Markets live chat transcript for the chat ending at 12:10 on 15 May 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE) Paul Murphy, FT (PM)
NH:
Hello
NH:
Welcome to Markets Live
NH:
This is FT Alphaville’s daily market chat
NH:
And I’m joined today by Bryce
BE:
Hi there
BE:
Bit late notice mate
NH:
Yes. Bryce has been pressed into service today.
BE:
They’re going to be asking below about Murphy
NH:
Just ignore ‘em.
BE:
Well you have to say something.
NH:
No I don’t
NH:
Think some sort of statement is coming out later.
NH:
From the FT
NH:
Well, the authorities in one form or another.
NH:
So let’s talk about stocks
BE:
NH:
FTSE 100 up
NH:
creeping back towards 4,400
NH:
up 16 points at 4,379
NH:
might have to close the bear
NH:
what do u think Bryce??
BE:
Hm.
BE:
Three days down, two days up.
NH:
PM: Don’t close the bear. We might have retraced much of the initial fall.
NH:
PM: But don’t close the bear.
NH:
I’m not going to.
NH:
Anyway, I thought you were hiding
NH:
PM: I am – under your log in
NH:
That’s very confusing for me.
NH:
feel as though I’m talking to myself.
NH:
PM: Well you are.
NH:
PM: Cos I’m not here.
NH:
get out of my login!
NH:
NOW
NH:
PM: Oh, alight then
PM:
But if I get slotted by some lumpen money market trader it will be your fault.
11:06AM
NH:
Backstory here is that Murph did a joke post on some stupid bank to go bust conspiracy thing yesterday – and it blew up in his face.
NH:
Some people allegedly traded on it – thinking it was true – and all the phones were ring off the hook. Etc
PM:
Eventually had to take it down.
NH:
Certain senior bankers were complaining to the editor here.
NH:
Murphy’s career in the balance.
PM:
Still is.
PM:
PM:
You know what happened here, don’t you?
PM:
We publish a post titled “FINANCIAL COMET ABOUT TO HIT!!!!”
PM:
And then some desk monkey at some trading house send out an email to clients that reads “FT says bank to go bust”
PM:
And people trade on that before reading the actual story.
PM:
Then they read the story and look like clots
NH:
And then the want someone to blame – YOU.
PM:
hmm
PM:
if we had to lower our game here to the lowest common denominator in the money markets, well….
PM:
You know on an evolutionary basis, the money markets are the missing link in the financial world.
NH:
NH:
the missing link
NH:
very funny
PM:
Anyway, I’m bored with Cometgate. Lets move on.
BE:
So, now the A-list cast has arrived, can I go back to my proper job?
PM:
Bryce!
PM:
thank you
PM:
You are welcome to hang around and contribute whenever you want
NH:
yep
NH:
seen anything interesting??
11:10AM
BE:
Well
NH:
I take that as a no
BE:
There’s this incredible scoop on some bank or other ….
NH:
funny you should mention that
PM:
You know we’ve got all the way to 11.10 and have still avoided crowing about Barclays.
NH:
Admirable self control.
NH:
Fact is we’d look real idiots if we started saying “Told you so” or referring to Barclays’ Disinformation Office.
NH:
Also, it would be really arrogant of us to supposed that Bob Diamond and Roger Jenkins read this post here on Alphaville back at the end of Feb – and thought – hey that’s a good idea
PM:
PM:
Guy I feel sorry for is Mr Alistair Smith,
Barclays Head of Media Relations
Barclays Head of Media Relations
PM:
Whose name appeared on this letter to the FT
NH:
oh, yes that’s very emabarassing for him
NH:
not really in the loop is he?
PM:
Then you’ve got this mornings splash in the FT – by Henny Sender.
PM:
Who unlike us tends not to get things wrong
PM:
Barclays shares surge on hopes for $10bn BGI sale
By Henny Sender in New York and Martin Arnold and Jane Croft in London
Published: May 14 2009 23:56 | Last updated: May 15 2009 09:59
Barclays is in talks about selling asset management arm Barclays Global Investors for about $10bn, with potential bidders including US money manager BlackRock, according to people familiar with the matter.
Talks on the potential sale of BGI are the outcome of an initial auction for iShares, the fast-growing exchange-traded funds unit of BGI, which Barclays agreed to sell to CVC Capital Partners, the private equity group, for $4.2bn last month.
Barclays shares surge on hopes for $10bn BGI sale
By Henny Sender in New York and Martin Arnold and Jane Croft in London
Published: May 14 2009 23:56 | Last updated: May 15 2009 09:59
Barclays is in talks about selling asset management arm Barclays Global Investors for about $10bn, with potential bidders including US money manager BlackRock, according to people familiar with the matter.
Talks on the potential sale of BGI are the outcome of an initial auction for iShares, the fast-growing exchange-traded funds unit of BGI, which Barclays agreed to sell to CVC Capital Partners, the private equity group, for $4.2bn last month.
NH:
Obviously, the claim here on the Barclays side will be that these discussions – possibly with Blackrock – have just kicked off as a consequence of the decision to sell iShares.
NH:
But we will say again clearly that that is NOT the case. Barclays has been actively considering the sale of ALL of BGI at least since February.
NH:
and Blackrock has been one of the people they were taking to
NH:
of that I have no doubt whatever Smith says
PM:
yeah — but let’s not be too hard on him
PM:
I think he was being completely honest at the time
PM:
Just that the talks were happening elsewhere in the bank
PM:
Such as in the US and or the middle east
NH:
but look, disinformation from barclays hardly a shock
PM:
sure!
NH:
not destroyed my faith in human nature
NH:
so let’s look at the financial implications of this
PM:
we haven’t got any formal statement out of Barc yet.
