Markets live chat transcript for the chat ending at 12:08 on 24 Apr 2009. Participants in this chat were: Paul Murphy, FT (PM) Bryce Elder (BE)
PM:
Hi there
PM:
Apols — little late this morning
PM:
Welcome to Markets Live
PM:
It’s Friday and we a de-humed today
PM:
Bryce Elder is with me.
BE:
Hello
PM:
Here to help us celebrate
BE:
Hooray, GDP is rubbish
BE:
Buy stocks
PM:
Quite extraordinary isn’t it
PM:
We were sitting here earlier as the GDP figs came out – much worse than expected – down 4.1% year on year. Down 1.9% in Q1
PM:
Watched sterling fall thru 1.46 – had the little live “today’s session” graph up – which as Izy pointed out was rather like playing with etch-a-sketch.
BE:
Gilts of course rose – yield at around 3.52 on the 10 year stuff.
BE:
We’re in a world where deflation is good for government bonds
PM:
But equities?
BE:
Hardly any reaction to this.
BE:
Footsie was up about 52 points before the GDP figs. Now up 47 – at around 4065.
PM:
GDP fall greatest since the last time labour were in power.
PM:
PM:
We’re pretty convinced that Alistair Darling said first quarter GDp decline was going to be 1.6 per cent on Wednesday – but haven’t been able to find that reference just yet.
BE:
Retail sales meanwhile much better than expected.
BE:
March up 0.3 month on month – people had been expecting -0.5.
PM:
So the basic picture here is that with Darling et al literally talking down the krona– like “Britain’s bust, says Chancellor”
PM:
Vulture shoppers are flocking here from France and giving our retailers the idea that everything’s fine –and the recession is over.
BE:
I know, it is quite bizarre.
BE:
Can’t blame the French tho. Combination of endless sales and GBK where it is – well, must be irresistible.
PM:
hmmm
PM:
I came back from Monaco obviously
BE:
PM:
Taxes here might be unbearable — but so is the architecture in monaco
11:09AM
BE:
I should point out tho that the retailers have lost some ground since those March retail sales figs came out.
PM:
Have they?
BE:
They have.
BE:
Marks & Spencer, WH Smith – all showing good advances early. But those have been chipped away over the past hour or so.
BE:
I think it is simply profit taking.
BE:
For example, here’s Robert Mann earlier from Collins Stewart – on M&S
BE:
Profit to take after material and rapid outperformance
BE:
A startling run of outperformance
Since July 2008, M&S has rallied 57% in absolute terms and 115% against the FTSE 100. Since our upgrade to Buy in January, it has rallied by 52% against the FTSE 100, rising 47%. It is now within 9% of our price target, so whilst we see a little more upside on a fundamental basis, we can see a heavy incentive to take profits after a startling run of outperformance.
Since July 2008, M&S has rallied 57% in absolute terms and 115% against the FTSE 100. Since our upgrade to Buy in January, it has rallied by 52% against the FTSE 100, rising 47%. It is now within 9% of our price target, so whilst we see a little more upside on a fundamental basis, we can see a heavy incentive to take profits after a startling run of outperformance.
BE:
¦ Valuation anomaly has now largely been closed
Our price target, which was supported by CS Quest™ Modeller, is based on a FCF yield of 6% in the year to March 2010. The current FCF yield for that period is 6.8%, so still offering some upside, but less than before. If we assume a dividend cut of a third at the full year results on May 19th, then the shares would yield 4.4%, acceptable, but scarcely cause of itself to invest. In PE terms we now see the shares on 12x March 2011 semi-recovered earnings; we see upside, but the valuation anomaly that was in place has been closed by the rally.
Our price target, which was supported by CS Quest™ Modeller, is based on a FCF yield of 6% in the year to March 2010. The current FCF yield for that period is 6.8%, so still offering some upside, but less than before. If we assume a dividend cut of a third at the full year results on May 19th, then the shares would yield 4.4%, acceptable, but scarcely cause of itself to invest. In PE terms we now see the shares on 12x March 2011 semi-recovered earnings; we see upside, but the valuation anomaly that was in place has been closed by the rally.
BE:
¦ Economic background is not improving
In terms of business direction, Q4 represented an improvement on previous quarters and newsflow has suggested (perhaps alarmingly from a more general economic backdrop) that the consumer has remained relatively robust. However, now that some have sought to call this year the trough for UK retail, we feel nervous. Unemployment is rising apace and hopes for a return to GDP growth in 2010 seem optimistic at this stage.
In terms of business direction, Q4 represented an improvement on previous quarters and newsflow has suggested (perhaps alarmingly from a more general economic backdrop) that the consumer has remained relatively robust. However, now that some have sought to call this year the trough for UK retail, we feel nervous. Unemployment is rising apace and hopes for a return to GDP growth in 2010 seem optimistic at this stage.
BE:
Valuation discounts much of the self-help – take profit
Our argument on M&S was that the numerous errors made in the recent past, especially in food, the implementation of systems change and the tardiness with which it reacted to the recession, left substantial room for self-help driven improvements in performance. That story still stands, but in valuation terms the shares have discounted much of it. For the shares to run beyond our 375p price target we would need more help from the environment, rather than self-help inspired; we fail to envisage that macroeconomic tailwind for some time to come, hence would lock in profit.
