday
PM:
Sick boy is still sick.
PM:
Neil Hume is unwell.
PM:
So…..
PM:
We’ve got Bryce!
PM:
Who is back from holiday, tanned and relaxed.
BE:
Err … I was in Dundee for a week, so I return neither tanned nor relaxed.
PM:
PM:
It is Friday, Thanksgiving weekend in the US. There’s precious little going on.
BE:
That’s right, Murphy, draw the readers in.
PM:
So update me on the Footsie
BE:
We are up 1 whole point, at 4227
PM:
That’s what’s going on — one point higher
BE:
Rose at the open as miners followed a rally in Oz, but it’s all gone flat.
PM:
We have some rubbish CBI figs on retail sales just a few mins ago
BE:
Consumer confidence was pretty grim overnight as well
PM:
Grim grim grim
PM:
Let’s go to the banks, cheer ourselves up
PM:
PM:
Now, how about this Mr Overhang guy?
BE:
You are referring to John Crompton I suspect.
PM:
I am – he’s the Merrill Lynch man that is moving over to Kingman investments, the vehicle set up to manage the governments stakes in the banks.
PM:
Crompton has to devise a strategy to eventually sell the government’s stake in RBS and Lloyds/HBOS.
PM:
So what’s his assets under management?
BE:
Well, up to £28bn.
PM:
Hmmm. Do you think we could set up a little portfolio spreadsheet, the Kingman basket, and monitor the performance?
BE:
I’m sure we could.
BE:
We have of course got the result of the RBS rights issue this morning.
BE:
Idiots speaking for 55,977,458 shares have bought new stock at 65.5p when they could have paid 55p in the market.
BE:
So HM treasury will now step in and buy 22,853,798, 818 shares
BE:
Give the gov a stake of 57.9 per cent.
BE:
Let’s hope the rights of minority holders are protected going forward.
PM:
So whaat’s RBS stock done in reaction?
BE:
Not awfully well – down 2.3p at 52.7p
BE:
and 22bn pennies is rather a lot
PM:
And having paid 65.5p, Kingman Investments is sitting on a paper loss of ….??
BE:
Hang on.
BE:
£2.9bn
PM:
Oh dear. And do we continue to mark Kingman to market?
BE:
Rude not to.
PM:
How big will the holding be in Lloyds/HBOS?
BE:
Up to £13 billion
PM:
Actually, hadn’t realised. – The prime minister is in Halifax today – at the HBOS headquarters.
BE:
What’s he doing, handing out P45s?
PM:
Hmmm
PM:
This is from the Halifax Courier:
PM:
PREMIER Gordon Brown was expected at the HBOS headquarters in Halifax today to bolster staff worried about the Lloyds TSB takeover.
Mr Brown had been invited by MPs Linda Riordan and Chris McCafferty amid growing concern that up to 6,500 jobs could be affected locally.
Mr Brown had been invited by MPs Linda Riordan and Chris McCafferty amid growing concern that up to 6,500 jobs could be affected locally.
Last night Mr Brown promised: “Where we can save jobs, we will.”
He said the Government was determined to build a strong banking sector for the future. Mrs Riordan said Lloyds TSB would be “absolutely crazy” not to take on the workforce and that they were under tremendous pressure not knowing what the future held.
Mrs McCafferty said: “I want the Prime Minister to see for himself the highly trained and committed workforce and the infrastructure at the Halifax hub so he can use that information when he speaks to Victor Blank, the chairman of Lloyds TSB.”
The PM was expected to meet executives and union representatives during a tour of the Trinity Road building.
Ged Nichols, general secretary of the Accord union, which represents more than half the HBOS staff, said he was looking forward to speaking to him. Lloyds TSB shareholders voted earlier this month to approve the takeover, which Mr Nichols said was good news for jobs in Halifax. HBOS shareholders vote on December 12.
BE:
Isn’t the whole cabinet up in Yorkshire today?
PM:
Yes Leeds.
PM:
From the Yorkshire Post:
PM:
Today’s cabinet meeting is only the second outside London since David Lloyd George hauled his senior colleagues to Inverness to discuss the Ireland situation almost 90 years ago.