PM:
But what are other people saying?
NH:
well, in terms of the share price
NH:
the market likes it
NH:
up 20.75p at 273.75p
NH:
as for what it is worth
NH:
and what selling it means for Barclays
NH:
IMO
NH:
what it means is that Barclays’ earnings become more volatile
NH:
BarCap is going to be a bigger part of earnings
PM:
and if Diamante Bob gets his way and even bigger part, what with this equities business he is building
PM:
So Barclays looses stable fund management earnings
PM:
and replaces them with IB earnings
NH:
yep
NH:
this is now an IB with some retail banking bits on the side
NH:
one wonders how long that will remain the status quo
PM:
yeah, perhaps Varley will IPO it
PM:
So they can focus on IB
PM:
and try and build themselves in to a new Goldman
NH:
NH:
as regards valuation
NH:
$10bn
NH:
values the business at around 0.64% of assets under management
NH:
actually Simon Pilkington at Caz has crunched some numbers on all this
NH:
and he makes the real good point that a sale of BGI – which seems like madness to me and something shareholders should be very, very wary of
PM:
(FG — will forgive you but Henny’s a her)
)NH:
will increase the capital intensity of the group, and remove a high growth, high return business
PM:
hmmm, one wonders if they are being forced to do this
NH:
by who?
NH:
the FSA?
NH:
HMT?
PM:
Or their own balance sheet realities
NH:
it really does make me wonder
NH:
bizzare
NH:
and selling at this point in the cycle
NH:
why do it??
PM:
I dont know.
NH:
nor me
NH:
anyway here’s Pilko
NH:
Barclays – Renewed speculation of BGI sale [BARC LN BARC.L], 253p, In-line, sector – Neutral
The press (eg. FT) reports that Barclays is in negotiations with several bidders “including Blackrock” to sell BGI for about US$10bn. This values the business at 63bp of 2008 AUM and 12.0x 2009E earnings, a discount to the quoted fund managers (15x).
If successful, we estimate the potential benefit to capital is material at an incremental 50bp beyond the impact of the iShares disposal (versus our current estimate 2009E of 6.8%).
NH:
On the same basis, the valuation also benefits, with an estimated 23p increase in 2009E NTAV to 283p. On a fully diluted basis, adjusting for the exercise of warrants, we estimate the NTAV would increase from 246p to 262p.
The sale of BGI would increase the capital intensity of the group, and remove a high growth, high return business. This has to be balanced against the continued focus on capital adequacy and leverage.
NH:
Financial impact
Based on proceeds of US$10bn, and deducting the US$175m break fee payable to CVC, we estimate the pre-tax accounting gain on sale would be £3.1bn after writing off goodwill of £1.5bn. This compares with the £1.5bn expected from the sale of iShares (or £1.2bn excluding participation interest).
Assuming no tax on the gain, we estimate the gross benefit to tier 1 would be c.95bp, although this depends on any financing arrangements associated with the sale, and the gross increase to NTAV would be 41p.
Based on proceeds of US$10bn, and deducting the US$175m break fee payable to CVC, we estimate the pre-tax accounting gain on sale would be £3.1bn after writing off goodwill of £1.5bn. This compares with the £1.5bn expected from the sale of iShares (or £1.2bn excluding participation interest).
Assuming no tax on the gain, we estimate the gross benefit to tier 1 would be c.95bp, although this depends on any financing arrangements associated with the sale, and the gross increase to NTAV would be 41p.
NH:
However, our estimates already include the expected benefits from the sale of iShares, and so the incremental effect is to increase 2009E equity tier 1 by 50bp (to an estimated 7.3%) and 2009E NTAV rises by 23p to 283p. We estimate the disposal would dilute 2010E earnings by an additional 3p (2010E: 11p).
The £800m gain on the tier 2 debt exchange announced yesterday increases equity tier 1 by c.17bp and NTAV by 7p.
The net effect of the potential sale of BGI and the tier 2 debt exchange is therefore to increase 2009E equity tier 1 by c.70bp to around 7.5% and NTAV by 30p to 290p (and 268p on a fully diluted basis). The P/NTAV ratio would therefore decrease from 0.97x to 0.87x.
The £800m gain on the tier 2 debt exchange announced yesterday increases equity tier 1 by c.17bp and NTAV by 7p.
The net effect of the potential sale of BGI and the tier 2 debt exchange is therefore to increase 2009E equity tier 1 by c.70bp to around 7.5% and NTAV by 30p to 290p (and 268p on a fully diluted basis). The P/NTAV ratio would therefore decrease from 0.97x to 0.87x.
NH:
want any more comment
NH:
got loads of it
PM:
yes please
NH:
Alex Potter at Collins Stewart
NH:
Having agreed the sale of iShares to CVC on 9-Apr-09, Barclays has been exploiting its “go shop” clause. The FT is now reporting that Barclays is closing on selling the whole of Barclays Global Investors for c.$10bn, acquirers named include BlackRock and Bank of New York.
NH:
iShares sale would have increased book value to 242p
The £3bn ($4.2bn) sale of iShares, which represents c.40% of BGI’s profits would have been £1.5bn gain-on-sale. This moves tangible book value per share (tBVps) to 242p (from 230p) and equity Tier 1 to 7.1% (from 6.7%).
The £3bn ($4.2bn) sale of iShares, which represents c.40% of BGI’s profits would have been £1.5bn gain-on-sale. This moves tangible book value per share (tBVps) to 242p (from 230p) and equity Tier 1 to 7.1% (from 6.7%).
