Markets live chat transcript for the chat ending at 12:05 on 22 Jun 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Welcome
PM:
11.02
PM:
It’s Monday.
PM:
This is Markets Live– FT Alphaville’s daily market commentary
PM:
Neil and I were going to come on here this morning and declare our aim to take the Footsie below 4300 within the next hour.
NH:
But traders have clearly taken pre-emptive action.
PM:
Too easy — Footsie on 4301
PM:
Down 45 pionts currently
PM:
We are just too predictable.
NH:
To use FSA speak, we are being “pre-hedged”
PM:
Pre-hedged?
NH:
Yeah, I’m not sure either. Front running.
PM:
Well it’s not front running. It’s just anticipation. Basic common sense.
PM:
The Footsie’s headed to 4000. What’s there to argue about?
NH:
Actually, there’s bound to be a bounce back above 4300 pre-lunch.
NH:
But after that bout of market manipulation on Friday morning, the trend will re-establish itself.
NH:
So forget about wobbling or wanting to take any money off the table. The big H&M directional bet remains in place.
PM:
Okay. I’m solid on this.
PM:
Actually, couldn’t we close out half our position. Take a bit off the table – provide a bit of an escape cute if we see a fresh bear squeeze and we are forced to close?
NH:
No.
PM:
OK 
11:05AM
NH:
Right
NH:
we are having a few tech problems this morning
NH:
comments appearing very slowly
NH:
in fact everything is appearing very slowly
NH:
Paul, you still there?
PM:
I am
PM:
Just a prob with comment updating i think
PM:
refreshing…
NH:
Right
NH:
looks as if comments are not refreshing
NH:
seems to be happening on all browsers
NH:
Paul is reporting the problemm now
11:09AM
PM:
Let’s muddle on
PM:
We’ve got to talk about Anglo and Xstrata
NH:
yes, the deal that won’t happen
PM:
?!
NH:
in its present form at least
PM:
Hmm
PM:
Let’s get the price action out first
PM:
What moves have we seen?
NH:
Okay
NH:
Anglo traded as high as £18.25
NH:
but now up just 90.5p at £17.12
NH:
meanwhile Xstrata
NH:
traded at 700p initially but now off 27.5p at 653.5p
PM:
so what’s that telling us?
NH:
well, two things I guess
NH:
that the market expects Xstrata to increase the terms of its offer
NH:
a hostile nil-premium merger is not going to succeed
NH:
or that a white knight might come in
PM:
someone like Vale
??
NH:
but even this has to be something of a long shot because a), the synergies don’t look compelling and b) could Vale get debt financing for a deal of this size
PM:
Anglo’s market cap is almost £23bn, so I would say no
NH:
agreed and what is also interesting is that all of the deals announced this morning, Anglo, Brixton and Chaucer are all scrip offers
NH:
no cash
NH:
which suggests to me that acquisition finance is still hard to come by for cyclicals sectors
NH:
you might be able to convince the banks to lend in pharma and oil, but not elsewhere
PM:
although smaller deals can get done
NH:
that’s true
PM:
so, in summary we are not too bullish on this deal
NH:
no, but then we did not break it
NH:
when you break a deal like this, you want it to happen
PM:
That’s soo true
PM:
And everyone else knocks it down — says it wont happen
NH:
so expect a positive editorial in the Telegraph
NH:
tomorrow
PM:
But if you have broken the story, human nature means you want it to succeed
PM:
But how about more fundamental reasons
PM:
ON why it wont happen in its current form
PM:
???
NH:
aside from the fact it’s nil premium
NH:
anglo’s board aren’t interested
NH:
the South African government will be less than impressed as the prospect of the big redundancies that would accompany any deal
NH:
and don’t underestimate the importance of Anglo in South Africa
NH:
hugh employer
NH:
all told this looks like an opportunistic move by Xstrata to take advantage of some disquiet among Anglo shareholders who don’t think the CEO Cynthia Carroll has moved quickly enough to restructure, pay down debt
PM:
and what’s also interesting here is the DNA of Xstrata
PM:
six months after completing a very big cash call, they want to do another deal
PM:
they need to do another
PM:
another fix
NH:
well, there is a view on that
PM:
which is?