Our argument on M&S was that the numerous errors made in the recent past, especially in food, the implementation of systems change and the tardiness with which it reacted to the recession, left substantial room for self-help driven improvements in performance. That story still stands, but in valuation terms the shares have discounted much of it. For the shares to run beyond our 375p price target we would need more help from the environment, rather than self-help inspired; we fail to envisage that macroeconomic tailwind for some time to come, hence would lock in profit.
PM:
Hmm. Fair enough
11:11AM
PM:
Back on GDP – we should put up a few bits of snap comment
PM:
Here’s Howard Archer at Global Insight
PM:
After a quick re-run of our model to incorporate the deeper than expected drop in GDP in the first quarter, we have cut our GDP forecast for 2009 to -4.2% from -3.8%.
We still expecvt GDP to contract by 0.2% in 2010
PM:
The 1.9% quarter-on-quarter plunge in GDP in the first quarter of 2009 was deeper than expected and even worse than the 1.6% drop seen in the fourth quarter of 2008. Indeed, it was the sharpest drop for almost 20 years. This meant that GDP plummeted 4.1% year-on-year which was the largest decline since 1980. The dominant service sector contracted by 1.2% quarter-on-quarter, which was the worst performance since 1979, while industrial production nosedived and construction output slumped.
> No details were released on GDP on the expenditure side, but it seems highly likely that business investment plunged and stocks were run down sharply further. It is also very likely that consumer spending contracted again despite retail sales rising by 0.9% quarter-on-quarter as the Bank of England’s regional agents indicate that consumer spending on services declined markedly during the early months of the year and this is a significantly greater component of total consumption. Exports very likely fell sharply in the first quarter, but this may well have been countered by a sharp decline in imports.
> No details were released on GDP on the expenditure side, but it seems highly likely that business investment plunged and stocks were run down sharply further. It is also very likely that consumer spending contracted again despite retail sales rising by 0.9% quarter-on-quarter as the Bank of England’s regional agents indicate that consumer spending on services declined markedly during the early months of the year and this is a significantly greater component of total consumption. Exports very likely fell sharply in the first quarter, but this may well have been countered by a sharp decline in imports.
PM:
There are hints in the latest data and survey evidence that the rate of decline in GDP may now be starting to ease. Nevertheless, comic activity is clearly still declining appreciably and any recovery still looks some distance away.
PM:
We expect the economy to contract at a slowing rate through the rest of 2009 and the first quarter of 2010 before stabilizing. Nevertheless, GDP contraction of 4.0% or more looks very much on the cards for 2009. This makes the Chancellor’s public deficit forecasts look even more questionable, especially as we expect GDP to edge down by a further 0.2% in 2010. In contrast, the Chancellor forecasts GDP to contract by 3.5% in 2009 and to grow by 1.25% in 2010
> Consumer spending will be pressurized heavily by soaring unemployment and markedly reduced income growth, while business investment is being slashed in the face of sharply weakened final demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession. On top of this, the marked downturns in the commercial property sector and the housing market are substantially depressing construction investment. Meanwhile, despite benefiting from the extremely weak pound, exports will be hit hard by global recession, especially sharply contracting domestic demand in the Eurozone and U.S. However, net trade will probably still make a significant positive contribution to GDP in 2009 as imports are likely to contract even more substantially than exports due to the extreme weakness of U.K. domestic demand.
> Consumer spending will be pressurized heavily by soaring unemployment and markedly reduced income growth, while business investment is being slashed in the face of sharply weakened final demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential length and depth of the recession. On top of this, the marked downturns in the commercial property sector and the housing market are substantially depressing construction investment. Meanwhile, despite benefiting from the extremely weak pound, exports will be hit hard by global recession, especially sharply contracting domestic demand in the Eurozone and U.S. However, net trade will probably still make a significant positive contribution to GDP in 2009 as imports are likely to contract even more substantially than exports due to the extreme weakness of U.K. domestic demand.
PM:
With the economy contracting by even more than expected in the first quarter of 2009 and unlikely to see any growth before the second quarter of 2010, we expect the Bank of England to keep interest rates down at 0.50% until deep into next year. We also suspect that the bank may well extend its quantitative easing programme.
>
>
BE:
It’s difficult to avoid the conclusion that Darling’s gdp forecasts are looking increasingly comic
BE:
and we haven’t got to the end of budget week.
PM:
What can you say?
PM:
BE:
Just spooling through the other comment on this …
BE:
And, not a lot
BE:
Buckley at Deutsche and Ward at HSBC basically speechless
BE:
Can’t even put up the comments. Not worth it.
PM:
11:14AM
PM:
Where shall we go that’s a bit fresh?
PM:
How about the miners?
PM:
Why are they up?
BE:
It does seem rather contra logic
BE:
However, there’s a big push from Cazenove this morning
BE:
Suggesting we can see a bottom for metals prices
BE:
Western demand is going to be slow to recover but there’s China crisis, in short
PM:
Can we see the note?