NH:
Sale of entire division moves book value to 260p
If we assume c.50% of sale price is goodwill (similar to iShares transaction), then $10bn for the entirety of BGI yields a gain of c.£3.6bn. This improves tBVps to 260p (from 230p) and equity Tier 1 to a much-healthier 7.5%+ (from 6.7%). Improvements in book value and capital ratios have been key drivers for bank stock prices. Whilst BGI does generate c.15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view.
Sale of entire division moves book value to 260p
If we assume c.50% of sale price is goodwill (similar to iShares transaction), then $10bn for the entirety of BGI yields a gain of c.£3.6bn. This improves tBVps to 260p (from 230p) and equity Tier 1 to a much-healthier 7.5%+ (from 6.7%). Improvements in book value and capital ratios have been key drivers for bank stock prices. Whilst BGI does generate c.15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view.
NH:
Some valuation upside – preferred amongst UK domestics
With an upgraded tBVps of 260p, Barclays is at a marginal discount to book. This compares favourably with the European bank average which has now rallied back towards 1.2-1.3x tangible book. Barclays’ peak earnings run-rate (1H07) was c.£5.5bn of attributable profit. If we assume the 15% earnings loss from the sale of BGI is at least offset by the Lehman NA acquisition, “recovered earnings” can be a similar level. This equates to a c.15% RoE on a normalised basis and would call for Barclays to trade nearer 1.3x book (or 340p). BarCap head Bob Diamond has been making positive comments at a recent conference surrounding the sustainability of BarCap revenues through 2009 and this remains the key determinant. Whilst we can see upside to the price on a long-term view, this year will continue to be volatile. Barclays is clearly the best-placed among UK domestic banks, we believe.
With an upgraded tBVps of 260p, Barclays is at a marginal discount to book. This compares favourably with the European bank average which has now rallied back towards 1.2-1.3x tangible book. Barclays’ peak earnings run-rate (1H07) was c.£5.5bn of attributable profit. If we assume the 15% earnings loss from the sale of BGI is at least offset by the Lehman NA acquisition, “recovered earnings” can be a similar level. This equates to a c.15% RoE on a normalised basis and would call for Barclays to trade nearer 1.3x book (or 340p). BarCap head Bob Diamond has been making positive comments at a recent conference surrounding the sustainability of BarCap revenues through 2009 and this remains the key determinant. Whilst we can see upside to the price on a long-term view, this year will continue to be volatile. Barclays is clearly the best-placed among UK domestic banks, we believe.
PM:
Got any stuff from Jonathan Pierce
PM:
at CS
NH:
nope, he has been silent on this
NH:
which leads me to believe Credit Suisse is advising on the process
PM:
hmm
NH:
anyway, looks like CVC are going to be in line for chunky break fee
PM:
175m i think
PM:
anyway, we should move on
11:23AM
PM:
I should explain why we are not side by side — with the comments
PM:
as per the new ML
PM:
It is being released today — but the new code for the site does not go live until later this afternoon
PM:
So they can check any late errors over teh weekend
PM:
They being Assanka
Cracking little software shop who built FT Alphaville
NH:
so it will be side by side not just on ML, but also the main site
PM:
No no! — just ML
PM:
But there are some other fixes/changes to the rest of the stie — minor things, like in theLong Room
PM:
But look
PM:
We are doing one more ML test a few mins after this session
PM:
If you go here at 12.30 you will be able to play with the new layout
PM:
We had some probs yesteray, but they have been resolved
PM:
reportedly
NH:
right, some breaking news
11:26AM
NH:
Following the suspension of the Company’s ordinary shares on AIM and the
appointment of joint administrators, the Company confirms it is not engaged in
any talks with a third party regarding a potential offer for the shares of
Southampton Leisure Holdings plc. Accordingly, the Company is no longer in an
offer period pursuant to the City Code on Takeovers and Mergers.
appointment of joint administrators, the Company confirms it is not engaged in
any talks with a third party regarding a potential offer for the shares of
Southampton Leisure Holdings plc. Accordingly, the Company is no longer in an
offer period pursuant to the City Code on Takeovers and Mergers.
However discussions are still ongoing regarding a possible sale of the assets of
the Company, including Southampton Football Club.
Paul Murphy was raised in Portsmouth and tends to be abusive of anything Southampton-related
NH:
looking bad for the Saints
PM:
Looks like curtains to me
PM:
Scummers about to go under the waves
11:27AM
NH:
and some breaking news on expensesgate
NH:
RTRS-UK JUNIOR MINISTER SHAHID MALIK STEPS DOWN PENDING INVESTIGATION INTO POTENTIAL BREACH OF MINISTERIAL CODE-GOVERNMENT
PM:
this backlash against the press on the expenses front is picking up a bit
PM:
But the fact is we can hardly get anything thru expenses these days
PM:
NH:
that’s true
NH:
no cabs
NH:
tubes
PM:
We ahve to get the tube to Le Gavroche — can you believe that?
NH:
I know, tough life
PM:
And its a long walk at the other end
11:29AM
PM:
Where now
PM:
Retailers?
PM:
How’s Marks doing?
NH:
M&S?
PM:
yes
NH:
Hmm – against the immediate trend by there’s quite an aggressive note out from Investec on them.
NH:
David Jeary
PM:
Ah, this is the Maniesto for M&S
NH:
That’s the one
NH:
For Chairman Rose
NH:
of Marks Rose & Spencer
NH:
We set out below, in a 5 point “manifesto”, the changes we would need to see to make us more positive on M&S shares. We believe the trading strategy, the store portfolio mix and the management team all need to see changes in order to restore positive momentum. By resorting to discounting to protect market share, and cost-cutting to protect the dividend, the longer term health of the business is threatened in our view.
PM:
So what are the five points?
