Markets live chat transcript for the chat ending at 12:14 on 25 Mar 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
hi there
PM:
My clock has been fixed
PM:
It’s 11.03
PM:
It’s Markets Live
PM:
FT Alphaville daily markets chat
PM:
Neil is reading Money is the way
PM:
he’s nervous
NH:
Too right I am
NH:
look at this
NH:
Yes, it is. They are all there in the desert, you know. Lionel, Lucy, Gideon, Gillian, Paul, Neil, even Sam. I have seen them all.
Yes, it is. They are all there in the desert, you know. Lionel, Lucy, Gideon, Gillian, Paul, Neil, even Sam. I have seen them all.
And it is massive, with more to come. And it is a mess right now. Still loads of work to be done. So I’m thinking the middle of next week. Wednesday/Thursday, maybe.
O my children, watch this space.
PM:
I’m not. The money burns in my soul
NH:
what is he planning??
NH:
a Goodwin style attack on the FT?
NH:
this is all very worrying
PM:
Dont suggest such a thing Neil
PM:
I’m fine with Fowke
PM:
He’s a fine Fowke
PM:
r
11:07AM
PM:
right — lets start outside our comfort zone, Neil
NH:
that doesn’t narrow things down
PM:
PM:
You know how we are generally pretty ignorant about gilts?
NH:
Yeah, I know, we’ve got to learn. Going to be swimming in gilts pretty soon.
PM:
Hmm – we need help from the readers here.
PM:
Who can explain the significance of this poor auction result this morning?
NH:
Debt management office were flogging some really long dated paper.
NH:
And few people wanted to buy it.
PM:
1.75bn of 2049 4.25 per cent.
PM:
Covered only 0.93 times
PM:
Isn’t this an emergency? Just as they turning on the taps, eveyone’s suddenly had their fill of gilt-edged.
NH:
Threat of inflation, presumably.
NH:
Meanwhile, there’s this sense that QE is failing on both sides of the Atlantic.
NH:
Yields on british paper now back above where they stood when Merv made his move.
NH:
10 year yields at 3.5 per cent
PM:
And it is similar in the US. Yields on treasuries have lost have the move thye made when the Fed announced its 300bn purchase plan
NH:
Hmm – and John Kemp has been pumping loads of stuff out on the fact that there has been now carry over from the US treasuries market to the corporate bond market.
PM:
Which is what QE is supposed to do.
PM:
Have you got some stuff from him.
NH:
I have – quick note from him this morning
NH:
The Fed’s bid to lower long-term interest rates has largely failed.
NH:
While 10YR Treasury yields (2.72%) are still about +29 basis points below the level prevailing before the quantitative easing announced last Weds (3.01%), rates on Aaa-rated corporate paper (5.62%) are +30 basis points higher (5.32%) and yields on Baa-rated paper (8.56%) are +39 basis points higher (8.17%).
Lower rates on government debt have been more than offset by a widening in credit spreads across the whole credit spectrum.
NH:
All the Fed is doing is manipulating apparent prices and yields in a fairly thin part of the government yield curve. It is not having much impact on the broader market.
It is possible to argue in the counterfactual — that corporate credit costs would have risen even more in the absence of Fed action. But in terms of actually lowering borrowing costs, the Fed’s bid appears to be failing so far.
PM:
Also worth loking at this
PM:
Came out earlier in the week from the Fed
PM:
The Role of the Federal Reserve in Preserving Financial and Monetary Stability
Joint Statement by the Department of the Treasury and the Federal Reserve
Joint Statement by the Department of the Treasury and the Federal Reserve
NH:
Defending its actions, eh
PM:
But if QE is in trouble on both sides of the Atlantic – why are shares so stable. – relatively????????
NH:
Dunno
NH:
mind you they are coming under a bit of pressure now
NH:
FTSE 100 off 50 points 3,863
PM:
But let’s stop and think about this for a moment
PM:
– corporate credit market is largely broken.
PM:
government debt markets now in crisis
PM:
dollar in ragged retreat
PM:
Equtiies fine (ish) and people saying “we’ve seen the bottom”
PM:
What do the bottom pickers know that we don’t???
NH:
not sure
PM:
Au Contraire mentions the gilt arb
PM:
Buy em low from the DMO and sell high to the BoE –can it really be that simple??
NH:
right we have some breaking news
11:14AM
NH:
from the insurance industry
NH:
The Board of Standard Life plc confirms that in the Chairman’s statement to
shareholders due to be sent out shortly in Standard Life’s Annual Report and
Accounts 2008, Gerry Grimstone, Chairman, will make the following comment
regarding management succession.
shareholders due to be sent out shortly in Standard Life’s Annual Report and
Accounts 2008, Gerry Grimstone, Chairman, will make the following comment
regarding management succession.
“Sir Sandy Crombie and the Board have agreed that the process of identifying his
successor should commence in 2009. There is no fixed timetable and we do not
envisage making any further statements about this matter until a successor is
confirmed and a timetable for transition is set.”
Sir Sandy Crombie will remain Group Chief Executive until the Board has
appointed his successor and an orderly handover process has been completed.
PM:
Hmm — Sir Sandy has done well to survive this long, in my view
NH:
a miracle
PM:
Well, i didnt say that
11:16AM
NH:
right where to now?
NH:
We should chat about Barclays
PM:
Should we? I thought we’d agreed to rein back on the banking coverage. It’s boring.
NH:
Oh no you don’t.
NH:
Murph is a tad uncomfortable with this
NH:
Barclays did not mislead the media on iShares sale
NH:
Letter from the head of comms at Barclays
PM:
Look, im not going to be drawn into commenting on that.
NH:
Little puffs of steam were coming out of Murphy’s ears.
PM:
That would be rude – to comment – and point out certain things.
PM:
What I will say tho, is that it made me smile that Alistair only sent a letter after the original blog post was re-published in the newspaper.
PM:
Obviously felt he had to “say something.” – write a letter.
PM:
Here on AV we have a much more direct and open right to reply service than the letter page.
PM:
Called the comment box.
NH:
Anyway…..
NH:
What’s of much more interest than Smith’s letter is this
NH:
Code will help Barclays avoid tax haven curbs
NH:
That looks like a very well informed number from Alex Barker and colleagues
PM:
Very detailed – and quite an eye opener.
PM:
Basically, the treasury are trying to get off this tax hook – fine for Barclays to keep their structured tax dodge division going – no impediment to joining the GAPS.
PM:
Cos obviously, all that stuff Brown was saying about clamping down on off shore centres – that was just guff for the masses.
NH:
Reality is that they can’t clamp down.
PM:
It’s also fresh evidence that the authorities are just as embarrassed by the Barclays document saga as the bank itself.
PM:
Specifically, HMRC. Publishing the docs meant they might have to do some work and try and find out what Barclays is up to.
PM:
Anyway, I’m sick of Barclays
NH:
me too, sick to death of them
PM:
Tricksy bank
PM:
Let’s move on.
NH:
Hold on hold on.
NH:
You wrote this post yesterday.
PM:
yeah, so what?
NH:
Well how does your suggestion that Diamante Bob has taken a 99% salary cut square with this.