BE:
Sure. Here’s the exec summary.
BE:
We are upgrading our sector recommendation from Neutral to OVERWEIGHT. Although on balance we are cutting earnings via our commodity price changes today, we believe economic stabilisation evidenced in an array of global lead indicators and the remarkably robust Chinese economy suggest that commodity pricing has probably seen its lows. While we do not believe the Western economic recovery will be anything more than anaemic as and when it starts, there is likely to be some positive restocking effect in the near future. Today’s earnings changes leave the diversifieds trading on single digit multiples in 2010E, based on prices generally below today’s spot.
BE:
We are adjusting recommendations to position for recovery, most importantly by downgrading BHP Billiton to IN-LINE from Outperform and upgrading Kazakhmys to OUTPERFORM from In-Line. We now have OUTPERFORMs on Xstrata and Kazakhmys; IN-LINEs on BHP Billiton, Anglo American, ENRC, Antofagasta, Lonmin and Fresnillo; UNDERPERFORM on Vedanta. We are restricted on Rio Tinto. Our top pick among the diversifieds remains Xstrata on valuation
PM:
Right. So it’s all predicated on the china take
The Truth! Unvarnished. The price of rice always falls. Shanghai investors do not sell stocks. Torch protestors are vile.
BE:
Heh. Long time since that was used.
PM:
BE:
The torch protesters reference probably needs updating
BE:
But, to be totally fair, the call is a bit wider than that.
BE:
Macro news improving
Recovery ‘noise’ is increasing almost daily with most major global economies’ lead indicators showing a reduced rate of decline, although still, in most cases, contraction. China, the exception as we discuss, has been remarkably robust with most major indicators suggesting a bottom was reached in November, from which we have subsequently seen steady MoM improvements. Recent lead indicators in money supply and credit creation, not to mention iron ore and copper imports, point to an economy responding to the aggressive stimulus measures announced in October.
While we do not believe the Western economic recovery will be anything more than anaemic, as and when it starts, there is likely to be some positive restocking effect in the near future.
Recovery ‘noise’ is increasing almost daily with most major global economies’ lead indicators showing a reduced rate of decline, although still, in most cases, contraction. China, the exception as we discuss, has been remarkably robust with most major indicators suggesting a bottom was reached in November, from which we have subsequently seen steady MoM improvements. Recent lead indicators in money supply and credit creation, not to mention iron ore and copper imports, point to an economy responding to the aggressive stimulus measures announced in October.
While we do not believe the Western economic recovery will be anything more than anaemic, as and when it starts, there is likely to be some positive restocking effect in the near future.
BE:
Commodity price and earnings forecasts – last of the downgrades
We are adjusting our commodity prices mainly down overall while assuming a modest uptick in prices generally into 2010. The biggest changes since our last note are thermal coal, coking coal, aluminium and rhodium. We had already changed coal assumptions in our models following settlements. Counter-intuitively we have lifted our copper price forecast 13% to $1.70/lb. Iron ore now becomes the biggest ‘call’ in the sector generating 43% of our 2009 forecast EBIT. The changes to 2009 EPS forecasts are in descending order: VED (+241%), FRES (+159%), ANTO (+47%), KAZ (+17%), BLT (2%), RIO and XTA (both 7%), AAL (35%), ENRC (37%) and LMI ( 333%).
We are adjusting our commodity prices mainly down overall while assuming a modest uptick in prices generally into 2010. The biggest changes since our last note are thermal coal, coking coal, aluminium and rhodium. We had already changed coal assumptions in our models following settlements. Counter-intuitively we have lifted our copper price forecast 13% to $1.70/lb. Iron ore now becomes the biggest ‘call’ in the sector generating 43% of our 2009 forecast EBIT. The changes to 2009 EPS forecasts are in descending order: VED (+241%), FRES (+159%), ANTO (+47%), KAZ (+17%), BLT (2%), RIO and XTA (both 7%), AAL (35%), ENRC (37%) and LMI ( 333%).
BE:
Margins remain healthy particularly for this point in the cycle
The overall margins for the diversifieds have reverted to between 14-33% at the operating profit level– this compares with a range of 10-22% at the last cyclical nadir. The copper pure plays, on our price forecast of $1.70/lb for the year, deliver a margin of 40% vs 41% in 2002. This shows that good quality mining companies will generate substantial cash at the bottom of the cycle – a case for rerating. The companies are not wasting time either in using the current low margin environment to squeeze costs (-18%, 09/08), through the shut down of more marginal production, assisted by weaker domestic currencies.
The overall margins for the diversifieds have reverted to between 14-33% at the operating profit level– this compares with a range of 10-22% at the last cyclical nadir. The copper pure plays, on our price forecast of $1.70/lb for the year, deliver a margin of 40% vs 41% in 2002. This shows that good quality mining companies will generate substantial cash at the bottom of the cycle – a case for rerating. The companies are not wasting time either in using the current low margin environment to squeeze costs (-18%, 09/08), through the shut down of more marginal production, assisted by weaker domestic currencies.