Gordon Brown announced plans earlier this year to hold more meetings away from Whitehall and in September took his top team to Birmingham.
Gordon Brown announced plans earlier this year to hold more meetings away from Whitehall and in September took his top team to Birmingham.
Before this afternoon’s meeting, cabinet ministers were dispatched across the region to carry out a series of high profile visits and meetings.
Business leaders from the city were invited to breakfast with Chief Secretary to the Treasury Yvette Cooper and Universities Secretary John Denham.
PM:
Sophistication? Don’t talk to me about sophistication – I’ve BEEN to Leeds.
BE:
????
PM:
Sorry – just some old Pauline Calf joke.
BE:
Anyway, LLoyds is trading up 3p at 167p …
BE:
Hbos is up 2.4p at 95p
BE:
So at a 5p discount to the Lloyds merger terms, which of course have been voted through by shareholders.
BE:
PM:
Right — Tuna has brought up Taylor Wipeout
BE:
Taylor Wipeup
PM:
TW – whatever – im just gobsmacked by the moves we’ve seen.
PM:
Recap: We’ve got singed digits on this one.
BE:
PM:
We thought it unlikely that a refinancing might be agreed above the market price – and so we were implicit sellers at 5/6p
PM:
And what happened? Stock rocketed.
BE:
Hiked yesterday afternoon – and hiked again this morning
BE:
BE:
Ran all the way up to 13.5p.
BE:
Come back a bit since then – currently up 1p at 11p
PM:
But what is going on???
PM:
This is TW? What has possibly changed on the upside?????????
BE:
Well, as idiotbox notes, there’s a short squeeze on not much volume
BE:
And Axa, which was its biggest shareholder, managed to get the thing off its books
BE:
And there was a rather spiky note yesterday from KBC …
BE:
Taylor Wimpey (TW.L) – Could debt for equity be a good thing?
BE:
On Tuesday a debt for equity (d4e) was a bad thing – shares fall 37%. On Wednesday, d4e is the best thing and the shares rally 31%. Who is right? Well the shares are so low relative to any half sensible attempt to measure fair value (NAV 207p, NAV after another big provision 106p) and so much equity value is lost already that actually even a massive d4e swap is probably the best option for existing shareholders. If debt can be reduced and thus interest cover lowered or covenants waived it may be possible that the interest-related breaches do not occur, so the cross default on the bonds does not occur, nor does the loan to value breach on the bonds and
so the company faces considerably less pressure.
so the company faces considerably less pressure.
BE:
If half the debt was swapped out there would significant dilution but most likely to a level higher than the current share price. The extent depends on the strike price but the shares in the last 10 days have traded between 4p and 15p so the strike is anyone’s guess. But the banks should appreciate the impact on the valuation of a lifeline and may take equity above the current price either directly now or as a warrant.
There remains the complexity of who gets what (between the banks and the USPP debt) and what of the bondholders? These are still big issues but with the board now going past the intellectual barrier of dilution, there are new possibilities. The case for selling the shares is now weak and investment still remains ultra high risk but even with a d4e swap it is possible to see the shares well above the current level a 50% debt swap at 10p and after an additional £1bn of land provisions the NAV could be as high as 21p but the price of this is dilution of 88%.
BE:
That’s from Robin Hardy at Peel Hunt
PM:
Okay – so the argument is that the implicit value of a lifeline is so great in relative terms that the banks might well agree to take an exercise price above the market.
PM:
Why?
BE:
I don’t know – its just Robin Hardy’s view.
PM:
I see no reason why the banks might be altruistic towards TW shareholders.
PM:
Maybe, if the market price held at 10p they might do a workout at 5p. But say 15P?
PM:
Looks like a mad, dangerous situation for equity punters.
BE:
V v dangerous. Hands away form the button Zoomy!
BE:
Too unpredictable.
PM:
Zoomy — move away from the controls
PM:
PM:
Where next?
BE:
How about the ten year gilt?
PM:
Er, well if you insist
BE:
I thought you were always looking for barometers of stress.