NH:
Resetting priorities for the balance sheet. As a first step, a dividend cut would send a clear message to the markets that management is fully alive to the pressures on the balance sheet, but this should not be accompanied by further cuts in capex: overdue spend on systems and distribution must take priority;
NH:
Site portfolio rationalisation. We do not believe M&S should be developing separate formats. Its primary focus should be to right-size group footage by location and catchment. For example, management needs to make proactive moves to address the company’s under-representation out of town. In-town, we believe that the disparate food-led portfolio needs to be addressed as a priority, with the Simply Food store closures already announced just a first step;
NH:
Change in trading strategy. Whilst management insists that its promotional stance is tactical, we believe the increase in discounting is teaching customers to shop on promotion. It may well be driving store traffic – attracting a less loyal customer – but risks alienating the traditional customer and reducing the frequency of visit, historically a big strength for the company. Price integrity has been undermined and price architecture is still encouraging trading down.
NH:
Management change. The succession issue has been well aired, but remains unaddressed. The operational management team has not delivered an impressive performance over the past 18 months and whilst changes have been made within the food division, we do not see the next CEO as within the ranks, and indeed question whether the operational team needs to be strengthened in general merchandise. The structure of the board – including the lack of an independent chairman – also looks unbalanced.
NH:
Overseas expansion should be put on the back burner. Whilst we absolutely accept that a longer term growth story outside the UK has to be part of management planning, franchise expansion remains a lower risk, less timeconsuming way of expanding the footprint, than owned stores. The recent mismanagement of the launch in China demonstrated all the old M&S vices.
PM:
They won’t like that in Baker St
NH:
They’re not in Baker St any more
PM:
Oh yeah, now in Paddington
PM:
Anyway, they wont like that in Paddintgon – referring to all the old M&S vices
NH:
Here’s a bit more from the note
NH:
Management – reverting to the Norm
The traditional M&S response to tough trading can be summarised as: “Beat
up suppliers; Tart up stores; Er…that’s it.”
What surprises us looking at management performance under the Rose regime is that so many of the problems, and the responses, are familiar. Traditionally, M&S operated with an Executive Chairman, so Rose’s amalgamation of the role was not setting any precedent. But having set a time limit on his tenure, and having seen the gains of his early strategies given up (FY09E PBT will be broadly back to 2002 levels), management is once again an issue for M&S and for the share price.
The traditional M&S response to tough trading can be summarised as: “Beat
up suppliers; Tart up stores; Er…that’s it.”
What surprises us looking at management performance under the Rose regime is that so many of the problems, and the responses, are familiar. Traditionally, M&S operated with an Executive Chairman, so Rose’s amalgamation of the role was not setting any precedent. But having set a time limit on his tenure, and having seen the gains of his early strategies given up (FY09E PBT will be broadly back to 2002 levels), management is once again an issue for M&S and for the share price.
NH:
and there are some figs next week
NH:
and M*S has had a good run
NH:
Revised Price Target set at 300p
We have argued that M&S is being valued as a recovery stock, although recovery is far from certain in the absence of a major industry revival and/or the exit of a direct competitor. On our revised forecasts, the company is trading on a calendar 2009 PE of 15x – broadly a sector average valuation – but a c25% premium to the stockmarket. This is also above the long-run sector average forward PE (c14x).
We have argued that M&S is being valued as a recovery stock, although recovery is far from certain in the absence of a major industry revival and/or the exit of a direct competitor. On our revised forecasts, the company is trading on a calendar 2009 PE of 15x – broadly a sector average valuation – but a c25% premium to the stockmarket. This is also above the long-run sector average forward PE (c14x).
NH:
15 times forecasts earnings
NH:
for a reatailer at the moment!!!!!!!!
NH:
NH:
The shares have enjoyed a strong rally since the positive surprise delivered with the Q4 IMS and over the past quarter have outperformed the All Share by 17%. However, they have moved in line with the General Retail sector over the same period. The chart below shows that although the absolute share price remains well below those seen in the recent past, it is back towards the levels seen in the period
following Sir Stuart Rose’s appointment as CEO, but before the “Rose recovery” took off.
following Sir Stuart Rose’s appointment as CEO, but before the “Rose recovery” took off.
NH:
In the near term, the shares look over-bought. In the medium term, we retain fundamental concerns about the direction of the business, and even if the sector holds its current rating, M&S looks relatively over-valued in that context. As a result, we retain our Sell recommendation.
PM:
thanks for all that
11:33AM
PM:
Note genie’s story below
PM:
About the guy who was supposed to help Aer Lingus
PM:
Turns out he runs a sweet shop and ives in a pebble dashed house in Gorebridge
PM:
Looks to be a very funny story
PM:
Over in Ireland
NH:
really
NH:
who is proposing to help them?