BE:
Valuations up to speed with fundamentals but should not prevent performance
The equity markets have driven a very powerful beta rally in the sector from admittedly distressed levels. While this has left many of the diversifieds trading on what may appear demanding multiples on spot (15-20x PER in 2009E), arguably this is a reasonable level should 2009 prove a trough year for earnings. Analysis of over 20 years historic PER data suggests that current multiples based on our forecasts suggest a significant probability of positive absolute returns. We note too the heightened sensitivity of the sector: our assumptions see the multiples fall to an average of 11x 2009E and pretty modest price improvements drive through considerable growth
in earnings 2010/2009 (26%). On a stock by stock basis, we find the biggest mismatch between multiple and commodity exposure is Xstrata which looks favourably placed.
The equity markets have driven a very powerful beta rally in the sector from admittedly distressed levels. While this has left many of the diversifieds trading on what may appear demanding multiples on spot (15-20x PER in 2009E), arguably this is a reasonable level should 2009 prove a trough year for earnings. Analysis of over 20 years historic PER data suggests that current multiples based on our forecasts suggest a significant probability of positive absolute returns. We note too the heightened sensitivity of the sector: our assumptions see the multiples fall to an average of 11x 2009E and pretty modest price improvements drive through considerable growth
in earnings 2010/2009 (26%). On a stock by stock basis, we find the biggest mismatch between multiple and commodity exposure is Xstrata which looks favourably placed.
PM:
Isn’t Cazenove just a bit late with this call?
PM:
Hasn’t the sector nearly doubled since early March??
BE:
True
BE:
And LME copper’s up about 60% ytd
BE:
Which was pinned on strategic restocking from China and what amounted to a free money arb between the London and Shanghai prices
PM:
Exactly. Not a demand recovery.
BE:
Hang on – think I’ve got something from BNP on this theme
BE:
A 15/20% drop in copper prices looks likely in the short term
With OECD countries showing no sign of recovery yet, we expect the copper market to be in a moderate surplus in FY09e-10e. LME inventories stand around 11 days, which is compatible with a USD3,000-4,000/t range. A consolidation looks likely, as costs provide no support with 95% of the industry profitable at cash level.
With OECD countries showing no sign of recovery yet, we expect the copper market to be in a moderate surplus in FY09e-10e. LME inventories stand around 11 days, which is compatible with a USD3,000-4,000/t range. A consolidation looks likely, as costs provide no support with 95% of the industry profitable at cash level.
BE:
Copper retains the tightest fundamentals within base metals
In a more bullish scenario, where the US recovery surprises on the upside and global GDP growth reaches 3% next year, the copper market could return to deficit, potentially pushing prices above USD5,000/t.
In a more bullish scenario, where the US recovery surprises on the upside and global GDP growth reaches 3% next year, the copper market could return to deficit, potentially pushing prices above USD5,000/t.
BE:
Amidst a likely correction, diversifieds will regain their defensive status
Aside from Antofagasta, on which we keep our Underperform rating on valuation grounds, the most leveraged play on a recovery in copper prices is Xstrata, showing 68% upside in our bull case. If, as we expect, copper prices consolidate short term, diversified low-costs players such as Rio Tinto and BHP Billiton should outperform.
Aside from Antofagasta, on which we keep our Underperform rating on valuation grounds, the most leveraged play on a recovery in copper prices is Xstrata, showing 68% upside in our bull case. If, as we expect, copper prices consolidate short term, diversified low-costs players such as Rio Tinto and BHP Billiton should outperform.
BE:
That’s from Raphael Veverka at Exane BNP.
BE:
So between them, it’s a nice point and counterpoint. All part of the service.
PM:
Can we put in some prices here?
Xstrata (XTA:LSE): Last: 556.00, up 31 (+5.90%), High: 568.50, Low: 535.00, Volume: 8.45m
Xstrata (XTA:LSE): Last: 555.50, up 30.5 (+5.81%), High: 568.50, Low: 535.00, Volume: 8.45m
Kazakhmys (KAZ:LSE): Last: 496.50, up 20 (+4.20%), High: 515.00, Low: 490.50, Volume: 1.41m
Vedanta Resources (VED:LSE): Last: 982.00, up 47 (+5.03%), High: 991.50, Low: 926.50, Volume: 598.45k
PM:
That’s plenty. Thanks. get the picture
11:20AM
PM:
that mention of Chinese investors not selling stocks reminded me of something
PM:
H/T HW on this
PM:
Id missed it — was also on Zero Hedge
PM:
basically – the SEC falling for a spoof complaint letter — saying good Americans dont sell stocks
PM:
Selling stocks should be banned etc
BE:
Oh dear
BE:
How embarrasing
11:21AM
BE:
Ok
BE:
Just for a change of pace
BE:
Let’s be nice to the Telegraph this morning
PM:
Why do you want to do that?
BE:
Candover
PM:
Smoked out a bid eh
BE:
Yup – confirmed
PM:
Statement saying they are looking at indicative proposals from unidentified parties
PM:
A nice hit
PM:
What has candover stock done?