NH:
that Mick Davis the CEO of Xstrata has wrung everything they possible can out of the company and they need to find another target to suck the life out of
NH:
which explains a lot
NH:
of course, Xstrata have also put themselves in play by doing this
NH:
as much as Anglo could be targeted by Vale, so could Xstrata
NH:
they held talks before – Vale offered £45 a share remember
NH:
and they have $12bn of cash
PM:
Okay
PM:
what have the analysts made of it
NH:
well, they all very excited by the synergies
NH:
they love this sort of thing, a chance to NPV the synergies
NH:
and fantasise about the cost cuts that could be achieved
NH:
that said, most of them don’t think a Vale counter bid is very likely
NH:
right, here’s something from Morgan Stanley on synergies
NH:
Synergy potential and overlap: There are 4 areas of
major operational overlap – a) Australian coal (mainly in
Queensland) b) South African coal (in the Witbank area)
c) South African platinum (where Xstrata has small
operations and great ambitions, while Anglo is already
the dominant player) and d) South American copper –
where there are operations and the biggest mine
Collahuasi is a JV between Anglo and Xstrata.
major operational overlap – a) Australian coal (mainly in
Queensland) b) South African coal (in the Witbank area)
c) South African platinum (where Xstrata has small
operations and great ambitions, while Anglo is already
the dominant player) and d) South American copper –
where there are operations and the biggest mine
Collahuasi is a JV between Anglo and Xstrata.
NH:
Trying to quantify synergies: We estimate the pretax
operating cost base of the combined entity would be
c$34bn in ‘09e. Based on precedent transactions in
mining, 2%-3% is not an unreasonable estimate for cost
synergies (especially given the operational overlap), and
hence cost savings of $650mn-$1bn are feasible. There
could also be tax benefits due to Xstrata’s Swiss tax
domicile. In addition, there would be additional NPV
benefits from optimizing the organic growth pipelines
and accelerating growth programmes (such as
Collahuasi to 1mt project).
operating cost base of the combined entity would be
c$34bn in ‘09e. Based on precedent transactions in
mining, 2%-3% is not an unreasonable estimate for cost
synergies (especially given the operational overlap), and
hence cost savings of $650mn-$1bn are feasible. There
could also be tax benefits due to Xstrata’s Swiss tax
domicile. In addition, there would be additional NPV
benefits from optimizing the organic growth pipelines
and accelerating growth programmes (such as
Collahuasi to 1mt project).
NH:
Citi on White Knights of lack of
NH:
White knight?
Xstrata and Anglo are Vale’s only two options of making a one-deal jump into
the big time to compete against global peers across a broad range of
commodities. However, there are minimal synergies between AAL and Vale
making it a less attractive alternative.
Xstrata and Anglo are Vale’s only two options of making a one-deal jump into
the big time to compete against global peers across a broad range of
commodities. However, there are minimal synergies between AAL and Vale
making it a less attractive alternative.
Vale remains ambitious in terms of global growth and diversification. A deal
with XTA would provide geographic diversification (Australia and South Africa),
commodity diversification (copper, zinc, thermal coal and coking coal) and
synergy potential (nickel assets in the Sudbury basin). Vale management has
repeatedly noted a preference for copper and coking coal, two commodities
XTA has significant exposure to.
NH:
Near term we believe a deal is unlikely as debt financing would be a stretch for
Vale. Equity financing is complicated by Vale’s dual shareholding structure.
The synergies from a deal are also limited to the Canadian nickel operations
and concentration in the nickel market could encounter anti-trust issues. The
previous deal breakers over relative value and marketing rights also remain.
Vale. Equity financing is complicated by Vale’s dual shareholding structure.
The synergies from a deal are also limited to the Canadian nickel operations
and concentration in the nickel market could encounter anti-trust issues. The
previous deal breakers over relative value and marketing rights also remain.
NH:
and here are some other major hurdles to a deal
NH:
Complicated deal structuring: Political sensitivities in SA and high debt levels
in both companies make a hostile deal unlikely. We believe that given the
importance of mining (and AAL’s flagship status) to South Africa, any deal
would have to involve the retention of a SA listing. Questions of value would
be significant. The companies have similar market caps, revenue and
earnings bases. Arguably Anglo has better quality, longer life assets. The
political / regulatory complications in South Africa are unlikely to be a deal
breaker given XTA’s experience in the region.
in both companies make a hostile deal unlikely. We believe that given the
importance of mining (and AAL’s flagship status) to South Africa, any deal
would have to involve the retention of a SA listing. Questions of value would
be significant. The companies have similar market caps, revenue and
earnings bases. Arguably Anglo has better quality, longer life assets. The
political / regulatory complications in South Africa are unlikely to be a deal
breaker given XTA’s experience in the region.