PM:
he was going to inject €25m
NH:
really
PM:
also he was supposed to prop up a bust property developer, taggart Holdings
PM:
with a cool €450m
NH:
NOW DON’T ANYONE TRADE ON THIS STORY
PM:
NH:
especially money market muppets
NH:
we think it is mad
NH:
got that MAD
PM:
nah — the story’s real enough — irish times
11:37AM
NH:
just got some flashes coming out of Glaxo
NH:
selling a lot of flu vaccine
NH:
RTRS-GLAXOSMITHKLINE PLC – HAS RECEIVED ORDERS FROM SEVERAL GOVERNMENTS AIMING TO STOCKPILE A NEW CANDIDATE A (H1N1) ADJUVANTED INFLUENZA VACCINE
NH:
GSK HAS RECEIVED ORDERS FROM SEVERAL GOVERNMENTS AIMING TO STOCKPILE A NEW CANDIDATE A (H1N1) ADJUVANTED INFLUENZA VACCINE
NH:
TO MANUFACTURE THE NEW VACCINE, ONCE VIRUS SEED IS MADE AVAILABLE BY THE WHO
NH:
SUPPLYING THE UK GOVERNMENT WITH 60 MILLION DOSES OF THE CANDIDATE A (H1N1) ADJUVANTED INFLUENZA VACCINE
11:36 15May09 RTRS-GLAXOSMITHKLINE PLC – FRENCH GOVERNMENT INTEND TO PURCHASE 50 MILLION DOSES OF THE CANDIDATE A (H1N1) INFLUENZA VACCINE
11:36 15May09 RTRS-GLAXOSMITHKLINE PLC
NH:
GSK WILL SUPPLY THE CANDIDATE A (H1N1) ADJUVANTED INFLUENZA VACCINE TO DEVELOPING COUNTRIES
PM:
So, this swine flu scare has turned into a real money spinner
GlaxoSmithKline (GSK:LSE): Last: 1,055, down 10 (-0.94%), High: 1,064, Low: 1,052, Volume: 3.41m
PM:
Simon Jenkins will be going apoplectic at the Guardian
PM:
* Comment is free
Swine flu? A panic stoked in order to posture and spend
NH:
he will
PM:
Good read that
11:39AM
NH:
can we just have a very quick look at Rio
PM:
sure
NH:
due to all the recent speculation, Rio was forced by the Aussie regulators last night to issue a statement
NH:
basically said, we know of no reason for the recent prices moves and the deal with Chinalco is still very much on track
PM:
i see
PM:
Rio shares are up 65p at £26.58
NH:
Thanks
PM:
Gain of 2.5% — were higher earlier
NH:
the whole sector has come off the boil by the looks of it
NH:
anyway, as we reported this morning the new Rio chairman is on an investors road show at the moment
PM:
that’s Jan De Plessis
PM:
the ex-BAT
NH:
yep
NH:
and a pretty clear picture is emerging, according to sector watchers
NH:
backing the deal and the CEO Albanese but
PM:
go
NH:
tactfully leaving the door open to unsolicited superior offers from third parties
PM:
well, that’s explains where all these BHP bid/rights issue rumours are coming from
NH:
I would guess so
NH:
but Du Plessis also hinting that the Chinalco deal could be revised if the share price remains at around £30
PM:
i see
NH:
£30 is more or less the conversion price on one of the two tranches of bonds
NH:
wanna see a bit of comment on this
PM:
sure
NH:
from the mining team at Liberum
PM:
paste away
NH:
The new Chairman of Rio Tinto is two days into his debut roadshow and a clear picture is emerging from the feedback we have received from shareholders and a statement released to the ASX earlier today. As we expected, Jan du Plessis’ is backing his CEO and sticking to the Chinalco deal, whilst tactfully leaving the door open to unsolicited superior offers from third parties (BHPB?). Contrary to misguided press speculation, a rights issue is not under consideration whilst the Chinalco deal is still live. With the board unwilling to take a Chinalco deal to shareholders that would be voted down, the Chinalco transaction on current terms could to be a non runner should RIO’s share price stay at or above the £30/share level. Rather than a binary approval/rejection outcome we think there may be scope for a renegotiated deal should RIO’s share price strengthen from here.
NH:
Of course Chinalco need to play ball, but their choice is stark: either walk or renegotiate. Whether RIO will be able to pull off a sweetened deal is a function of a) equity/commodity market levels and b) the credibility of RIO shareholders’ resolve to vote down an unattractively priced deal and c) whether the FIRB throw open the doors to the (re)negotiation rooms with a heavily conditional approval. There are a multitude of scenarios that could play out under a re-negotiated deal, with most focused on dealing with the convertible, the most unpopular part of the deal. One elegant compromise could be the scrapping of the Chinalco convertible in favour of a straight bond. This would leave RIO getting a cash injection of $12bn+ for the asset sales to Chinalco (sufficient to avoid any other equity issue); Chinalco would be left at 9% in RIO, below the FIRB’s sensitive level of 15%; institutional investors would be happy at their treatment and Chinalco would get an income yield to service their deal debt.
NH:
Overall then, the recent pull back in RIO on right issue scare stories provides an opportunity to top up holdings (it was up strongly in Oz overnight). RIO have more options than the market perceives, and a Plan B rights issue is bottom of the list.
PM:
any more?
NH:
a couple more pars
NH:
One possible solution – scrap the CB in favour of a bond? One stab at a solution could be Chinalco still get to invest at the asset level but scrap the deeply disliked convertible, replacing it with a straight bond at a similar coupon. That way Chinalco still get a yield with which to service their deal debt (priced at a crazy libor + 80bp); the FIRB are happy that Chinalco remain sub 15% and have less need for board seats
NH:
Under this scenario of no Chinalco convertible, but keeping the sale of minority interests at asset level RIO FCF for 10 months to 31 Oct 2009 is US$6.1bn (shortfall of US$2.8bn) and the FCF for 12 months to 31 Oct 2010 is US$3.5bn (shortfall of US$6.5bn). However, after including US$12.3bn proceeds from the asset sales to Chinalco and meeting both debt repayments, Rio would be left with head room of US$3.1bn ie: asset sales alone could meet the funding gap. Net debt is US$18.3bn at end 2009 and US$17.3bn at end 2010. This would give comfortable debt coverage ratios of Net debt / EBITDA = 1.32x 2009 and 1.62x 2010 based on EBITDA in 2009 of $13.8bn and $10.6bn 2010.
NH:
Where does this leave BHP Billiton? RIO resolving to complete the Chinalco deal albeit possibly on altered terms is not good news for BHPB. BHPB don’t want a stronger competitor; a rival that is in bed with their biggest customer; or their best M&A opportunity moving further from reach. It is becoming clearer that if they want to move on RIO they need to go soon. However, BHPB remain very cautious on the cycle and it is not clear how willing the new RIO Chairman is to think about an approach from BHPB. An agreed deal must be absolutely watertight (financing/regulatory risks) for them to abandon the Chinalco deal.