NH:
Barclays cuts Diamond’s pay to £17m
The boss of Barclays’ investment banking arm has taken a £4m blow to his annual remuneration
The boss of Barclays’ investment banking arm has taken a £4m blow to his annual remuneration
NH:
Because you know the author of that piece – Jill Treanor – is an expert on UK remuneration reports…
PM:
Yes yes
PM:
I took a view that the bonus money she refers to was double counting.
PM:
Was included in his total comp figure for 2007, even if the actual cash did not reach his pocket until 2008.
NH:
Hmmm.
PM:
No, seriously!
PM:
lets mvoe on
11:21AM
NH:
right some further news on the gilt auction
NH:
DMO SAYS AFTER FAILED AUCTION THAT 2049 IS “RISKIEST PART OF THE CURVE”
NH:
DMO SAYS IMMINENT FINANCIAL YEAR END MAY ALSO HAVE DETERRED SOME BIDDERS AT 2049 SALE
NH:
nonetheless
NH:
UK GILT FUTURES MORE THAN HALVE LOSSES MADE AFTER FAILED LONG-DATED AUCTION, DOWN 60 TICKS ON DAY
11:23AM
PM:
Monkey — knowing your new employer, I can report that we have LOADS of readers there
PM:
In fact, there are probably more from that bank than any other
NH:
yes, but that assumes he has access to a terminal
PM:
PC
PM:
Or Iphone
11:24AM
PM:
Wider market
NH:
well, the FTSE 100 is down 46 points at 3,864
NH:
Aviva the biggest faller
NH:
but as their PR company were quick to point out this morning
NH:
that is only because they are ex-dividend
NH:
Good morning. I am sure you’re already aware, but just to remind you that Aviva’s shares have gone ex-dividend today. Aviva’s final dividend per share was 19.91p. The total dividend per share was maintained at 33.00p
Aviva (AV:LSE): Last: 231.00, down 36 (-13.48%), High: 244.00, Low: 227.00, Volume: 6.84m
PM:
PM:
so they have not gone ex that well
NH:
no
NH:
and it will be interesting to see what happens from here
NH:
obviously Aviva’s dead cat bounce has been helped by the performance of the wider market
NH:
but also by people trying to get on the register for the divi
NH:
a few traders reckon the stock could take quite a tumble from here
NH:
and while we are in the insurance sector
NH:
results out from Legal & General this morning
NH:
and they are pretty poor to be honest
NH:
hang on a mo
PM:
Oh my — look at the stock
NH:
they were holding up earlier
NH:
no more
PM:
Down 6.1p at 36.7
PM:
what has happened there?
NH:
mind you we should get things in perspective here
NH:
they have doubled in the past few weeks
PM:
true
NH:
and there is nothing in today’s figs
NH:
that would want to make you buy
NH:
basically L&G is in cash preservation mode
NH:
final divi halved
NH:
that’s the first cut in the company’s history
NH:
going to write less new business
NH:
and the stuff they do will be less capital intensive
NH:
so that means pension protection stuff
NH:
on the plus side
NH:
they have at least come clean on their CDOs
NH:
an internally constructed and created one no less
NH:
but
NH:
this has not put to bed concerns about the quality of its assets
PM:
What’s that, a home made bomb?
NH:
yeah
NH:
it is
NH:
created, managed and rated in house
NH:
not be eh
NH:
sort of like a little experiment
PM:
PM:
dangerous experiment
PM:
Blow yer hands off
NH:
we will create our own and then see if want to buy some more
NH:
anyway, L&G is basically a levered play on corporate bonds
NH:
and more so now
NH:
this morning’s statement also reveals that they sold a £1.1bn of equities last year
NH:
(Lemmy I think you will discover the minion you are referring to does not feature on this year’s show)
NH:
and some of that was done in the first quarter of the year
PM:
when stocks were on their knees
PM:
analyst comment?
NH:
sure
NH:
Cazenove are really, really unhappy with the div cut
NH:
says it will hit management credibility
NH:
here’s James Pearce from the brokerage
NH:
The dividend cut is unwelcome, and may affect management credibility. Although the yield may suggest a cut was priced in, the dividend is in our view the only fundamental many observers really believe in and a cut is
traumatic, even if it is the right thing to do given tumultuous markets. Solvency is better than previous guidance and the new dividend level looks affordable. EEV trading looks disappointing particularly in the UK, while IFRS profit and NAV is in line with our estimate. The stock looks cheap but a period of mourning may be necessary before it recovers from the dividend cut and we are cutting our rating from OUTPERFORM to IN LINE.
traumatic, even if it is the right thing to do given tumultuous markets. Solvency is better than previous guidance and the new dividend level looks affordable. EEV trading looks disappointing particularly in the UK, while IFRS profit and NAV is in line with our estimate. The stock looks cheap but a period of mourning may be necessary before it recovers from the dividend cut and we are cutting our rating from OUTPERFORM to IN LINE.
NH:
L&G has paid a full year dividend of 4.06p, 32% lower than the 5.97p FY07 payment, and 23% below the 5.3p consensus. The final dividend has been halved to 2.05p, and we would expect a full year 2009E DPS of around 3p, half
the 2007 rate. The dividend cut will be controversial, given unequivocal comments from the executive management team, and the continuing buyback in 2008. We suspect that the FSA’s increasingly stringent solvency tests have
prompted the non-executives to make sure they did not make the same mistake as the bank boards who raised 2007
final dividends only to regret it later. At least the 7% prospective yield post cut suggests that the market had deep
suspicions about the dividend
the 2007 rate. The dividend cut will be controversial, given unequivocal comments from the executive management team, and the continuing buyback in 2008. We suspect that the FSA’s increasingly stringent solvency tests have
prompted the non-executives to make sure they did not make the same mistake as the bank boards who raised 2007
final dividends only to regret it later. At least the 7% prospective yield post cut suggests that the market had deep
suspicions about the dividend
NH:
EUIGD year end solvency surplus is now reported at £1.9bn before dividend accrual compared to “in excess of £1.6bn” quoted on 17th February. Solvency 1 cover is 169% which is good. 2009E cost of dividend at 3p would be £176m, or
10% of the year end surplus, which appears sustainable. Solvency at 23rd March would have been £1.5bn reflecting the fall in equities and the final dividend.
10% of the year end surplus, which appears sustainable. Solvency at 23rd March would have been £1.5bn reflecting the fall in equities and the final dividend.
IFRS NAV was 61p, in line with consensus. IFRS operating loss of £189m was stated after the credit reserving as foreshadowed on 17th February and was in line with our estimate.
NH:
EEV operating profit of £870m was 12% below than the £989m consensus. Within this, new business profit was £297m, down 17% and 2% below consensus. The UK performance looks weak, with new business profit below our forecast for
most products. However, the discount rate has been raised to 8.3% from 7.5%, despite the fall in risk free rate, which is conservative and probably explains the shortfall. The company has also taken a £116m persistency charge in the UK in
relation to unit-linked bonds, although it is not yet clear to us whether this relates to observed or anticipated behaviour.
most products. However, the discount rate has been raised to 8.3% from 7.5%, despite the fall in risk free rate, which is conservative and probably explains the shortfall. The company has also taken a £116m persistency charge in the UK in
relation to unit-linked bonds, although it is not yet clear to us whether this relates to observed or anticipated behaviour.