NH:
Culture clash: The cultural fit is completely at odds and AAL has been
reluctant to pursue a deal in the past. Xstrata’s operates a devolved, leaner
style business model based around aggressive LBO style growth compared to
Anglo’s more traditional and conservative style operating from a larger
corporate base.
reluctant to pursue a deal in the past. Xstrata’s operates a devolved, leaner
style business model based around aggressive LBO style growth compared to
Anglo’s more traditional and conservative style operating from a larger
corporate base.
Balance sheet limits flexibility: The majority of XTA’s deals in the past have
been based on financial leverage, paying down cheap debt with cash flows
and making use of the group’s tax efficient status. High debt levels make a
cash deal unlikely.
NH:
and finally here’s the mining team at Liberum with an overview
NH:
Following intense media speculation in the Sunday papers both Xstrata and Anglo American have confirmed that Xstrata has made an approach to the board of Anglo American seeking their consideration for a merger of equals.
With Xstrata now out in the open, we feel Anglo American can no longer afford to quietly ignore their advances and must properly seek the views of its shareholders. As such Anglo may well now be “in play” and the board is likely to have to examine all potential routes to maximise shareholder value.
NH:
In our view the case for a ‘stand alone’ Anglo is slight in this scaling up world and where shareholders desire better diversification against AAL’s specific risk set. A whole range of potential suitors may yet come out of the woodwork such as Vale (see our note of Friday) or even a Chinese backed BEE consortium; but we feel the natural best-fit partner is Xstrata in a straight merger or RIO style asset JV.
With so many potential options available to the Anglo board; all of them positive; we expect our sector pick Anglo to push higher on this news (+15-20%?). Our initial short term target price for Anglo today would be £19.
NH:
£19 is pretty bullish
NH:
here’s a bit more from Liberum
NH:
What other factors are there to consider?
Anti trust. We think the anti-trust issues for a combination of this kind are small and manageable (mainly coal disposals required in SA and Australia). Note that XTA’s 25% stake in Lonmin would almost certainly have to be sold (Anglo had to sell their stake in Lonrho in the late 1990s on an EU anti-trust ruling)
Governmental. South African government approval is clearly key to the success of any deal. They have a significant 5% holding in AAL via the government pension fund and are the regulator of much of its asset base, most importantly Amplats, Kumba, SA coal and the Venetia diamond mine. We believe XTA has good relationships with the SA govt and would expect them to offer a BEE deal to help the merger get over the line. We also note Anglo’s approach of appeasement on BEE issues has yielded precious little thus far in terms of hard mining rights conversions at the key Amplats division. We wonder just how well their relations with government really are?
NH:
Tax and exchange control issues. Anglo’s tax affairs are very complex. When they listed in London Anglo were granted a dividend access share by which to externalise capital. SA tax rules on capital gains and the low book values of most assets mean even a partial break up of the company would generate serious tax liabilities. Exchange controls also mean proceeds from sales of SA assets would have to stay in SA. This frustrates any ‘value maximising’ initiatives that the company may choose to make with alternative prices.
NH:
What could Anglo American’s response be?
Given the heightened governance environment alluded to above it is very likely that the board of Anglo American under the Chairmanship of Sir Mark Moody Stuart will engage on a twin tracked process of understanding the mood and desires of its key shareholders and examining all options to maximise shareholder value. Anglo’s shareholders are a fragmented lot with the biggest non indexed UK shareholder at a mere 1%!. The SA holders account for c.25% of the register, making UK Index following holders naturally underweight. We see a range of possible options that Anglo could look at as options to “maximise shareholder value “:
1) Anglo American as a stand alone company. This doesn’t seem like a runner at this stage unless the stand alone company comes with a new management team that the market wants to back. This would be the so called “Stuart Rose” defence. Names in the frame would be Jack Parker (again) or ex-RIO Chairman Jim Leng. This is a tough ask, fraught with political issues. Isn’t the best qualified new CEO/Chair Xstrata’s Mick Davis?
NH:
) Engage with XTA to do the merger or an asset based a JV. If Anglo engage with XTA they may well be compelled to do either a merger or an asset based JV on their global coal ad copper assets. A JV would still leave them with management succession issues.