BE:
Unchanged at 390p
PM:
Oh great
BE:
Tel says the bidder’s French private equity firm Eurazeo
BE:
Willing to pay 450p
BE:
And, as VP noted below, they have been in bid/rescue talks for rather a long time
BE:
So it’s hard to see what’s not already in the price
11:26AM
PM:
Is there anything RAW to look at?
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.
BE:
Yeah, a few things
BE:
Neil was in touch this morning
BE:
Having picked up some gossip about a Taylor Wimpey rights issue next week
PM:
Ok. They’ve already said they’re looking haven’t they?
BE:
Yup.
BE:
And that’s the kicker
BE:
CEO said earlier this month it was considering raising at least £350m
BE:
However, that’s rather wide of the figures we’ve been hearing
BE:
The rumour – and I stress it’s only a rumour – is one-for-five at 25p
BE:
Which would only raise about £100m
BE:
And that kind of amount would be little more than a sticking plaster on the balance sheet
BE:
Do remember this is very much stock tartare though.
PM:
TW down 1.25p at 45.5p at the moment.
PM:
Has moved up from around 20p at the start of the month.
BE:
Yup
BE:
That’s after it bought time by extending debt out to July 2012
BE:
Which came with a load of conditions
PM:
Ok – thanks for that
PM:
While on RAW
PM:
Anything more to say on yesterday’s Intertek rumour?
BE:
Not a lot
BE:
As we wrote in the paper today
BE:
There’s a theory that Intertek’s been drawing up a defence plan
BE:
Although I’d be surprised if they didn’t have one already, given the SGS story’s been around the block a few dozen times
BE:
And SGS has been talking down the chances of major M&A
BE:
It’s worth posting a bit of comment from Exane
BE:
Which was driving SGS around on a Scandinavian roadshow earlier this week
BE:
Four factors underpin the speculation on a potential deal: 1) SGS can afford it given its strong firepower (net cash of CHF573m end 2008–available credit line of CHF800m, treasury shares of 4% of its capital); in total, it may get around CHF2.5-3bn to make acquisitions (this would, however, require raising new debt, giving it a net debt/EBITDA close to 2.5x); while given the weakness of the GBP (ITRK is 20% more attractive today than it was a year ago), ITRK’s EV is GBP1.9bn or CHF3.2bn; 2) it would be an accretive deal for SGS up to 1400p/s, or 14x EV/EBIT in line with the sector historical average; 3) there are substantial cost synergies to be extracted given significant geographic and business overlaps (Intertek and SGS compete head-to head in many markets, mainly the
commodities related divisions and consumer testing activities). We assume that cost synergies could achieve around 1.5%-2% of group sales or 10% of group EBIT.
commodities related divisions and consumer testing activities). We assume that cost synergies could achieve around 1.5%-2% of group sales or 10% of group EBIT.
BE:
We are sceptical on a potential deal
BE:
A deal is possible, but: SGS has said it is not looking for a transforming deal, at least in the short term. Although financially feasible, an acquisition would be risky in our view in terms of execution risks and risk profile. It would increase the cyclicality of SGS with stronger exposure to volume-driven and lab-oriented activities (requiring more capex/ with stronger operating leverage). There could be some antitrust issues, especially in commodity-related divisions such the oil market, where the new co will be in a monopoly situation. Disposals would thus be necessary.
BE:
Maintaining our Neutral rating on Intertek (target price of 900p)
ITRK now trades in line with SGS at 10.5x EV/EBIT 09e (which we see as unjustified given its smaller size and higher cyclicality) and with a 10% premium to BV (trading at 9.9x). In the sector, we continue to prefer both SGS and BV.
ITRK now trades in line with SGS at 10.5x EV/EBIT 09e (which we see as unjustified given its smaller size and higher cyclicality) and with a 10% premium to BV (trading at 9.9x). In the sector, we continue to prefer both SGS and BV.
BE:
… which is, give or take, what we wrote in today’s paper
BE:
As for this theory going round that a conglomerate like GE or 3M could go for Intertek
BE:
Not sure I fully understand the logic
BE:
Seems to me it’d screw up a whole bunch of customer relationships.
BE:
And before we leave the raw category …
BE:
Textron mentioned below
BE:
Big report in Businessweek last night
BE:
Which would seem to add credence to Neil’s 
rumour
rumourBE:
Consortium pulls out from Textron takeover
Whilst previous media reports have indicated that a United Arab Emirates group were preparing to buy the maker of Cessna aircraft and Bell helicopters for $21 a share, it has become apparent that the consortium has walked away after a month of due diligence.
Whilst previous media reports have indicated that a United Arab Emirates group were preparing to buy the maker of Cessna aircraft and Bell helicopters for $21 a share, it has become apparent that the consortium has walked away after a month of due diligence.