NH:
sorry that was a bit long
NH:
but worth reading if you are following this saga
11:44AM
PM:
Quick market update
PM:
Footsie just gone into negative territory
PM:
had squeezed through 4400 earlier
PM:
back to 4361
PM:
Told you not to close the bear
NH:
i didn’t H&M Capital Management LLP
NH:
still short and proud of it
NH:
So, Murph
NH:
as chief investment officer of H&M
PM:
am i?
NH:
yeah, you have just been promoted on the back of yesterday’s story
PM:
Fiasco
NH:
anyway, what I want to know is this
NH:
are we going to back the Max Property floation?
PM:
the new Nick, “the secret millionaire”, Leslau float??
PM:
well, I was thinking about it and then I saw this article by Richard Fletcher in the Daily Telegraph
PM:
A private company controlled by Nick Leslau will collect at least £18.75m in fees for advising an Aim-listed vehicle in which the entrepreneur is a director
Max Property – which is due to float on Aim within weeks – has signed a seven-and-a-half-year management agreement with Mr Leslau’s private vehicle Prestbury Investments.
According to the admission document, Prestbury Investments will collect “an annual fee equivalent to 1.75pc per annum of the average net asset value of the group… subject to a minimum fee of at least £625,000 a quarter”.
PM:
Any payment over £625,000 will be split with Och-Ziff, the hedge fund that is backing the flotation. Prestbury Investments will receive 80pc of the fees and Och-Ziff the remainder.
An incentive scheme means the pair will also be in line to share 20pc of all profits once they have delivered an annual return of at least 11pc to investors.
An incentive scheme means the pair will also be in line to share 20pc of all profits once they have delivered an annual return of at least 11pc to investors.
NH:
woah
NH:
at least £625,000 a quarter
NH:
nice work if you can get it
NH:
but seriously if we are considering backing this float, it might be worth flicking through a note that Noble Research have stuck out this morning
NH:
Titled-Pre IPO Questions for Management
PM:
So what should we be asking the Secret Millionaire
NH:
according to Noble we might want to focus on
NH:
the close alignment of interests through co-investment
PM:
what?
NH:
yep Prestbury will be investing alongside Max
NH:
but that could be a good thing of course
NH:
A key feature of the company’s structure is the co-investment by the Prestbury management team on both a company and co-investment level. The potential scale of this investment is £80m (£25m IPO, £55m co-investment) compared to third party investment in Max Property at IPO of a maximum of £175m. This will ensure a close alignment of interests between shareholders and management and should avoid any potential conflicts arising from performance fees payable to Prestbury Investments. Moreover, shareholders are protected by a robust performance fee structure, whereby no incentives are payable to Prestbury until shareholders receive a return of their capital and a preferred return of 11% p.a.
NH:
which means we should probably quiz him on the following
NH:
Q: Is Max Property going from a ‘standing start’ in sourcing and appraising investment opportunities?
Q: What is the extent of the current pipeline of investment opportunities accessible by the Prestbury team?
Q: How long after admission would the management like to make its first investment?
Q: What is the extent of the current pipeline of investment opportunities accessible by the Prestbury team?
Q: How long after admission would the management like to make its first investment?
NH:
Q: What time frame does management anticipate for the full deployment of the IPO proceeds?
Q: What does the company see as the long-term ‘fair value’ for yields for well-located assets with long-term, secure rental flows?
Q: What does the company see as the long-term ‘fair value’ for yields for well-located assets with long-term, secure rental flows?
PM:
OK
PM:
but what about the fees ??
PM:
seems on the high side to me
NH:
Noble agree
NH:
Looking at the fee arrangements for a range of other Channel Islands domiciled real estate vehicles provides a good means of benchmarking Max Property’s proposed fee arrangements. The real estate fund industry as a whole has moved away from gross asset value based fees, given the ability to inflate management fees by taking on leverage to increase the gross asset base. On this basis an NAV-based fee seems appropriate. The level (1.75%) seems to be on the high side and this is the feedback we received from other real estate fund managers
NH:
The same management fee is charged by London and Stamford, and we can only assume that these fees are justified on the basis that the fund has little or no standing investment portfolio and therefore the manager will need to spend time sourcing, appraising and executing investments from scratch. One point to note regarding the management fee is that given that cash distributions are likely to be deferred until after the five-year investment phase, a minimum of £12.5m will have already have been paid out in management fees before any cash distributions are paid to shareholders.
NH:
The performance fee carried interest of 20% in excess of the hurdle is in line with precedents, if slightly more favourable to Prestbury Investments due to the initial catch-up in carried interest. The hurdle itself is robust due to it being based on cash, rather mark-to-market returns to shareholders. The 11% level of the hurdle is also in-line with other fund structures. Having a performance fee of any kind marks the company out as higher risk than core income funds.
PM:
right
PM:
is that it??
NH:
no one more point
NH:
Leslau is of course not the only property entrepreneur to set up one of these vulture
NH:
others are doing it which means there is going to be some competition
NH:
So we should ask how they plan to stay one step ahead
NH:
We are aware that there are a number of ‘recovery’ funds currently in the pipeline, which will seek to capitalise on current market opportunities in the UK real estate sector. By example, F&C REIT Asset Management have announced this week that they have raised a £300m UK opportunity fund to invest over a 7 year lifetime.
Below, we have shown two examples of precedent acquisitions made by London & Stamford, a fellow opportunistic investor and potential competitor of Max Property. The transactions are very close to Max Property’s own investment criteria of well-located, long-income properties, with stapled debt in place in the case of the Meadowhall transaction.