3) Find a white knight. We feel Anglo have been preparing for this approach for some time and the ground work has been laid making ‘friends’ as far afield as China (they have a 3% holder from there – possibly the CDB) and Brazil (Vale and Anglo have a long held regard for one another and the management teams are reported to have met as little as two weeks ago in South Africa). We think the UK players will show interest – though only certain assets – BHPB and RIO though quite preoccupied at the moment will be interested in the non SA assets as will players such as ENRC.
4) Local BEE groups backed by private capital such as Temasek are likely to play a role if this finishes up as a break up. The white knight option is clearly the most unpredictable to think about given the panopoly of potential outcomes. Although we feel no partner would bring the level of synergies that XTA could and there are likely to be serious tax and capital market issues to work through, many could bring a premium cash offer. As such we would in no-way rule them out in what is likely to be a long saga.
NH:
and here is the summary
NH:
Summary
In summary then, with Xstrata having come out of the cover, Anglo must now act. They have many cards to play and but “doing nothing” does not seem to be an option. We stick with our view that Anglo’s shares are the pick of the diversifieds as we feel all of the options they have are positive outcomes for existing shareholders. We have no idea if this offer by Xstrata will succeed, but think it is a deal that makes sense and will be a tough one to beat. If it is to be trumped, it will be for cash – something we believe is a poor alternative to leveraged mining equity at this point in the cycle. We would be buyers of Anglo to £19/share initially on the day and buyers of the Anglo/XTA ratio to 2.8:1 (vs 2.38:1 at Fridays close). Lonmin is likely to underperform on this news against what we feel will be a stronger sector.
In summary then, with Xstrata having come out of the cover, Anglo must now act. They have many cards to play and but “doing nothing” does not seem to be an option. We stick with our view that Anglo’s shares are the pick of the diversifieds as we feel all of the options they have are positive outcomes for existing shareholders. We have no idea if this offer by Xstrata will succeed, but think it is a deal that makes sense and will be a tough one to beat. If it is to be trumped, it will be for cash – something we believe is a poor alternative to leveraged mining equity at this point in the cycle. We would be buyers of Anglo to £19/share initially on the day and buyers of the Anglo/XTA ratio to 2.8:1 (vs 2.38:1 at Fridays close). Lonmin is likely to underperform on this news against what we feel will be a stronger sector.
NH:
right
NH:
we are going to give you a few minutes to digest all of that
NH:
but in summary
NH:
there’s no premium
NH:
Anglo don’t want to do a deal
NH:
there’s culture clash
NH:
the SA govt won’t be happy
PM:
Thanks for all that
NH:
and that’s before we have tried a figure out a name for the merged company
PM:
Angst
PM:
Copyright PM
NH:
Anglo-Xstra
PM:
Very good
PM:
wedig.com very good
NH:
V good Throg
NH:
Axa
NH:
seen it somewhere before
NH:
but what the hell
NH:
Axa it is
PM:
let’s move on
11:22AM
NH:
Sam’s graced us with his presence again I see. When do we get rid?
PM:
Well, I’m not sure. Think he waltzes off on holiday sometime soon.
PM:
Actually it’s not holiday.
NH:
Presumably he has to prepare for his new job – hedge corr. Press his shirt, polish his shoes.
PM:
Yeah, and get some experience.
PM:
Look at this
NH:
(nice one Rifter)
PM:
From: Alistair Osborne
Date: 2009/6/22
Subject:
To: city.office@telegraph.co.uk
Date: 2009/6/22
Subject:
To: city.office@telegraph.co.uk
Watcha – we have a young work experience chap, Sam Jones, in this week. If any of you have press conferences/events you could take him along to that would be great. Also, any small tasks you’d like done, such as putting data together for snapshots etc (we’d have to check it obviously). He wants to be a journo, so he may as well find out what it’s like. Cheers Alistair
Alistair Osborne
Business Editor
NH:
Ah, off to the Tel to get some experience of real journalism.
NH:
Does Alistair Osborne know that you get all his emails automatically.
PM:
Not all of them – just the ones sent to the broad business department at the Telegraph.
NH:
Not that they need to be paranoid or anything. You wouldn’t use the info for anything other than entertainment purposes.
PM:
NH:
and we also have someone on work experience with this week
NH:
and next week
PM:
Yes, Josh Benson has joined us this morning
PM:
But we can’t get him logged in yet — so he can’t say “Hello”
NH:
typical
NH:
what’s Josh going to do
NH:
it could take him two weeks to get logged in
PM:
Fetch coffee’s and stuff
NH:
are
NH:
no need for a password then
PM:
Daddy — Princess Bea was a no-show
PM:
Nerve failed her
NH:
couldn’t hack it
PM:
Tuna — we have four females on AV currently, alongside three men
PM:
An Neil counts for two, so its actually evenly balanced
11:27AM
NH:
just going back to the miners of mo
NH:
we should have a look at Lonmin quickly
PM:
yes — price id down 68p at 11.82
PM:
off 5.5% — what’s going on there??