BE:
Whilst previous media reports have indicated that a United Arab Emirates group were preparing to buy the maker of Cessna aircraft and Bell helicopters for $21 a share, it has become apparent that the consortium has walked away after a month of due diligence. Advisors to the consortium including Citibank, Goldman Sachs and Deutsche Bank have advised against the sale stating that the price is excessive given the poor state of the business as the global recession reduces demand for aircraft and negatively effects its finance business. In addition the deal is further complicated by the numerous parties involved including Kuwait, Abu Dhabi and Lockheed Martin Corp as well as the numerous divisions of the group. Textron Inc is a multi-industry company with a global network of aircraft, defence, industrial and finance business to provide customers with solutions and services around the globe.
BE:
The company operates its business through five operating segments. Four of the company’s operating segments represent its manufacturing businesses: Cessna, Bell, Textron Systems and Industrial. The fifth segment consists of its Finance business. Apart from the high price and weak state of the business, the rumoured buyout of Textron also caused concerns in Israel given that the UAE-led consortium was interested in Textron’s civil industries and planned to sell off the defence operations to a US company. Israel’s defence establishment has strong ties with companies owned by Textron. These include the Bell Helicopter company that manufactures the Cobra attack helicopter used by Israel and aids Israel’s air force in its upkeep and maintenance. There are many projects that Textron and Israel develop together and if the company is bought it is feared the a lot of classified information will be exposed. Takeover speculation has resulted in Textron shares increasing the most in 28 years to around $13 versus around $6 as at the end of last month.
BE:
However – I’ve got work to do this afternoon
BE:
And don’t want to spend all day answering calls from panicky US fundies
BE:
So I stress I have no new information to offer on this one.
PM:
cheers for that
11:33AM
BE:
Oh – should also mention Tiscali has confirmed it’s back in talks to sell its UK assets
BE:
Milano Finanza reported this morning that Carphone Warehouse would make a firm offer by the end of the month
BE:
Which appears accurate
BE:
And will put pressure on BSkyB to pull something together
BE:
Some talk last week about Sky working on a £200m offer
BE:
£50m down on the bid it pulled, which sent Tiscali down the toilet
Carphone Warehouse Group (CPW:LSE): Last: 148.00, up 4 (+2.78%), High: 149.75, Low: 144.50, Volume: 901.03k
British Sky Broadcasting (BSY:LSE): Last: 441.00, up 0.75 (+0.17%), High: 446.00, Low: 436.00, Volume: 919.70k
BE:
Oh, and should also mention Shire
BE:
Bid talk heard around the traps yet again yesterday
BE:
AZN, Squibb, the usual list basically
BE:
Which Mergermarket followed up with a quote from “sources close to the company” overnight
BE:
“The rumors are largely unfounded,” the first source said. “Shire is not looking for buyers or received any offers. It would be very difficult for any large pharmaceutical company to buy them.”
Shire (SHP:LSE): Last: 870.00, up 2 (+0.23%), High: 873.00, Low: 865.00, Volume: 290.10k
BE:
Ok – monologue over
PM:
Cheers for all that
11:36AM
PM:
jsut catch up with the gags below
PM:
crusties with scissors
PM:
PM:
Throg’s trying to get us to talk about banks
PM:
Webby voting — we are still in the lead — just
PM:
so thanks for your votes
PM:
And for all the nice comments on the Webby site
PM:
And if you HAVENT voted yet — go here immediately
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register, etc — i know its a drag
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Then find the biz blog category in “marketplace”
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2 min registration – not too bad
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And vote for richard Branson
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Oh no
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Although the site’s irritatingly clunky
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Ive called his people to see whether he wants to come on here and try and improve his vote — but no reply yet
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Will try again later
11:40AM
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Where now (assuming we have no views to share on 
flatulence)
flatulence)PM:
How about Sports direct?
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Aha – I was wrong.
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SPD down 2.5p at 67.5p
PM:
Who was it the other day who said “buy” SPD??
BE:
Can’t remember.
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Will have to scan back
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But Investec are saying “Sell” today
BE:
With industry turmoil and brand de-stocking, Sports Direct is driving revenues hard to put additional pressure on competitors, albeit at the expense of its own margin structure. Whilst some specialist capacity has exited, new competition comes from general retailers moving into branded sportswear and we do not see margins rebuilding until well into 2010. We remain Sellers.
BE:
Key points
We think Sports Direct may have over-played its hand in trying to increase pressure on competitors, leaving it heavily over-stocked and at risk of further margin compression in 2010E.
Meanwhile de-stocking continues to weigh on the branded division which we do not expect to contribute much profit in H2 or in FY10E as Sports Direct’s secondary and tertiary brands are squeezed.
We see year-end debt levels of at least £450m and no material cash generation within our forecast horizon and think the shares should trade at a discount to the sector; we cannot justify a valuation premium to a high quality competitor like JD Sports*† (rec: Buy). This logic lies behind our revised Price Target of 40p.
We think Sports Direct may have over-played its hand in trying to increase pressure on competitors, leaving it heavily over-stocked and at risk of further margin compression in 2010E.
Meanwhile de-stocking continues to weigh on the branded division which we do not expect to contribute much profit in H2 or in FY10E as Sports Direct’s secondary and tertiary brands are squeezed.