Likewise the shortfall in reported EV per share of 111p (115p consensus) reflects the use of the higher discount rate.
Outlook: cautious, selective on growth, shift to capital conservation.
NH:
and this is from KBW
NH:
Legal & General has provided an updated (31/3/2009) statutory solvency (IGD) surplus of £1.5bn post the £120mn 09 final dividend, which is in line with our expectation. Given the absence of a rights issue and a 50% cut in the final
dividend, the market could view this as positive in terms of capital management.
A commitment to control sales and costs to meet a new target for cash flow of
£450mn implies that the dividend is also now strongly covered. Finally, the fact
that there have been no defaults on corporate bond holdings in 2009 is another
positive. However, on the negative side, the EV operating profit was light of
consensus, primarily due to an unanticipated strengthening of persistency
assumptions. The EV per share of 111p was 3% light of 115p consensus, mainly
explained by a greater than anticipated impact from the pre-announced £650mn
strengthening of the statutory reserve bond default assumption. Given weakness
over last few days, we don’t see any significant negative correction from these
results.
dividend, the market could view this as positive in terms of capital management.
A commitment to control sales and costs to meet a new target for cash flow of
£450mn implies that the dividend is also now strongly covered. Finally, the fact
that there have been no defaults on corporate bond holdings in 2009 is another
positive. However, on the negative side, the EV operating profit was light of
consensus, primarily due to an unanticipated strengthening of persistency
assumptions. The EV per share of 111p was 3% light of 115p consensus, mainly
explained by a greater than anticipated impact from the pre-announced £650mn
strengthening of the statutory reserve bond default assumption. Given weakness
over last few days, we don’t see any significant negative correction from these
results.
NH:
Investment case. We believe the stock is cheap, but not the cheapest. We feel a
further rating downgrade is likely, which, together with a lower stock of capital, is
likely to constrain annuity sales. This might not be seen negatively by the market as
investors have recently been concerned about the group taking on too much of this
high credit risk leveraged business. The stock is also facing the UK domestic life
sector, which we would recommend investors avoid. Maintain Market Perform.
Cheap but not the cheapest. With a price to KBWe price to market-consistent fair
value of 39%, stock is trading at a premium to Prudential with a 31% ratio, but at a
discount to the sector average of 60%. The same message is given if we look at the
09E price to embedded value of 0.31x and the 10% 2010E ROEV, compared to the
sector average with 0.80x and 18%, respectively
further rating downgrade is likely, which, together with a lower stock of capital, is
likely to constrain annuity sales. This might not be seen negatively by the market as
investors have recently been concerned about the group taking on too much of this
high credit risk leveraged business. The stock is also facing the UK domestic life
sector, which we would recommend investors avoid. Maintain Market Perform.
Cheap but not the cheapest. With a price to KBWe price to market-consistent fair
value of 39%, stock is trading at a premium to Prudential with a 31% ratio, but at a
discount to the sector average of 60%. The same message is given if we look at the
09E price to embedded value of 0.31x and the 10% 2010E ROEV, compared to the
sector average with 0.80x and 18%, respectively
NH:
and Nomura
NH:
Investment conclusion
Legal & General’s 50% dividend cut will save the company close to £200m per year in solvency capital, and the sale of £1.1bn of equities in the last six months has significantly reduced the sensitivity of solvency to further market falls. In the short term, the share price is likely to be strongly geared to corporate bond prices, but with a £1.2bn provision for UK bond defaults and trading at a 25% discount to IFRS book value, we expect real value to emerge over time.
Legal & General’s 50% dividend cut will save the company close to £200m per year in solvency capital, and the sale of £1.1bn of equities in the last six months has significantly reduced the sensitivity of solvency to further market falls. In the short term, the share price is likely to be strongly geared to corporate bond prices, but with a £1.2bn provision for UK bond defaults and trading at a 25% discount to IFRS book value, we expect real value to emerge over time.
NH:
Summary
EV and IFRS operating earnings were below expectations as a result of one-off charges. In EV, a £114m persistency assumption change lowered the result, whereas IFRS was impacted by charges to the annuity business due to higher expected defaults and lower gilt yields.
EV and IFRS operating earnings were below expectations as a result of one-off charges. In EV, a £114m persistency assumption change lowered the result, whereas IFRS was impacted by charges to the annuity business due to higher expected defaults and lower gilt yields.
IGD capital surplus of £1.9bn (173% ratio) is £300m more than the pre-announced figure and in our view should be taken positively. 10% fall in equities now reduces surplus by £175m, compared to £300m previously.
Outlook for IFRS earnings improving as company expects to reduce UK new business strain by up to 30% and grow in-force profits 10% in 2009.
PM:
thanks for all that
PM:
Should make the point that Aviva was thumped for not slashing the divi — and now L&G is punished for cutting too far
NH:
yeah, yeah. but it is all about how you manage expectations
NH:
L&G were pretty confident on the divi recently
NH:
now it has been halved
NH:
and will be rebased going forward
NH:
to whatever earnings it makes
NH:
and the guidance in the weekend press was for a small divi cut
PM:
yes, STRNS suggested just a fractional cut didnt say the fraction was 1/2
PM:
lets move on
11:37AM
PM:
what else shall we look at?
NH:
what about Smiths Industries
NH:
taken a real pasting this morning
NH:
stock off 108.5p at 713p
PM:
oh dear
PM:
a drop of almost 13%
PM:
what’s triggered that?
NH:
well results are out this morning, interims
NH:
and at the headline level they look very good
NH:
Ebita ahead of expectations
NH:
as was EPS
NH:
and the divi was held
NH:
but what has spooked people are some cautious comments on the outlook
NH:
such as these
NH:
HT friendly broker
NH:
SMIN LN conf call: may prove difficult to maintain margins in John Crane
NH:
If John Crane margins cannot be suatianed, then forecasts will collapse
NH:
oh dear the FD has just said that net debt will remain unchnaged at £975m at year end, i.e. no cash inflow
PM:
NH:
and then
NH:
there is the massive rise in the pension deficit
NH:
from £11m to nearly £500m
NH:
and that’s all down to the fall in equities apparently
NH:
and to make matters worse
NH:
the company is warning it could get worse
NH:
because discount rates are falling…
PM:
goodness
NH:
here’s some relevant pars from the results statement
NH:
The increase in deficit is largely caused by the fall in global equity
values.Company contributions to the funded pension planswere £13m
(2008: £18m). A summary of the retirement benefit position is shown in
note 8. The Bank of England’s policy of quantitative easing has caused
discount rates to fall which will have increased pension fund liabilities
since the period end. The triennial review of the pension schemes will
begin in April 2009whichwill cause future contributions to increase
values.Company contributions to the funded pension planswere £13m
(2008: £18m). A summary of the retirement benefit position is shown in
note 8. The Bank of England’s policy of quantitative easing has caused
discount rates to fall which will have increased pension fund liabilities
since the period end. The triennial review of the pension schemes will
begin in April 2009whichwill cause future contributions to increase
NH:
QE in action
NH:
or after this morning’s failed auction
NH:
perhaps not
NH:
anyway
NH:
here’s somoe reaction
NH:
Smiths Group snap reaction to interim results (SMIN.L SMIN LN) 821p OUTPERFORM; Sector Underweight
Headline EBITA grew 18% yoy at reported rates, with another strong performance from John Crane (which grew organic profit +18%). But the £27m yoy increase in operating profit can be broken down £+36m from currency, £+11m from acquisitions offset by a £20m yoy decline in underlying earnings highlights the challenging macro conditions that all industrial companies are currently facing.