NH:
well if the AXA deal happens
NH:
and that’s massively unlikely
NH:
then Xstrata will have to dump their holding in Lonmin
NH:
actually I have a little bit of comment from Citi on this
NH:
In response to an article in the Sunday Telegraph yesterday, Xstrata put out a
press release in the afternoon confirming it has approached Anglo regarding a
potential “merger of equals”. Xstrata doesn’t have the balance sheet to do any
kind of cash deal, in our view. The new entity would be number 1 globally in zinc,
platinum, thermal coal, and ferrochrome and therein lies a problem for XTA and
LMI as the European Union would be unlikely to allow an Amplats/Lonmin
combination. Lonmin therefore faces issues on two fronts now, namely the
technical challenges at the operations and now, additionally, the risk that a 25%
bloc may be perceived to be overhanging the market for the next few months while
AAL entertains XTA, rebuffs it or turns to the likes of Vale for a solution.
press release in the afternoon confirming it has approached Anglo regarding a
potential “merger of equals”. Xstrata doesn’t have the balance sheet to do any
kind of cash deal, in our view. The new entity would be number 1 globally in zinc,
platinum, thermal coal, and ferrochrome and therein lies a problem for XTA and
LMI as the European Union would be unlikely to allow an Amplats/Lonmin
combination. Lonmin therefore faces issues on two fronts now, namely the
technical challenges at the operations and now, additionally, the risk that a 25%
bloc may be perceived to be overhanging the market for the next few months while
AAL entertains XTA, rebuffs it or turns to the likes of Vale for a solution.
PM:
So Vale are going to buy Lonmin too
NH:
possibly
NH:
taking on the world
11:29AM
NH:
Here’s some breaking news
NH:
quite surprising news
NH:
RTRS-CATTLES PLC – CONFIRMS THAT IT IS IN TALKS WITH ITS DEBT PROVIDERS WITH A VIEW TO OBTAINING A STANDSTILL AGREEMENT
NH:
Cattles is still alive
NH:
we though it had perished at the abbatior
PM:
Should have been incinerated, cattles
NH:
Mad Finance Disease
PM:
Bovine Spongiform Finance was the gag
PM:
Anyway — we are being distracted
NH:
(Very good Taxloss)
11:31AM
PM:
Wht next?
NH:
British Airways???
PM:
biggest faller in the FTSE 100 at the moment
PM:
Stock is off 8.8 at 127.6p
NH:
and that follows some pretty amazing stuff in the weekend papers
NH:
the Sunday Times in particular
NH:
asking the question
NH:
Could BA go bust?
NH:
and coming to the conclusion that yes, it could go bust
NH:
here’s a link to their piece
NH:
It was close to midnight when Willie Walsh finally emerged from Waterside, British Airways’ sprawling Heathrow headquarters. The airline’s chief executive blinked in the lights of the waiting television crews, cleared his throat, and started to speak, his voice trembling.
NH:
“I am sorry to say that despite our efforts today we have been unable to secure further funding from our banks. The cash drain we sustained as a result of the rolling programme of industrial action by cabin crew and ground staff means we can no longer continue as a going concern. British Airways has this evening been put into administration.”
NH:
This may seem a far-fetched scenario, but not according to Walsh’s own doom-laden forecasts. BA is in trouble, with recession and the banking crisis – banks accounted for nearly 40% of BA’s business-class traffic – pushing it to its worst-ever loss in the financial year that ended in March.
PM:
Oh, please!
PM:
It was close to midnight when Willie Walsh finally emerged from Waterside, British Airways’ sprawling Heathrow headquarters. The airline’s chief executive blinked in the lights of the waiting television crews, cleared his throat, and started to speak, his voice trembling.
PM:
Is taht a parody of a slow burn, drop intro on page 5 of the Sunday Times Bus section????