Below, we have shown two examples of precedent acquisitions made by London & Stamford, a fellow opportunistic investor and potential competitor of Max Property. The transactions are very close to Max Property’s own investment criteria of well-located, long-income properties, with stapled debt in place in the case of the Meadowhall transaction.
NH:
Q: What differentiates Max Property’s offering from that of other recovery funds?
Q: How much capital is already on the sidelines ready to invest in the sector?
Q: Is there a possibility of the UK real estate market being flooded with equity buyers in the next 12-24 months?
Q: How much capital is already on the sidelines ready to invest in the sector?
Q: Is there a possibility of the UK real estate market being flooded with equity buyers in the next 12-24 months?
PM:
okay thanks for that
PM:
let’s call Leslau and get a date in the diary
NH:
will do, boss
11:51AM
NH:
I hope CityUnslicker is out of African Copper
NH:
and the profits are in the bank
PM:
Stock down 25% or so
PM:
off 2.5p at 8p
NH:
what’s happened
PM:
tryin to get the statement
PM:
Acquisition of Bonds
Natasa Mining Ltd (Natasa or the Company) advises that it has acquired bonds (the bonds) with a face value of BWP149.6 million (US$21 million) in African Copper plc’s primary subsidiary, Messina Copper (Botswana) (Pty) Ltd (Messina). The consideration is comprised of a cash payment equivalent to 60% of the face value of the bonds, plus a contingent profit share element whereby 33.3% of any profit from disposal of these bonds will be distributed to the previous bond holders. Should Natasa acquire Messina from the provisional liquidator (see last paragraph), Natasa will arrange for 10% of the equity interest in Messina to be distributed to the previous bond holders. The cash consideration was paid using Natasa’s existing cash reserves.
Taking into account previously existing indebtedness from the African Copper group (African Copper) to Natasa, the Company is presently owed some US$25.6 million by African Copper and, based on information in the public domain, believes it is by far the single largest creditor of African Copper.
PM:
Furthermore, Natasa holds a mortgage bond over the mining assets and has a contractual right to effect an encumbrance over African Copper’s residential estate as well as an hypothecation over all movable assets of Messina. Natasa’s security is over a sum of US$15.6 million.
Natasa draws attention to certain salient facts in the African Copper audited accounts for the year ended 31 December 2008. At that date, African Copper had total liabilities of £29.5 million (some US$44 million) and a deficit of shareholders funds of £12.9 million (some US$19 million).
African Copper is currently in breach of the terms of the bonds and they, together with the other indebtedness of African Copper to Natasa, are now due and payable. Natasa has therefore today lodged a petition with the High Court of Botswana to seek an order, inter alia, for the winding up of Messina and the appointment of a provisional liquidator.
NH:
so, someone has bought into the bonds
NH:
of a subsidiary
NH:
and now wants full repayment
PM:
yep — going for winding up order
PM:
This is the main subsidiary — Messina Copper
NH:
er, right
NH:
this does not seem good
NH:
Right, we have not looked the money markets for a while
NH:
and i reckon Murph should steer clear
NH:
but this just popped up on the wires
NH:
RTRS-3-MTH DOLLAR LIBOR/OIS SPREAD LOWEST SINCE MID-MARCH 2008
NH:
that’s pretty bullish, no?
PM:
it is
PM:
Well — a sign of relatively calm
NH:
interesting though
NH:
the central bank medicine working
11:56AM
PM:
right
PM:
time for small cap corner?
PM:
What’s this thing?
PM:
PV Crystalox Solar
PM:
PM:
never heard of it before, but its share price is getting a real shoeing this morning
PM:
Down 17.75 at 90
NH:
well, first it is a FTSE 250 company
NH:
for now anyway
NH:
and without getting too technical about things
NH:
it is leading manufacturer of multicrystalline silicon ingots and wafers, the key component in solar power systems
PM:
wot
NH:
makes bits for solar panels I think
NH:
anyway it has issued a profits warning this morning
NH:
which is not a huge surprise to sector followers
PM:
why’s that?
NH:
because one of the biggest customers, Germany’s Q-Cells, issued some rubbish figures early this week, warning of slowing demand etc
PM:
right, I see
PM:
all not well in the solar world
NH:
It would seem not
NH:
half year revenues are going to be around 10% lower because
NH:
clients deferring orders
NH:
and PVC having to cut costs on the contracts that customers are going ahead with
PM:
any comment?
NH:
yep
NH:
KBC
NH:
Long-term contracts can withstand only so much and the rate of order deferral has increased. Downward revisions to earnings are needed. PVCS does though have good exposure to Japan where more subsidies are being
introduced, a strong balance sheet and still stands as the cheapest play in the sector. BUY
introduced, a strong balance sheet and still stands as the cheapest play in the sector. BUY
Order deferrals on the rise. Order deferrals by the end of June are now
expected to reach 30-35MW up from <10MW at the end of March. At c25 % of
sales, despite it all being fully contracted, this is a significant deterioration.
NH:
Price pressure. PVCS has “agreed temporary price flexibility” on its contracts,
citing spot prices being below their contracted level. We have already factored
into our forecasts prices 10% below contracted levels.
citing spot prices being below their contracted level. We have already factored
into our forecasts prices 10% below contracted levels.
2009 revision. Assuming a 10% shortfall in both volume and price from
contracted levels, PBT for FY09E becomes €80m (down from €93m). Our
forecast for FY10 is under review
NH:
NomuraCode
NH:
Comment: Despite its long term relationships PVCS now seems to be caught up in the midst of the pricing pressure affecting the whole of the crystalline value chain. As we discussed in our last update, issued on the 2 April, there is very little differentiation between wafers and with the spot price of wafers sold by Asian manufacturers already below PVCS’s contract pricing, we felt it was inevitable that customers feeling pricing pressure themselves looked to negotiate pricing. In addition to the pressure on pricing, PVCS is also being affected by significant order deferrals, which at 30-35MW account for >11% of this year’s forecast output.