We see year-end debt levels of at least £450m and no material cash generation within our forecast horizon and think the shares should trade at a discount to the sector; we cannot justify a valuation premium to a high quality competitor like JD Sports*† (rec: Buy). This logic lies behind our revised Price Target of 40p.
BE:
What was this floated at again?
PM:
300p i think
PM:
BE:
Raising £929m for Ashley
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And the IPO was oversubscribed
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11:44AM
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How’s Vodafone this morning?
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Not all that healthy – off 3p at 119. Why? This Bernstein note?
PM:
Yes – that’s the one. Craig Moffett – he’s rather good.
PM:
Here’s the summary
PM:
Eventually, funding Verizon’s ~$5B annual dividend will require access to the cash flows generated by Verizon Wireless. But all roads to that cash pool go through Vodafone.
•As it stands today, essentially all of Verizon’s free cash flow is generated by Verizon Wireless… and Vodafone owns claim to 45% of that cash. Verizon’s Wireline division generates no cash… and yet it’s the Wireline division that’s on the hook for Verizon’s dividend. In effect, Verizon Wireline has borrowed to pay the dividend, while Verizon Wireless has offset that incremental debt with retirement of debt of its own. At the consolidated level, Verizon’s overall indebtedness is therefore declining.
•By the end of 2010, however, VZW will have paid down debt to the “long-term” level likely desired by management. Thereafter, VZW won’t have a clear use for the resulting cash flow.
•As it stands today, essentially all of Verizon’s free cash flow is generated by Verizon Wireless… and Vodafone owns claim to 45% of that cash. Verizon’s Wireline division generates no cash… and yet it’s the Wireline division that’s on the hook for Verizon’s dividend. In effect, Verizon Wireline has borrowed to pay the dividend, while Verizon Wireless has offset that incremental debt with retirement of debt of its own. At the consolidated level, Verizon’s overall indebtedness is therefore declining.
•By the end of 2010, however, VZW will have paid down debt to the “long-term” level likely desired by management. Thereafter, VZW won’t have a clear use for the resulting cash flow.
PM:
•Verizon then faces three realistic options:
1) Make an acquisition (to rebuild debt levels);
2) Buy out Vodafone’s 45% stake in VZW, or;
3) Simply begin distributing cash (i.e. begin paying a dividend to VOD).
•We believe that there are clear impediments to either of the first two options. Moreover, Verizon’s need to access VZW’s cash flow to support its own dividend means that distributing the cash is, in our view, by far the most likely outcome.
•A VZW dividend to Vodafone would be a clear positive for VOD. As the probability of a VZW dividend rises, we believe investors will gain greater conviction in a fairer and higher valuation of VOD stock. Vodafone management is committed to a “progressive dividend policy,” so we believe that some cash associated with VZW distributions would be re-distributed to Vodafone shareholders.
•Conversely, a VZW dividend would be an incremental negative for Verizon, in our view. As things currently stand, adjusted for what is attributable (and eventually payable) to Vodafone, Verizon has essentially no free cash flow “cushion” after paying its own dividend.
•Standalone Verizon Wireless financial statements, as well as Vodafone’s cash flow statement, are included in appendices
1) Make an acquisition (to rebuild debt levels);
2) Buy out Vodafone’s 45% stake in VZW, or;
3) Simply begin distributing cash (i.e. begin paying a dividend to VOD).
•We believe that there are clear impediments to either of the first two options. Moreover, Verizon’s need to access VZW’s cash flow to support its own dividend means that distributing the cash is, in our view, by far the most likely outcome.
•A VZW dividend to Vodafone would be a clear positive for VOD. As the probability of a VZW dividend rises, we believe investors will gain greater conviction in a fairer and higher valuation of VOD stock. Vodafone management is committed to a “progressive dividend policy,” so we believe that some cash associated with VZW distributions would be re-distributed to Vodafone shareholders.
•Conversely, a VZW dividend would be an incremental negative for Verizon, in our view. As things currently stand, adjusted for what is attributable (and eventually payable) to Vodafone, Verizon has essentially no free cash flow “cushion” after paying its own dividend.
•Standalone Verizon Wireless financial statements, as well as Vodafone’s cash flow statement, are included in appendices
PM:
Investment Conclusion
Verizon Wireless generates prodigious free cash flow, but the vast majority of it has not been distributed to its owners, Verizon and Vodafone. Instead, it has been used for other purposes, and will be used to pay-down Alltel-related and other debt going forward. We believe debt will be reduced to an appropriate long-term level around the end of 2010. At that point, we believe distribution of future cash flows is likely.
Vodafone would finally realize a long-awaited cash return on its investment and, we believe, garner more credit for it in its share price. We continue to rate Vodafone (VOD.LN) Outperform with a Target Price of 180GBp.
For Verizon, the “optics” of its free cash flow from operations would be negatively impacted, and its dividend would look materially less secure. We continue to rate Verizon (VZ) Underperform with a Target Price of $27.
Verizon Wireless generates prodigious free cash flow, but the vast majority of it has not been distributed to its owners, Verizon and Vodafone. Instead, it has been used for other purposes, and will be used to pay-down Alltel-related and other debt going forward. We believe debt will be reduced to an appropriate long-term level around the end of 2010. At that point, we believe distribution of future cash flows is likely.