PM:
We are, we are
BE:
Well, you need to keep an eye on the flattening of the yield curve.
PM:
BE:
The yield on 10 year gilts has been tumbling. Currently around 3.74.
BE:
That’s the lowest seen since it came in as a benchmark.
PM:
Telling us?
BE:
Well, the threat of deflation, basically.
PM:
Speaking of which – seen euro inflation?
PM:
Dived from 3.2% in October to 2.1% in November – way lower than expected.
BE:
Meaning the ECB is going to “do a King”
PM:
Yep – people now saying a 75bp cut a cert next week
PM:
Take euro interest rates down to 2.5 per cent
PM:
Unemployment up in the eurozone also – 7.7 per cent.
PM:
PM:
Here’s a quick take from Nick Kounis at Fortis:
PM:
Eurozone HICP inflation fell to 2.1% in November from 3.2% in October, leaving it at the lowest level since September 2007 and within touching distance of the ECB’s price stability goal (of close to but below 2%). The drop was bigger than expected (consensus: 2.3%). Plummeting energy and food price inflation most likely drove the drop. If oil prices stick at their current levels headline inflation is likely to decline to below 1% by the middle of next year. More importantly the sharp slowdown in demand that we are currently witnessing will keep inflation well-contained over the medium term horizon relevant for the ECB’s policy making. The inflation report – taken together with a whole range of weak activity indicators – makes a strong case for a more aggressive rate cut at next week’s meeting than we have seen up until now. We are forecasting a 75bp reduction, which would take the key policy rate to 2.5%.
BE:
Ta for that.
PM:
BE:
Can we return to some stock stuff now?
PM:
Yeah — why not
PM:
What’s happening with ITV?
PM:
See BSkyB has applied to appeal the stake ruling. Doubt that has come as a surprise to anyone though.
BE:
Shares slipping back a bit. Down 2.5% at 35p in the middle
BE:
Sorry – 2.5p, not %
BE:
… anyway, that’s having been up 18% yesterday, on the back of a leaked internal memo from the COO warning of further cost cuts after business deteriorated.
BE:
Called in Boston Consulting Group to work out another wave of redundancies.
BE:
“These are extraordinary times for ITV.”
BE:
“The economic outlook has worsened significantly since the summer and businesses right across the UK, including most of our customers, are facing considerable uncertainty.”
BE:
No new figures though, needless to say. But it did refer to analysts’ current forecasts for total television advertising to fall by 5% this year, and by 6 to 7% next.
BE:
“The need for action is therefore urgent. We need to accelerate our plans to improve the efficiency of all our operations now.”
PM:
Okay – but I thought ITV had already said it would be handing out the pink slips?
BE:
They did:
BE:
£35m of cuts by 2010 were announced a few months ago, in addition to £41m of savings announced in 2006 which were planned to feed through this year.
BE:
That’s despite the £48m they’ll be saving by 2010 after Ofcom relaxed the rules on the provision of regional programming a couple of months ago.
BE:
So, basically, if things go on in the same trend then by 2010 they’ll be reduced to sending Ant and Dec to Epping Forest, and filming them on mobile phones.
PM:
Any analyst comment on this?
BE:
Negative, as you’d imagine. UBS says it had already factored in additional £30m of cost savings, and can still only reach a 25p target price.
BE:
And this is from Nick Bell, at Jeffries:
BE:
Given that the downturn will be felt most in the broadcast division and that 74% of costs are programming, we believe it is likely that any new initiative will cut back in this area.
Advertising outlook for next year has, if anything, deteriorated further since we last updated numbers in October. We are currently forecasting a 10% decline at ITV in-line with the market. The financial sector (third largest advertising category on ITV) looks set to be slashed – we are hearing that one large bank intends cutting its budget by 50% and the Lloyds-HBOS merger could have a similar net effect. Retail, the largest category, has seen growth this year fuelled by price wars between the supermarkets but is likely to decline next year especially given potential closure of Woolworths and other large chains.
Stock is trading on very elevated multiples – ’09 PER of 16.6 compares to media at 11.5. This compresses to 11.7 in 2010 based on our assumption of market recovery of 3% growth and ITV at 5% recovery (outperformance assumes lifting of CRR) looks premature at best and possibly too optimistic given the uncertainty in the current economic climate.