Headline EBITA grew 18% yoy at reported rates, with another strong performance from John Crane (which grew organic profit +18%). But the £27m yoy increase in operating profit can be broken down £+36m from currency, £+11m from acquisitions offset by a £20m yoy decline in underlying earnings highlights the challenging macro conditions that all industrial companies are currently facing.
NH:
oh, this is from Caz
NH:
Debt increased to £975m broadly in line with expectations (we f/c a net debt/EBITDA ratio of 2.2x in FY09E), but the pension deficit increased substantially from £11m to £464m on the back of falling equity markets, which we would expect to increase further (due to a lower discount rate at the next review starting in April) and we would not rule out increased contributions going forward.
Outlook “Smiths Group has not been immune to the economic challenges but out half-year performance demonstrates a resilience that augurs well for the longer term in markets with inherently strong secular growth prospects…Absent further deterioration in world economies and assuming current exchange rates, we remain on track to deliver full year results in line with expectations.”
Outlook “Smiths Group has not been immune to the economic challenges but out half-year performance demonstrates a resilience that augurs well for the longer term in markets with inherently strong secular growth prospects…Absent further deterioration in world economies and assuming current exchange rates, we remain on track to deliver full year results in line with expectations.”
NH:
We believe that continued strength from John Crane, currency and further synergy benefits will enable SMIN to deliver FY09 result in line with Caz f/c of 79.3p, but we continue to see downside risks to forecasts in FY10E and beyond, however, we maintain our view that SMIN’s diversified structure and focus on defensive markets will enable SMIN to deliver stronger results than its industrial peers.
NH:
and here’s Numis
NH:
Smiths’ has reported mixed interim results for the 6 months to Jan’09 with strong
sales growth boosted by contributions from acquisitions and favourable FX
movements. The current economic environment helped drive an organic decline of
3% and on balance management expect FY results to be in-line with expectations.
The defensive characteristics of some of Smiths’ businesses positions it well to
resist the growing pressures of the economic downturn. The benefits from an
aggressive performance improvement programme (expected to realise savings of
£47m p.a. within 3 years) together with the devaluation of sterling should also
provide some cushion to earnings. However, given the first half performance and
the large valuation premium to the sector we retain our Reduce recommendation.
sales growth boosted by contributions from acquisitions and favourable FX
movements. The current economic environment helped drive an organic decline of
3% and on balance management expect FY results to be in-line with expectations.
The defensive characteristics of some of Smiths’ businesses positions it well to
resist the growing pressures of the economic downturn. The benefits from an
aggressive performance improvement programme (expected to realise savings of
£47m p.a. within 3 years) together with the devaluation of sterling should also
provide some cushion to earnings. However, given the first half performance and
the large valuation premium to the sector we retain our Reduce recommendation.
NH:
Outlook: Smiths operates largely in more defensive markets, especially Detection and
Medical, whilst John Crane’s good visibility and 65% exposure to the oil & gas
aftermarket should prove more resilient offsetting expected weakness in Interconnect
and Flex-Tex. Management is strongly focused on cost saving initiatives that should
generate significant benefits and we note that nearly 60% of profits are derived in US$.
Medical, whilst John Crane’s good visibility and 65% exposure to the oil & gas
aftermarket should prove more resilient offsetting expected weakness in Interconnect
and Flex-Tex. Management is strongly focused on cost saving initiatives that should
generate significant benefits and we note that nearly 60% of profits are derived in US$.
On balance management remain on track to deliver FY results in-line with expectations.
Valuation: The shares are trading on 10.2x 2009 EPS and 7.8x EV/EBITDA, a 52%
premium to the UK engineering sector. Despite the more defensive business mix we
feel this is hard to justify given the potential for downward pressure to earnings. Based on 7x EV/EBITDA (40% premium) our TP is 730p.
PM:
ta
11:43AM
PM:
right
PM:
do we have any rumourtrage??
PM:
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.
NH:
we do
NH:
and this could be a good one
NH:
Bryce and I referred to it in the paper this morning
PM:
NH:
Premier Foods, which makes things like Branston pickle, Hovis bread
PM:
ok
NH:
Well, a recently upgraded bandit
PM:
NH:
currently a three
NH:
NH:
he was 
NH:
last week
NH:
before a good shout in mecom
NH:
tells us that Kraft have been holed up at Premier’s offices over the past couple of days
NH:
one rumour is that Kraft want to buy some assets or brands
PM:
which ones??
NH:
er, we don’t know
NH:
but the sources are adamant something is going on
NH:
now Premier has just completed a £400m fund raising, which saw the private equity group Warburg Pincus emerge with a large holding the company
NH:
almost 14% I think
NH:
all of which means if Premier did want to sell assets it is now in a better negotiating position
NH:
and Premier still has a lot of debt
NH:
and while there is no danger of covenant breach now
NH:
post capital raise, ratio if net debt to earnings before interest, tax, depreciation and amortisation of 3.9 times, against a five times limit on its convenants.
NH:
Premier sill needs to get the debt figure down
NH:
and disposals are a good way to do that
NH:
obviously
PM:
all sounds very interesting
NH:
of course some people reckon Kraft might bid for the whole company
NH:
because they need to buy more branded goods
PM:
what are the shares doing??
NH:
er they are off slightly
NH:
down 1.25p at 29.75p
NH:
but I must stress this is all pretty raw
NH:
needs further work
11:48AM
PM:
Any more RAW
NH:
no
NH:
but some RAW feedback
NH:
some reaction to something we mentioned last week
NH:
has proved to be fairly accurate
NH:
Heritage Oil & Gas
NH:
oil explorer run by the former mercenary Tony Buckingham
NH:
and they have found a serious amount of oil
NH:
we are talking a billions barrels of oil perhaps
NH:
but there is one problem
NH:
it is in Iraq
NH:
and Heritage will have to get it out
NH:
be precise it is in Kurdistan
NH:
and this is bound to stoke up bid rumours
NH:
Heritage other mains asset is in Uganda
NH:
where it has a JV with Tullow Oil
NH:
which we have said many times before is also a takeover target
PM:
Any details on this find?
NH:
hang on a minute
NH:
right, this is the Miram West exploration well
NH:
and the keys points from the release as follows;
NH:
The Miran West-1 well has reached target depth of 2.9km, approximately three months after the well was spudded (announced on 22 December). The well encountered excellent oil shows over a 1,100m interval, across the three targeted reservoirs – the Shiranish, Kometan and Qamchuqua reservoirs, which are the three principal proven and producing reservoirs in the region.
Some of the oil was recovered to surface during drilling operations – it was shown to be a good quality, light, sweet oil.