NH:
look it is better than reading a Diamante Bob puff piece
PM:
NH:
anyway
NH:
Willie Walsh and BA won’t be happy with that
NH:
actually it is a very good piece
PM:
Yes, Dominic O’C is a very good hack
NH:
especially on Walsh and his tactics
NH:
whether his dire warnings are actually bluff designed to get the unions to negotiation table, or BA really is in trouble
NH:
and were some interesting comments from Branson in the Sunday Times
NH:
That’s Richard Branson – the Weeby’s LOSER
NH:
saying he considered a bid
NH:
but BA shares were too high
NH:
even below 100p they might be too high because of the associated liabilities
NH:
like the pension fund
NH:
which is one of the reasons why BA can’t launch a cash call
PM:
actually very good piece on the pension fund by Tony Jackson this morning
PM:
covers BA in depth
PM:
go here, if you want to read it
PM:
its called sums risk BA landing in a pensions hole
NH:
right
NH:
quick bit of analyst comment
NH:
from Unicredit
NH:
they are still bullish
NH:
Target price revised to GBp 135 (prev. GBp 155); rating remains Hold. BA’s
CEO Willi Walsh warned of a 24-month downturn and said that the worst of
the recession for airlines is still ahead. In May premium traffic was down by 17%
and passenger yields fell at a low double-digit rate. On a currency-neutral
basis, BA’s revenues are on course to fall by up to GBP 1.0 bn in 2009/10.
CEO Willi Walsh warned of a 24-month downturn and said that the worst of
the recession for airlines is still ahead. In May premium traffic was down by 17%
and passenger yields fell at a low double-digit rate. On a currency-neutral
basis, BA’s revenues are on course to fall by up to GBP 1.0 bn in 2009/10.
NH:
This will be partially offset by GBP 400 mn lower fuel expenses, cost
reductions from capacity and other cost-saving measures to mitigate the
revenue deterioration, but significant non-fuel cost savings are needed. The
current consensus estimates for an operating loss of GBP 200-250 mn in
2009/10 look optimistic; this could at least double if current trends persist.
reductions from capacity and other cost-saving measures to mitigate the
revenue deterioration, but significant non-fuel cost savings are needed. The
current consensus estimates for an operating loss of GBP 200-250 mn in
2009/10 look optimistic; this could at least double if current trends persist.
NH:
In a first positive sign, the pilots union BALPA has reached a draft pay and
productivity package with BA that would see pilots deliver annual savings of
GBP 26 mn as of October 2009. Pilots will each take a wage cut of 2.6%
and a 20% cut in flying time allowances (GBP 16 mn savings). The productivity
part includes an increase in annual duty hours, shorter turnaround times,
reductions to the crew arrangements (GBP 10 mn savings). In June 2011
pilots will be eligible to receive BA shares worth GBP 13 mn if certain
company targets are achieved (lock-up period until 2014).
productivity package with BA that would see pilots deliver annual savings of
GBP 26 mn as of October 2009. Pilots will each take a wage cut of 2.6%
and a 20% cut in flying time allowances (GBP 16 mn savings). The productivity
part includes an increase in annual duty hours, shorter turnaround times,
reductions to the crew arrangements (GBP 10 mn savings). In June 2011
pilots will be eligible to receive BA shares worth GBP 13 mn if certain
company targets are achieved (lock-up period until 2014).
NH:
There are a number of legacy issues with other unions that need to be
cleared to return the company to profitability. Willie Walsh has set the end
of June as a deadline, but so far the ground staff and cabin crew have been
unreceptive. In this context, there is the possibility of significant turmoil and
press noise in the coming months.
cleared to return the company to profitability. Willie Walsh has set the end
of June as a deadline, but so far the ground staff and cabin crew have been
unreceptive. In this context, there is the possibility of significant turmoil and
press noise in the coming months.
NH:
BA’s valuation is inside the range of the European mainline carriers. Our
greatest concern lies with the spiking gearing of 151%. Including higher net
debt of EUR 2.6 bn and capitalized operating leases of EUR 0.6 bn, we
calculate an EV of EUR 5.3 bn, which means that the group currently trades
at an EV/EBITDAR of 5.6x and 0.75x EV/CE 2010/11 multiples as well as a
P/BV of 1.0x. BA’s equity capital has slumped to a BVPS of GBP 1.43.
Discussions about the probability of a rights issue are justified.
greatest concern lies with the spiking gearing of 151%. Including higher net
debt of EUR 2.6 bn and capitalized operating leases of EUR 0.6 bn, we
calculate an EV of EUR 5.3 bn, which means that the group currently trades
at an EV/EBITDAR of 5.6x and 0.75x EV/CE 2010/11 multiples as well as a
P/BV of 1.0x. BA’s equity capital has slumped to a BVPS of GBP 1.43.