BE:
He also makes a scary argument about the pension fund:
BE:
We think the pension deficit poses a real threat to shareholder distributions. Trustees are likely to see the interim IAS 19 figure of £221m as understating its ‘true’ size, while under solvency methodology it could be six times larger putting it in-line with ITV’s market cap and DCF value.
BE:
(NJS: Good point. They could just stand Ant next to a mirror and cut costs by half.)
BE:
BE:
Interesting RNS just out on Moss Bros.
PM:
Well it is just Philip Green confirming he has sold out
PM:
Said yesterday he would not bid
PM:
He’s sold to a trust represented by one Simon Brewin — at 28.85p
PM:
What is going on there — sold at way over teh market price — which is currently 20p
PM:
IN auction now
BE:
Article on Brewin:
BE:
As managing director of Leeds-based tailoring business Berwin & Berwin he is one of the UK’s biggest suit suppliers, with customers including Next, Ted Baker, Slater Menswear, Speciality Retail Group and Moss Bros. He is also a retailer, with 52 concessions in House of Fraser department stores.
PM:
Moss Bros still in auction
PM:
Right — Moss Bros supplier
BE:
And he already bought a 5% stake from the Gee family earlier this year.
PM:
Here’s his picture:
http://www.drapersonline.com/imageGallery.html?articleUri=tcm:12-902982&pageUri=tcm:12-902986-64&xlImageUrl=/images/Simon%20Berwin_resized_150_tcm12-902965.jpg
PM:
Ay Yup, we’ve gone all yorkshire today
PM:
Moss Bros still in auction i think
PM:
PM:
Just a quick one — something of a rarity at the mo
PM:
Diageo has just launched a €1bn eurobond
PM:
Priced at “mid-swaps” — pluys 310bp
PM:
PM:
Anything else?
BE:
Are we allowed to talk about Continental again?
PM:
Hm. Do we have to?
BE:
Well, it’s quite a lively market right now. Although it’s best to flag up absolutely everything on the subject as absolutely red raw.
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
Indeed
BE:
Anyway, I think Sam noted yesterday a story in Handelsblatt saying that Schaeffler had mandated JPMorgan to restructure the debts it needs to take over Conti.
BE:
Now that helped add froth to a whole backwash of rumours that Schaeffler is looking to back out of the deal.
PM:
Hmmmm. Is it sensible to repeat any of these rumours here?
BE:
They’re affecting the price, so I’d argue yes – albeit with a huge stock tartare warning
BE:
Basically, people have been claiming that they’re trying to scupper their own tender offer so that they would be left with just a minority stake in Conti, and would not have to take on E10bn in debt to pay for the tendered shares.
BE:
Another tale – which doesn’t make a lot of sense, quite frankly – is that Conti could call a rights issue to which schaffler would subscribe, causing a deal to break.
BE:
That one seems well wide of the mark though, and people who have looked at the MAC clause say a cash call wouldn’t be a dealbreaker anyway.
BE:
And there’s a wild rumour doing the rounds is that OEMs and other suppliers are being badgered to complain to the EU competition about the deal.
BE:
And I emphasise once again that this is totally unsubstantiated gossip of the most bandit-ridden kind.
PM:
But Schaeffler has been in the market to buy up Conti stock pretty regularly, hasn’t it?
BE:
Indeed. There’s another questionable story doing the email loop that they get a margin call if Conti falls below a certain price.
BE:
Oh, and on a totally different tack …
BE:
Conti is apparently going to drop out of Deutsche Boerse’s DAX index basket because new exchange rules state that a company must have 10% of its shares in free float.
BE:
Schaeffler currently has about 90%.
PM:
Can we move on now?
BE:
Certainly. I guess the only conclusion I was looking to make was that Conti is the ultimate squeaky-bum market at the moment. Happy to leave it alone for now.