Vodafone would finally realize a long-awaited cash return on its investment and, we believe, garner more credit for it in its share price. We continue to rate Vodafone (VOD.LN) Outperform with a Target Price of 180GBp.
For Verizon, the “optics” of its free cash flow from operations would be negatively impacted, and its dividend would look materially less secure. We continue to rate Verizon (VZ) Underperform with a Target Price of $27.
BE:
Excellent team that. Robin Bienenstock in the UK as well.
PM:
so Vodafone finally to get some cash flow out of Verizon at the end of 2010.
PM:
This is such a touchy issue for them.
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remember a couple of years back when we printed all that stuff about their nuclear plan to actually bid for Verizon.
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They were not amused!
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I was talking to one banker recently. They had a huge stewards on how we’d go the info.
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No one was rumbled. Thankfully.
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BE:
Anyway – that Bernstein note might have been expected to help Vod – but hasn’t.
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Stock stuck below 120 – where it seems to have been for much of the past decade.
PM:
i know
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Dtel warning this week did them no good of course
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Think we’ve got Verizon results coming up soon as well
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cheers for that
11:49AM
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where now?
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How about gold?
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Ah, yes — back up above 900 dollars
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This people finding a new safe haven finally — alternative to gilts?
BE:
Hm. I think you’ll find it’s this revelation that China’s been secretly stockpiling bullion
PM:
have they? that’s very interesting
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China’s raised gold reserves by three-quarters since 2003
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To just over 1000 tonnes
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Fifth biggest reserve in the world
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Hmm — so maybe the Chinese can be relied upon to buy some of the stuff the IMF will be selilng
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Yup
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(Jay – bullion song is indeed excellent. Big fans of Joel’s work here.)
11:54AM
11:54AM
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Ok
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Before we wrap up
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Seen this out of WH Ireland?
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The Board of WH Ireland Group plc (the “Group”) announces that, following a board meeting held on 23 April 2009, two directors, Laurie Beevers and David Youngman, have been suspended as employees with immediate effect. The decision of the directors (excluding Messrs. Beevers and Youngman) was unanimous.
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The Board of WH Ireland Group plc (the “Group”) announces that, following a board meeting held on 23 April 2009, two directors, Laurie Beevers and David Youngman, have been suspended as employees with immediate effect. The decision of the directors (excluding Messrs. Beevers and Youngman) was unanimous.
PM:
Goodness me.
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The Board has also been informed by Laurie Beevers and David Youngman that they will not be voting in favour of certain of the resolutions at the Annual General Meeting of the Group to be held on 29 April 2009. These are Resolutions 4, 6, 7 and 9 for the re-election of Rupert Lowe, Richard Ford, Nigel Gurney and Roland Rudd as directors of WH Ireland Group plc and Resolution 12.
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Wh Ireland – Manchester brokerage of course
PM:
This beevis buthead combo built the business, no?
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They did. Beevers and David Youngman.
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There’s been a HUGE boardroom bust up.
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Between the old guard and the new investor group that came in last year.
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Top felt Roland Rudd. .
Rupert Lowe
Rupert LoweBE:
There was also Lord Marland – former Tory treasurer.
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Reading between the lines looks like Beevers and Youngman were fed up with the new chief executive, Richard Ford. But he hasn’t been there long.
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Share price has been rubbish, also. But then it’s a financial…
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JAY notes that this Rupert Lowe is the former boss of Southampton
Paul Murphy was raised in Portsmouth and tends to be abusive of anything Southampton-related
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But we’re not going to hold that against him
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for long
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I think Saints was doomed alongtime before he arrived on the scene
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An often vandalised Wikipedia page that one, by the looks of it
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Inherited impossible situation
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Bust up at Wh Ireland must have been pretty spectacular to actually lead to a suspension – as employees.
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Suspect there is more to this story.
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Feel free to email paul.murphy@ft.com if you have any details.
12:00PM
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Who keeps asking about Vatukoula?
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Sadly we have nothing else
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Would have assumed that anyone who bought it after reading about it hear would have sold by now
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Not that we advised either way
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Reader beware etc — penny dreadful
12:02PM
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But look — i think we are about done for today
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and for the week
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Oh – Ford results look like a big miss
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q1 75c underlying vs $1.24 est
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Hang on – that’s a loss isn’t it
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So … better.
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Anyway, all academic given the state of the industry
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Taxloss – don’t have a link for the Textron story I’m afraid
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Ford up 7% in premarket
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What ever is coming out of the states — it’s helping British equities
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Footsie now up 78 points at 4095
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(Itzman – that’s why I only move words around, not money)
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Chuck – no
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Ok – are we done?
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We are done
12:06PM
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Thanks for joining us Bryce
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Thanks for all the comments below
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And the gags
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And the Webby votes
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We will have a big push early next week
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So be prepared for taht
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In the meantime, enjoy the weekend
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Bye
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PM:
Ford not f-ed — buy the market
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Footsie up 86 points
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seeya