Discussions about the probability of a rights issue are justified.
PM:
ta for that
11:38AM
PM:
Right
PM:
from one company that could possibly go under to, another danger case
PM:
Yell
NH:
PM:
its return to the FTSE 250 greeted with a sharp fall
PM:
Down 2.75p at 26.5
NH:
and because its auditors slipped an emphasis of matter warning in to the annual report
NH:
Emphasis of matter – Going concern
In forming our opinion on the financial statements, which is not
qualified, we have considered the adequacy of the disclosures
made in note 1 to the financial statements concerning the ability
of the Company to continue as a going concern. There is a risk
that the Group may need to renegotiate its financial covenants
with its lenders. If the Group needed to but were unable to
agree amendments to the covenants and those covenants
were breached, the syndicate of lenders would have the right to
demand, with a two-thirds majority vote, immediate repayment
of all amounts due to them.
In forming our opinion on the financial statements, which is not
qualified, we have considered the adequacy of the disclosures
made in note 1 to the financial statements concerning the ability
of the Company to continue as a going concern. There is a risk
that the Group may need to renegotiate its financial covenants
with its lenders. If the Group needed to but were unable to
agree amendments to the covenants and those covenants
were breached, the syndicate of lenders would have the right to
demand, with a two-thirds majority vote, immediate repayment
of all amounts due to them.
NH:
This right, together with other
remedies available to lenders, creates doubt about the future
capital funding of the Group. These conditions, along with the
other matters explained in note 1 to the financial statements,
indicate the existence of a material uncertainty which may cast
significant doubt about the Company’s ability to continue as
a going concern. The financial statements do not include the
adjustments that would result if the company was unable to
continue as a going concern.
remedies available to lenders, creates doubt about the future
capital funding of the Group. These conditions, along with the
other matters explained in note 1 to the financial statements,
indicate the existence of a material uncertainty which may cast
significant doubt about the Company’s ability to continue as
a going concern. The financial statements do not include the
adjustments that would result if the company was unable to
continue as a going concern.
NH:
Now
NH:
that doesn’t tell us too much we don’t know
NH:
but
NH:
it does outline the fact that Yell needs a cash call
NH:
but it’s price is slipping
NH:
spiked to 55p in the dash for cash
NH:
on May 7
NH:
now half that level
NH:
can they raise enough money at that level to prop up the balance sheet??
PM:
needs a cash call and quick
PM:
But no one is better placed to help pull one off than their new chairman Bob Wigley
NH:
that’s true
PM:
NH:
and if Punch can find investors willing to give it £375m
NH:
there’s hope for everyone I guess
PM:
NH:
but
NH:
Yell would need what
NH:
£500m at least
NH:
perhaps more
NH:
what’s the market cap at the moment?
PM:
Er, 231m
PM:
Going to be difficult raising twice that
PM:
At, what, half the market price?
PM:
Lot of Yell-ow paper
NH:
a fancy it has to be a cash call with debt for equity swap
NH:
no other way out
PM:
And it wont be done at 25p, that’s for sure
NH:
that’s true
NH:
more like 5p
PM:
Well, yeah, maybe
NH:
still at least the CEO gave up his £1m bonus
PM:
NH:
although quite why it was awarded I have no idea
NH:
yep
NH:
they actually gave him a bonus
NH:
During the reporting year, the vesting of grants was accelerated and John Condron and John Davis agreed to the voluntary cancellation of under-water
share option awards. These cancelled awards were not replaced
share option awards. These cancelled awards were not replaced
NH:
that’s from the annual report
11:45AM
NH:
right
NH:
OK we had better deal with it
NH:
Paul
NH:
over to you
PM:
NH:
this 30% holiday thing
PM:
Look — they did it last year alos
PM:
On flexible working (and also conserving cash in testing times, etc) the FT has been offering extra holiday at reduced pay
PM:
Its very common
PM:
This is not a Willie work for Nothing Walsh thing
NH:
so a part of senior management
NH:
when will you be taking your week
NH:
so I can plan
NH:
and take the strain
PM:
Im not senior management. Just more senior than Sam
PM:
July
PM:
tho i think i will ahve to come in anyway
NH:
I won’t be taking any time off
NH:
can’t afford it
PM:
Anyway, let’s get off this before my week off is permanently extended
NH:
before we do
NH:
Caz have commented on it
PM:
Neil — are you on some sort of suicide missions
NH:
no
NH:
they say it is a sensible step
PM:
And intent on taking me with you
NH:
not all
PM:
Go on then, what to do Caz say
NH:
here’s goes
NH:
The Sunday Times reports that Pearson is seeking £13-14m of cost savings within the FT newspaper, including asking staff to take a week’s extra holiday at 30% of pay. This chimes in with anecdotal evidence that the newspaper has been ‘thin’ this year in advertising terms (despite a bounce in overall equity markets and deal activity). As we argued in our report last week, cyclical pressures at the FT and Penguin come on top of growing budget pressures for Pearson’s US school education business, and keep us cautious on the stock near term despite its strong longer term fundamentals and a less demanding valuation (13.3x EPS on our below-consensus 2010E EPS estimate, with EV/EBITDA of 9.0x and a near 6% dividend yield).