Heritage plans to perforate the most prospective fractured zones and run a series of drill stem tests, through casing, over a gross interval of c500m. The flow testing will take about a month to complete ie we can expect results around the end of April.
Some of the oil was recovered to surface during drilling operations – it was shown to be a good quality, light, sweet oil.
Heritage plans to perforate the most prospective fractured zones and run a series of drill stem tests, through casing, over a gross interval of c500m. The flow testing will take about a month to complete ie we can expect results around the end of April.
PM:
er, thanks for that
PM:
Didnt understand a word
NH:
nor me
NH:
but analysts tell me there could be over a billion barrels down there in Kurdistan
NH:
analsyst have previously pencilled in just 500m
NH:
actually, here is some comment
NH:
this is from Cazenove
NH:
The Miran West-1 exploration well is the first well ever to be drilled on the Miran block and today’s announcement is very encouraging for the prospectivity of the licence. The block contains two very large identified structures (Miran West and Miran East) with an estimated area of up to 330 sq km, which management guided could contain potential reserves of over 1bn barrels of oil (pre-drilling). A key risk prior to drilling was migration of the crude, but the presence of oil shows has derisked both Miran West and Miran East.
NH:
It is too early to estimate the potential size/commerciality of the discovery, as flow testing will be crucial. We note that even then, the results may be affected by the fact that Heritage needs to test through casing rather than through an open hole, which can limit rates.
We do not make any adjustments to our core NAV on the back of today’s news, but are very encouraged by the results, which underscore the potential prospectivity of the block, which has the ability to transform Heritage. We estimate that a billion barrels of recoverable reserves (as per predrill guidance), could add c400p to Heritage’s value (based on a NPV of $2.6/bbl and assuming Heritage’s net interest is 56.25% post third party back-in rights). We should have much more clarity after the results of the flow test, expected around the end of April.
NH:
We note that in the event of a large commercial discovery, the block is located close to one of Iraq’s major export pipelines. We also note that Iraq’s oil minister, Hussain al-Sharistani, announced on 19 March that DNO [DNO NO NOK 5.46 NR] could start exporting crude from its Tawke field in Kurdistan “as soon as possible”. Although DNO is still awaiting official confirmation, better relations between the Kurdistan Regional Government ‘KRG’ and Iraqi Federal government bodes well for other players in Kurdistan, as a long standing disagreement between the KRG and Iraqi government over the split for oil revenue had resulted in Iraq declaring all licences agreed post 2007 in Kurdistan ‘invalid’, although this is contested by the oil companies and KRG.
NH:
Today’s news is encouraging for Heritage, which has performed strongly this year, with a YTD TSR of +52%. In our opinion, some of the recent share price increase will have been due to pre-drill speculation surrounding the results of the Miran West-1 well. However, we do not believe all of the recent performance can be attributed to Miran West-1 speculation. Indeed, we note the whole E&P sector has performed strongly over the last few weeks on the back of a sharp increase in the oil price and possible bids for Bowleven and Venture Production, which have sparked hopes of wider consolidation. Indeed, aside from the exploration upside, we are bullish on Heritage given its likely appeal for predators. We note that Tony Buckingham, Heritage’s CEO, owns 33.3% of the company, and is thus unlikely to agree to any offer which does not recognise the potential upside.
At 311p, Heritage is trading at a 23% premium to our core NAV. At these levels, a certain amount of bid speculation and exploration success is priced in. However, given the potential upside from a successful flow test in Kurdistan and the company’s takeover appeal, we remain with our OUTPERFORM recommendation
Today’s news is encouraging for Heritage, which has performed strongly this year, with a YTD TSR of +52%. In our opinion, some of the recent share price increase will have been due to pre-drill speculation surrounding the results of the Miran West-1 well. However, we do not believe all of the recent performance can be attributed to Miran West-1 speculation. Indeed, we note the whole E&P sector has performed strongly over the last few weeks on the back of a sharp increase in the oil price and possible bids for Bowleven and Venture Production, which have sparked hopes of wider consolidation. Indeed, aside from the exploration upside, we are bullish on Heritage given its likely appeal for predators. We note that Tony Buckingham, Heritage’s CEO, owns 33.3% of the company, and is thus unlikely to agree to any offer which does not recognise the potential upside.
At 311p, Heritage is trading at a 23% premium to our core NAV. At these levels, a certain amount of bid speculation and exploration success is priced in. However, given the potential upside from a successful flow test in Kurdistan and the company’s takeover appeal, we remain with our OUTPERFORM recommendation
NH:
and this is from Evolution
NH:
Miran West-1 reaches target depth and looks very significant
EVO TAKE – For now, Heritage is sticking to its guidance of a mutli-billion barrel prospect but there is the potential for a significant upside here. In our valuation we had assumed a 500m gross recoverable reserve of 500m boe (56% net to Heritage) with risked upside of 123p, unrisked this would be 256p, before any increases in reserves estimates. This looks like being a very significant discovery for Heritage and possibly the whole oil industry, but today its possibly being over looked because of M&A news in the UK North Sea. We are raising our target price to 500p.
EVO TAKE – For now, Heritage is sticking to its guidance of a mutli-billion barrel prospect but there is the potential for a significant upside here. In our valuation we had assumed a 500m gross recoverable reserve of 500m boe (56% net to Heritage) with risked upside of 123p, unrisked this would be 256p, before any increases in reserves estimates. This looks like being a very significant discovery for Heritage and possibly the whole oil industry, but today its possibly being over looked because of M&A news in the UK North Sea. We are raising our target price to 500p.
NH:
DETAILS – Heritage’s exploration well Miran West-1 in the Kurdish region of Iraq has reached target depth. The well still has to be logged (another 10 days) and tested, which means a result is not likely until the end of April. However the provisional data indicates oil shows over a 1100m interval (total well depth 2935m) with excellent shows in three principal proven reservoirs. The well, which commenced drilling on 21 December 2008, reached a total measured depth of 2,935 metres. Good quality light, sweet oil was recovered to surface during drilling operations. Evidence from wireline logs and shows whilst drilling indicates the presence of hydrocarbons in the three main producing zones in the region; the Shiranish, Kometan and Qamchuqua reservoirs. Heritage anticipates that it will commence testing operations on the Miran West-1 well within ten days, following completion of wireline logging operations. The testing programme is expected to take up to one month to complete. The Company plans to perforate the most highly prospective fractured zones and run a series of drill stem tests (DSTs) through casing over a gross interval of approximately 500 metres. The Miran licence contains two large structures covering approximately 330 square kilometres. These structures, Miran West and Miran East, have been mapped from the 332 kilometres of excellent quality seismic data acquired by Heritage between April and June 2008.