We had already taken a more aggressive view on pricing for PVCS than many others; however, we had not factored in so many order deferrals. There is still plenty of time to make up for these deferrals with increased shipments in 2H09, especially as the outlook for the solar sector looks better in 2H09 with increased project financing in Europe due to the profitability of projects, and an increased contribution from the US and Japan. These points made, however, today’s news demonstrates that PVCS’s sell side relationships are not as strong as initially imagined and that the risks are on the downside with respect to both volumes (through order deferrals) and pricing: we had forecast a price decline to $1.41/W in 2H09 for PVCS versus $1.07/W for ReneSola on the basis that there was value in the contracts and strength of relationships
NH:
PVCS remains in a strong position in the crystalline value chain with a healthy balance sheet and low cost silicon input. Even under a worst case scenario, assuming deferrals remain at ~35MW and PVCS ships 240MW for FY09, and pricing declines towards $1.10/W, the Company will still make a net profit of circa €25m (our current forecast is for a net profit of €67m). Therefore despite the clearly negative news today we remain comfortable holders of PVCS and reiterate our Neutral recommendation. Our forecasts are now under review pending further analysis of the pricing PVCS can sustain in 2H09.
NH:
oh and here’s a bit from Caz
NH:
Slowing demand and inventory build of wafers at customers in recent months has seen requests for delivery deferrals increase from approximately 10MW at the end of March to 30-35MW in H1. This represents 10-13% of contracted volumes of 275MW for the FY. The company has guided to sales down 10% yoy, implying H1 sales in the region of £113m.
NH:
We are reducing our EPS estimate to 10.4€c for 2009E (45%) and 10.0€c for 2010E (–45%).
Upward creep in the level of deferrals undermines visibility and we therefore believe it is prudent to model further deterioration. The level of volume cuts and price concessions seen to date reflect the company’s customer relationships and its favourable exposure to Japan. Sentiment
in the broader solar sector has tentatively improved due to strong growth in Germany and Japan, as well as signs of new subsidy packages in the US and China. However with short-erm spot prices undershooting even the lowest price suppliers, no player is proving immune.
NH:
On revised estimates, the shares trade on 11.5x 2009E and 12.1x 2010E PER. The net cash position is further increased on the €81m level at end 2008, and project execution at the Bitterfeld plant is on-track. Owing to the relative valuation and strong balance sheet position, we maintain an Outperform recommendation, although newsflow will likely remain weak.
PM:
(Very good Chuck on the sun going out below)
NH:
as for rainfall in Hyde Park
NH:
not checked up on that
NH:
but CityBoy was offering some very favourable odds
PM:
indeed
NH:
10-12 rain days until the end of August I think
PM:
Footsie coming off nice btw
PM:
R Bradly looking for a fall below 4300 by the close
PM:
got to be a reasonable chance of that
PM:
Slew of US figs this afternoon
NH:
Core CPI (8:30 AM)
NH:
Empire Manufacturing (8:30 AM)
NH:
Industrial Production (9:15 AM)
NH:
Univ. of Michigan Consumer Sentiment (9:55 AM)
NH:
Dallas Fed President Richard Fisher at Texas Bankers Association conference (9:15 AM)
NH:
oh and this
NH:
Abercrombie (ANF) (Before bell)
NH:
which means we will get so see if people are still buying £60 polo shirts
PM:
ha
12:02PM
PM:
on a separate note, you know Jon Pierce at CS has been gonig on about how the banks are going to hve to hugely increase their liquidity buffer?
NH:
yeah
PM:
Well, he should read Hector Sants latest speech
PM:
here
PM:
Banks will also be required to dramatically increase their focus on liquidity. This also played a key role in the origins of this crisis. Many banks placed increased reliance on funding via the wholesale interbank markets. In addition, maturity transformation was increasingly performed not on bank balance sheets, but by non-banks and off-balance-sheet vehicles, mutual funds and SIVs.
12:03PM
NH:
breaking news
NH:
Fowke unmasked
PM:
NOT WAY
NH:
Yes, the sheet and the shades are gone!
Yes! Yes! Yes! I have decided not to hide from Jack Pickles and Satan any more.
O Master, is this wise? You will be vulnerable on the astral plane now.
SILENCE!!!
I know what I am doing.
NH:
As the world’s foremost financial shaman and a visionary poet of the credit crunch, I am just like a bridge over troubled water for bankers, traders, and analysts everywhere. I am a friend to the lost souls. A teacher. A leader. A mystic. Basically, a man of the future, and a master of reality. Let me guide you. Let me show you the way.
PM:
name please
PM:
NH:
some one must recognise this man
NH:
can we get him on crimewatch?
NH:
much older than i imagined
PM:
Looks impressively sinister tho
NH:
he does
NH:
we must get him on the show
NH:
now he has decided to come out as it were
PM:
We must
NH:
right, are we done?
PM:
Sort of
PM:
But if any of you fancy coming back in 20 mins or so
PM:
We will be doing another short ML test
PM:
new side by side format
NH:
really, I have column to write
NH:
and then some market stuff
NH:
to do
PM:
This link will be available in about 20 mins
PM:
So do join us if you have time
NH:
has Mr Betts ironed out the bugs??
PM:
he has
PM:
i hope
PM:
Right — got to go for a mo tho
PM:
Footsie off 28 points at 4334
NH:
4,000 here we come
PM:
Seeya
NH:
bye
NH:
Zoomy is in Sardina on hols