PM:
PM:
PM:
Stringer — on Moss Bros — it would appear so — but situation is not immediately clear
PM:
Stock is quoted at 23/24 right now
PM:
As for comments on Diageo bond — i prob shouldnt have put that up without the time to go and checks
PM:
Was jsut a reuters flash
BE:
For Laurence, I direct you to a good, fairly bullish story on p15 of today’s FT all about agri commods.
PM:
PM:
Moving on briefly
PM:
Did you see this:
PM:
LEGENDARY INVESTMENTS PLC
NOTIFICATION RE: ECHELON WEALTH MANAGEMENT
LEGENDARY INVESTMENTS PLC
NOTIFICATION RE: ECHELON WEALTH MANAGEMENT
PM:
The board of Legendary Investments plc (the ‘Company’) has received a notification from KPMG, the provisional liquidator of Echelon Wealth Management Limited (‘Echelon’). The Company had a trading account with Echelon which acted as broker for the majority of the Company’s trades. The trading account contained a substantial positive balance of up to approximately £600,000 representing the bulk of the Company’s cash reserves.
PM:
The notification states that KPMG are at an early stage of their investigations into the history of and reasons for Echelon’s failure. KPMG are pursuing a number of different means of recovering funds for creditors and further detail will be provided in due course.
There can be no certainty as to the timing of recovery or amount recoverable of the Company’s funds. Until clarification can be obtained on this issue the Company has requested that AIM suspend trading in its shares with immediate effect.
PM:
I think Legendary might have something to do with Shami Ahmed.
BE:
Errr…. I think you may be right.
PM:
Joe Bloggs guy
PM:
Another northerner!
BE:
Eaitisham (Shami) Ahmed, 46, Chairman and Chief Executive Officer, is the entrepreneur who, in the late ’80s and ’90s originated and developed the “Joe Bloggs” jeanswear business. He has contributed to the development of the Joe Bloggs and several other of its brands. Shami has also brokered investment into and provided support to a number of companies, including various AIM listed companies. Shami is the founder of Legendary Investments. In 1991 Shami was awarded an honorary degree by Lancashire University and in 1998 he won the EMMA awards for the categories of Best Marketing Campaign and Business Personality of the year.
PM:
Echelon – of course was the Glasgow CFD house that blew up
PM:
Some very heavy stories around this one
BE:
Er yeah. This is all a bit uncomfortable …
PM:
okay, fair enough
PM:
BE:
On Nexen, mentioned below.
BE:
Canadian oil company, been a bandit favourite for quite a few weeks.
BE:
Trading at around $26 – been going gangbusters of late
BE:
(That’s Loonie dollars, incidentally)
BE:
The latest tale is that Total’s advisors have had an emergency meeting to plot next move.
PM:
This remains RAW, yeah
PM:
Running around the Candian bush
PM:
You might get eaten by a bear
BE:
Very much so – and even the gossip mongers are cautious to suggest an outcome. Saying they could go ahead or walk.
BE:
But the theory is that they can’t let the share price run much further.
BE:
Worth noting there’s a lot of people all over this one though.
PM:
Price has all but doubled in the past week
BE:
Yup – it all brings back memories of a certain American hotellier …
PM:
being?
BE:
Morgans Hotel.
PM:
Ah, yes
BE:
One of the great disappearing bid stories of recent months.
BE:
BE:
Anything to finish up with?
PM:
Er, it’s friday
PM:
Used to be a time when we always got a Friday rumour
BE:
And it was usually wrong.
PM:
Yeah well Friday rumours are not facts — ever
PM:
They are just broker stories that might come true — one day
PM:
But we dont even get those any more
PM:
PM:
Tell you what we have got tho
BE:
Go on then
PM:
The Christmas Tree Guide
SECTOR REVIEW
Selecting Your Perfect Tree
SECTOR REVIEW
Selecting Your Perfect Tree
PM:
From the paper / forest products desk at Credit Suisse
BE:
Ok ….
PM:
Nearly everyone has been affected by the global downturn. Many have lost jobs, most have lost money, and few feel the level of security they felt in past years. But the holidays are a time for family, friends, and community. “Teach us to delight in simple things”, was Kipling’s suggestion, and is good advice in any market, and particularly during this holiday season.