NH:
VALUATION AND RECOMMENDATION – On 3rd March we wrote that we thought Kurdistan was a free option in Heritage’s share price with little downside risk if exploration failed. The downside appears to have been eliminated. Our old target price of 400p included a risked upside of 123p for the Miran structure based on 500m boe of recoverable reserves. Following today’s news we are raising our target price to 500p to reflect the success and the potential upside to our reserves assumption
NH:
shares currently up 27.75p at 339p
PM:
that seems a pretty muted reaction
NH:
it does
NH:
but as noted above
NH:
there is no flow rate
NH:
the find is a long way from the sea
NH:
it will need finance to develop the site
NH:
and so on
NH:
and
NH:
most people are focusing on another deal in the oil sector
PM:
yes
PM:
Premier Oil’s bid for Oilexco
PM:
and accompanying rights issue
PM:
I did a post on this earlier
PM:
unbelievably Oilexco told one of the newswires yesterday that they knew of no reason for the reason its share price
NH:
I know
NH:
shocking
NH:
anyway, the market has given a warm reaction to the deal
NH:
Premier shares currently up 84p at £10.36
NH:
Premier seems to have cut itself a good deal
NH:
it is getting hold of the Oilexco assets
NH:
as this note from Merrill Lynch highlights
NH:
Premier Oil announced the acquisition of Oilexco (in administration) for $505m in conjunction with a fully underwritten rights issue to raise c.$252m. The remainder
is to be funded via new credit facilities including a $175m bridge and $225m
revolving credit facility, as well as current cash resources of c.US$320m.
Importantly, the deal is to be done clear of Oilexco’s existing credit and rig
commitments. The price paid equates to $8.50 on 2P + Contingent basis.
The opportunist acquisition is attractive to PMO in our view, giving further scale in
the UKNS, and immediate production at lower cost.
is to be funded via new credit facilities including a $175m bridge and $225m
revolving credit facility, as well as current cash resources of c.US$320m.
Importantly, the deal is to be done clear of Oilexco’s existing credit and rig
commitments. The price paid equates to $8.50 on 2P + Contingent basis.
The opportunist acquisition is attractive to PMO in our view, giving further scale in
the UKNS, and immediate production at lower cost.
NH:
Numis also thinks the deal is a good one
NH:
We believe that Premier’s acquisition of Oilexco North Sea Limited is upto
25% accretive to our company risked NAV. We await further details on the
acquisition and Premier’s plans for Oilexco’s asset base at an analyst
presentation to be held at 11am today. Premier’s purchase price of $505mn
compares well to our Oilexco core valuation (ex-debt) of $823mn (Our core
valuation includes the Balmoral, Brenda, Nelson, Shelley and Nicol fields).
Our recommendation and target price is under review given today’s rights
issue and acquisition (Last published, Buy 959p/share).
25% accretive to our company risked NAV. We await further details on the
acquisition and Premier’s plans for Oilexco’s asset base at an analyst
presentation to be held at 11am today. Premier’s purchase price of $505mn
compares well to our Oilexco core valuation (ex-debt) of $823mn (Our core
valuation includes the Balmoral, Brenda, Nelson, Shelley and Nicol fields).
Our recommendation and target price is under review given today’s rights
issue and acquisition (Last published, Buy 959p/share).
NH:
Oilexco acquisition: We believe Premier’s acquisition to be significantly value
accretive with the acquired assets adding immediately to 2P reserves (+ 19%),
production (+37%) and cashflow. The transaction compares favourably at $12.6/bbl 2P and $8.4/bbl (2P+contingent) to recent North Sea asset deals. Premier are acquiring
40mmbbls of 2P crude oil reserves with the majority of the added reserve base in
developed / producing assets. The deal compares to $8.8/boe paid by Centrica for
lower margin North Sea oil/gas assets which we believe contain a greater percentage
of undeveloped booked reserves. In addition to bookable reserves Premier see
unrisked reserves potential of up to 385mmboe across fifteen exploration prospects.
accretive with the acquired assets adding immediately to 2P reserves (+ 19%),
production (+37%) and cashflow. The transaction compares favourably at $12.6/bbl 2P and $8.4/bbl (2P+contingent) to recent North Sea asset deals. Premier are acquiring
40mmbbls of 2P crude oil reserves with the majority of the added reserve base in
developed / producing assets. The deal compares to $8.8/boe paid by Centrica for
lower margin North Sea oil/gas assets which we believe contain a greater percentage
of undeveloped booked reserves. In addition to bookable reserves Premier see
unrisked reserves potential of up to 385mmboe across fifteen exploration prospects.
Our Oilexco core valuation of $823mn excludes risked development and exploration
upside where we see an additional $330mn of risked upside.
NH:
Funding: Premier’s acquisition is to be funded through a combination of cash raised
through a rights issue (c.$252mn and fully underwritten). Premier are to issue four new ordinary shares for every existing nine shares at 485p/share, a 40% discount to the
TERP and a 49% to yesterday’s close. The acquisition is to be backed by new credit
facilities totaling $550mn, announced today. The company forecast a cash position on
completion of the deal of $385mn which will assist fund the enlarged group’s
development commitments.
Exploration potential picks up in 2Q09. After a pause in drilling activity Premier’s
exploration campaign is due to commence in May 2009. Key catalysts include drilling
on block 07/03, Vietnam.
through a rights issue (c.$252mn and fully underwritten). Premier are to issue four new ordinary shares for every existing nine shares at 485p/share, a 40% discount to the
TERP and a 49% to yesterday’s close. The acquisition is to be backed by new credit
facilities totaling $550mn, announced today. The company forecast a cash position on
completion of the deal of $385mn which will assist fund the enlarged group’s
development commitments.
Exploration potential picks up in 2Q09. After a pause in drilling activity Premier’s
exploration campaign is due to commence in May 2009. Key catalysts include drilling
on block 07/03, Vietnam.
Valuation: Premier traded at just 0.99 times risked NAV compared to the peer group
on 1.06 times based on yesterday’s close. Our risked NAV based target price is under
review. Premier’s per barrel reserve multiple at just US$5.4/bbl based on yesterday’s
close was the lowest across the E&P peergroup. We expect this to rise slightly on
completion of the Oilexco deal.
PM:
cheers for all that
11:57AM
PM:
We were being asked below for more stuff on this failed gilt auction
PM:
As i said at the outset Neil and i are rubbish on gitls
PM:
rubbish on gilts as well
NH:
we are rubbish on oil exploration as well
PM:
here’s a snap reaction from Kemp at Reuters
PM:
Quick take on this morning’s failed UK debt auction
Clear signs in the US and UK that investors will not buy medium and longer-dated government debt at the paltry yields on offer. The ratio of risk (inflation, devaluation) to reward ratio is not good enough.
Governments can still fund at the short end of the curve — but it is resulting in a destabilising build up of short term debt.
They need to move the funding further forward. But if they try, it just drives up benchmark yields and unintentionally tightens monetary conditions for everyone else
Risk-assets (including commodities and energy, as well as equities) will struggle to make further moves higher against this more hostile rate environment.
NH:
talking about things failing
NH:
we might have a rights issue flop on ours hands
PM:
????
NH:
Beazley, insurance broker
NH:
trading below rights excercise price
PM:
Which is??
PM:
Neil has gone to find out
PM:
Rights issue and placing to rasie 150m 9-for-19 at 86p
PM:
apparently
PM:
Nil paid trading at 0.45p
NH:
vs the stock at the moment at 85.5p
PM:
Its on the edge
NH:
but it did go over briefly
PM:
Do you when the rights closes?
PM:
Neil?
PM:
Dealings in new on april 6
PM:
closes april 3
PM:
So plenty of time for it to fail — or rebound
NH:
interesting though
12:03PM
PM:
Quick look at Sainsbury before we go
NH:
better to travel than arrive
Sainsbury (J) (SBRY:LSE): Last: 324.50, down 6.25 (-1.89%), High: 338.00, Low: 320.50, Volume: 4.51m
NH:
results good but the market expected that
NH:
here’s Panmure
NH:
Excellent Q4
Another good performance from Sainsbury means that we are raising our
forecasts for the current year to consensus levels. We still believe that margins
will fall across the industry in 2009/10, although the continued strength of
inflation has mitigated some of the downside. We believe that the relative
defensiveness of the food retailers is already reflected in share prices. The
market is now looking to the beneficiaries of the ending of recession and will
therefore continue to sell the late cycle plays.
Another good performance from Sainsbury means that we are raising our
forecasts for the current year to consensus levels. We still believe that margins
will fall across the industry in 2009/10, although the continued strength of
inflation has mitigated some of the downside. We believe that the relative
defensiveness of the food retailers is already reflected in share prices. The
market is now looking to the beneficiaries of the ending of recession and will
therefore continue to sell the late cycle plays.
NH:
Another excellent trading performance from Sainsbury, with Q4 ex-fuel like-for-like sales
growth of 6.2% (or 6.8% stripping out the changes to VAT), a big improvement upon
the 4.5% delivered in Q3. The statement is otherwise short of detail, although it is
interesting to note that sales of Basics grew by 60%.
! As we wrote last year, we believe that food retail will be late cycle as is usual in a
recession, and this means that sector profit growth will stumble. We have been surprised
by the continued strength of food price inflation, which means that although we still
expect like-for-like sales to fall in 2009/10, our earlier expectation for a fall of 5% is
probably too pessimistic.
growth of 6.2% (or 6.8% stripping out the changes to VAT), a big improvement upon
the 4.5% delivered in Q3. The statement is otherwise short of detail, although it is
interesting to note that sales of Basics grew by 60%.
! As we wrote last year, we believe that food retail will be late cycle as is usual in a
recession, and this means that sector profit growth will stumble. We have been surprised
by the continued strength of food price inflation, which means that although we still
expect like-for-like sales to fall in 2009/10, our earlier expectation for a fall of 5% is
probably too pessimistic.
NH:
On the back of the strong LFL performance in Q4, we are raising our forecast for the
current year to consensus of £535m and from £437m to £477m for 2009/10 (consensus
is £584m). We are also increasing our target price to 295p from 233p (using the same
P/E as Tesco at our target price). We are, however, maintaining our Sell
recommendation. Despite inflation being Stronger for Longer, we still expect food
retailers to continue to underperform general retailers
current year to consensus of £535m and from £437m to £477m for 2009/10 (consensus
is £584m). We are also increasing our target price to 295p from 233p (using the same
P/E as Tesco at our target price). We are, however, maintaining our Sell
recommendation. Despite inflation being Stronger for Longer, we still expect food
retailers to continue to underperform general retailers
NH:
and Caz
NH:
Clearly Sainsbury has continued to perform well through to the end of its financial year and with food price inflation set to remain as a prop to the industry top line for the foreseeable future the scope for another year of solid sales and profit progress is clear. The shares have performed well this year to date, outperforming the FTSE by 14% and the supermarket sector by 7% and now stand on a full-looking rating of 15.2x Dec-09 (vs Tesco on 10.8x and Morrison on 14.7x). The shares are also towards the top end of their recent 290-340p trading range. There is some temptation, therefore, to bank the recent performance however the improving fundamentals of the UK industry relative to mainland Europe and the US (i.e. inflation remaining as a supportive factor) and the sense that Sainsbury’s trading outperformance has considerable momentum behind it suggests that the eventual break out from the current trading range will be to the upside.
12:04PM
PM:
Anythgin to finish — it is 12.04
NH:
just this GlaxoSmithKline rumour
NH:
that they are set to bid for a botox maker
NH:
called Allergan
NH:
now we have been pretty unimpressed with the rumour
NH:
too big
NH:
and does not fit any of the areas GSK want to expand in
NH:
but some analysts reckon it could happen
NH:
such as UBS
NH:
Bloomberg says GSK “may be pursuing a possible takeover” of Allergan GSK promotes Allergan’s Botox in Japan and China, and Allergan copromotes
GSK’s Imitrex and Amerge in the U.S. If there were to be a merger, we estimate it would be EPS accretive even at a price Allergan may want
(ie 45% prem). We believe talks are reasonably likely (neither co has commented at this time), and we expect GSK would continue to show price
sensitivity in any M&A process.
GSK’s Imitrex and Amerge in the U.S. If there were to be a merger, we estimate it would be EPS accretive even at a price Allergan may want
(ie 45% prem). We believe talks are reasonably likely (neither co has commented at this time), and we expect GSK would continue to show price
sensitivity in any M&A process.
NH:
Solid rationale: Deal size aside, deal likely syncs with GSK’s vision Allergan could represent a diversifying acquisition that would potentially lower
GSK’s U.S. small molecule branded pharma exposure, while at the same time making GSK a formidable global specialty pharmaceutical player with
new competencies and strategic options in therapeutic eye care products, medical devices, and cosmetic products. In our view, the Allergan portfolio
could materially benefit from GSK’s emerging markets expertise, and if such a merger were to occur, we could see scope for upside on revenue
synergies from GSK broadly distributing Allergan’s products on GSK’s robust geographic footprint.
GSK’s U.S. small molecule branded pharma exposure, while at the same time making GSK a formidable global specialty pharmaceutical player with
new competencies and strategic options in therapeutic eye care products, medical devices, and cosmetic products. In our view, the Allergan portfolio
could materially benefit from GSK’s emerging markets expertise, and if such a merger were to occur, we could see scope for upside on revenue
synergies from GSK broadly distributing Allergan’s products on GSK’s robust geographic footprint.
NH:
Solid financials: potential EPS accretion even at prices >$70/share If we assume peak pre-tax cost synergies of £431m ($633m, 15% of Allergan’s
2009E sales), such an acquisition could potentially be 6.3% accretive for GSK’s year 2 (2011) EPS at a hypothetical price of $70.98 (~45% prem.).
Although our cost-of-capital analysis, assuming cost synergies only, suggests breakeven at $56.38 for GSK (15% prem.) and 5.8% value dilution at the
$70.98 price (Chart 1-5), we believe that the potential for revenue synergies specific to GSK’s business could make a $70.98 price favourable.
Valuation: GSK rated Neutral; 1,300p PT unchanged Our 1,300p 12-mo PT is based on blended PE, EV/EBITDA, and DCF factors.
2009E sales), such an acquisition could potentially be 6.3% accretive for GSK’s year 2 (2011) EPS at a hypothetical price of $70.98 (~45% prem.).
Although our cost-of-capital analysis, assuming cost synergies only, suggests breakeven at $56.38 for GSK (15% prem.) and 5.8% value dilution at the
$70.98 price (Chart 1-5), we believe that the potential for revenue synergies specific to GSK’s business could make a $70.98 price favourable.
Valuation: GSK rated Neutral; 1,300p PT unchanged Our 1,300p 12-mo PT is based on blended PE, EV/EBITDA, and DCF factors.
NH:
still don’t get it
NH:
eyecare I get
NH:
but why would GSK want to get involved in comestic surgery
NH:
anyway botox is about to face some competition
PM:
no idea
NH:
actually this whole rumour was given a lease of life not by Bloomie
NH:
but by dealreporter
NH:
and here it is
NH:
they claim GSK bid for Allergan late last year
NH:
Allergan sweet spot for GSK as rumors abound of a possible bid -
sources Story As GlaxoSmithKline (NYSE:GSK) decides to streamline its
business through a restructuring program, industry sources believe the
company could be pursuing takeout overtures for specialty pharma and
medical device company, Allergan (NYSE:AGN).
sources Story As GlaxoSmithKline (NYSE:GSK) decides to streamline its
business through a restructuring program, industry sources believe the
company could be pursuing takeout overtures for specialty pharma and
medical device company, Allergan (NYSE:AGN).
A GSK spokesperson said ophthalmology is an area that the company has
recently moved into in early R&D – a development that has sparked M&A
interest among the investment banking community. In February, GSK and
University College London’s Institute of Ophthalmology entered into a
three year strategic collaboration to investigate new compounds to treat
potentially sight-threatening disorders.
NH:
Even though the GSK spokesperson would not comment specifically on
possible business deals, she said the company’s strategy focuses on
bolt-on acquisitions that complement its current business and strengths.
possible business deals, she said the company’s strategy focuses on
bolt-on acquisitions that complement its current business and strengths.
In the 4Q, GSK reported cash and cash equivalents at GBP 5.6bn (USD
8.2bn), while net debt at year-end increased significantly to GBP 10bn
(USD 14.6bn).
The spokesperson pointed out that net debt increased by GBP 4.1bn (USD
6bn) primarily due to share repurchases, further acquisition of
businesses and a significant strengthening of the foreign currencies in
which group debt is denominated, partly offset by increased cash inflows
from operating activities.
A first source familiar with GSK’s strategy said there is evidence that
the company is willing to consider other indications and perhaps
slightly outside its core areas of therapeutics focus. The source noted
that GSK is evaluating external opportunities more rigorously, and said
Allergan is “one good example of where they are focusing.”
It is understood that Allergan turned down a USD 72/share offer from GSK
late last year. Allergan’s share price closed at USD 43.17 on 23 March.
According to a Standard & Poor’s report dated 21 March, Allergan’s eye
care drugs in 2008 accounted for 46.3 percent of sales from its
continuing operations. Its Botox/neuromodulators comprised 30.2 percent,
while skin care treatments 2.6 percent, urologics 1.6 percent, breast
implants 7.1 percent, devices for obesity treatment 6.8 percent, and
dermal fillers 5.3 percent.
NH:
One of the major concerns is the looming 2H 2009 US launch of Reloxin,
the first US competitor to Botox, developed by Medicis (NYSE:MRX), which
could see pricing threats. An Allergan spokesperson pointed out her
concerns that there is going to be certain risks of misinformation and
misunderstanding about interchangeability of botulinum toxicities.
the first US competitor to Botox, developed by Medicis (NYSE:MRX), which
could see pricing threats. An Allergan spokesperson pointed out her
concerns that there is going to be certain risks of misinformation and
misunderstanding about interchangeability of botulinum toxicities.
“Botulinum toxic therapies are biologics, they are non-interchangeable,
so I would assume any manufacturer in this arena is going to provide
proper education to physicians to make sure that there is no
jeopardizing of patient outcomes and patient satisfaction,” she said.
Because both products are different in their risk-benefit profiles, this
will mean physicians will have to learn a whole new “language” in
administering this product, she said. “There is also no fixed dose ratio
in switching and that’s even stipulated by the FDA in our label,” the
spokesperson added.
Still, Allergan could be a sweetened target in the eyes of large pharma
as only 13% of Allergan’s revenues are dependent on Medicare
reimbursement, a lower figure to most medical device and specialty
pharmaceutical companies.
The Allergan spokesperson would not comment on M&A speculation or
rumors, but admitted that the company’s heritage is in eye care, and has
seen its seventh year in a row as achieving the status of being the
fastest growing ophthalmology company worldwide. The company’s eye care
drugs include prescription and nonprescription products to treat eye
diseases and disorders, including glaucoma, dry eye, inflammation,
allergy, and infection.
On the dermatology front, the spokesperson was more sanguine. She said
the company has a medical aesthetics portfolio and a medical dermatology
portfolio, of which the former is an area the company is excited about.
An industry source not privy to potential talks said Allergen is a
company of scale that would touch elements of aesthetics which would be
complementary to a number of different pharmaceutical companies. He
compared Allergan to Mentor, which was acquired by Johnson & Johnson
(NYSE:JNJ) in December at a time when Mentor’s shares were down
approximately 57% for 2008.
The source said GSK makes sense as a bidder, as it would not want to be
branching out in areas that it considers unfamiliar territory.
NH:
Still, a second industry source said Allergan would be attractive on the
ophthalmology front, but was more cautious on GSK’s interest in
Allergan’s obesity intervention product, the Lap-Band. “Does GSK really
want a device?”
he asked. Nonetheless, he admitted that GSK is looking to be more
creative.
He also said that there is an interest in the dermatology aesthetics
market, and with the limited amount of larger firms, there will be
further M&A plays. Medicis, Galderma and Stiefel Laboratories are all
noteworthy companies that remain independent, though rumored M&A plays.
ophthalmology front, but was more cautious on GSK’s interest in
Allergan’s obesity intervention product, the Lap-Band. “Does GSK really
want a device?”
he asked. Nonetheless, he admitted that GSK is looking to be more
creative.
He also said that there is an interest in the dermatology aesthetics
market, and with the limited amount of larger firms, there will be
further M&A plays. Medicis, Galderma and Stiefel Laboratories are all
noteworthy companies that remain independent, though rumored M&A plays.
A leading healthcare investor threw caution at the situation. Allergen
management has historically not been interested in selling, he said, and
even when talks have taken place, the company has sought a USD 100/share
offer. However, he admitted that realities change considering the
current market downturn, as the company has forecasted declines in 2009
sales in most of its leading products, including Botox, facial
aesthetics sales (for example Juvederm), breast implant sales, and in
obesity intervention.
PM:
yeah ok — remember Dealreport is a sister company Neil
PM:
NH:
I haven’t said anything about them
NH:
just put up that story
PM:
Fine
12:11PM
PM:
We are done
PM:
Do enter the G20 competition — some very good entries already
PM:
Fantastic Nomura prize on offer for that
NH:
yes, a fantastic prize
PM:
thanks for all the comments this morning
PM:
Quick ad for the TARPy II
PM:
Tomorrow night at the Enterprise Inn — Red Lion Street
PM:
From about 6 or so
NH:
yes do come along
NH:
the landlord has ordered extra beer
PM:
Otherwise, we will be back here tomorrow at 11am
PM:
seeya
NH:
bye