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
NH:
As a reminder, the Financial Times newspaper accounts for only a small part of Pearson group (we estimate 5% of revenues and 3% of profits in 2008, moving to a small operating loss forecast for 2009E). However, there is a high drop through to profits from cyclical fluctuations in levels of advertising which (despite the retail cover price increase to £2) still account for around 70% of total FT newspaper revenues. Following a 13% decline in Q4 of last year we have already factored in a 25% fall in FT advertising revenues this year. Each further 10% drop in ad revenues (which we estimate at £180m for 2008) hits group profits by around £15m pa (-2.5% off EPS).
NH:
The Sunday Times article suggests that less than 10% of staff have accepted the plan to date. It also suggests that Pearson has drawn up an ‘Armageddon’ plan for the FT, in which it would pull back on local and international coverage in the event of advertising markets deteriorating further, suggesting that Pearson will continue to manage the group’s cost base actively if cyclical pressures persist.
As we argued in our report on the Professional Publishers last week, despite a growing valuation case for Pearson, we continue to see a risk of very tough newsflow in the near term, driven by (1) dull interim figures due to phasing and (2) continuing deterioration of US state education budgets as most US states move through their June year ends; We do think these near term risks are broadly reflected in our EPS estimates, particularly for 2010E where we have already assumed further deferrals of school curriculum spending and pressure on education margins as Pearson continues to invest in new adoption products. However, we note we are 23% below the current
As we argued in our report on the Professional Publishers last week, despite a growing valuation case for Pearson, we continue to see a risk of very tough newsflow in the near term, driven by (1) dull interim figures due to phasing and (2) continuing deterioration of US state education budgets as most US states move through their June year ends; We do think these near term risks are broadly reflected in our EPS estimates, particularly for 2010E where we have already assumed further deferrals of school curriculum spending and pressure on education margins as Pearson continues to invest in new adoption products. However, we note we are 23% below the current
NH:
Reuters consensus (Caz 46p versus consensus 60p), suggesting consensus numbers may have some way to fall yet due to both US$ weakness and underlying trading.
PM:
The FT must be one of the healthiest newspaper based in Britain right now
NH:
yeah, look at the Indy
NH:
and its share price this morning
NH:
tanked
11:50AM
PM:
Independent News & Media
NH:
down 19% at 0.25 cents
PM:
Yeah – said they are going to have a rights, finally, predictably, desperately.
PM:
To pay off their pesky bond holders
PM:
Dublin – 22nd June, 2009: Independent News & Media PLC (“INM” and/ or the “Company”), based on media queries received and in line with its disclosure obligations, confirms that discussions with its syndicate of banks (“Banks”), with the ad-hoc committee of holders of the €200 million 5.75% guaranteed bonds due 2009 (“Bonds”), and certain of INM’s principal shareholders are continuing.
Dublin – 22nd June, 2009: Independent News & Media PLC (“INM” and/ or the “Company”), based on media queries received and in line with its disclosure obligations, confirms that discussions with its syndicate of banks (“Banks”), with the ad-hoc committee of holders of the €200 million 5.75% guaranteed bonds due 2009 (“Bonds”), and certain of INM’s principal shareholders are continuing.
PM:
While the outcome of these discussions remains uncertain at this time, recent discussions have shown a willingness on the part of the stakeholders to reach a consensual solution. As part of these discussions, the Company has put forward a comprehensive refinancing proposal – while not yet agreed by any stakeholder – which will require all stakeholders making some necessary material concessions in order to achieve significant deleveraging for INM. One element of this proposal involves INM seeking to raise some capital, subject to shareholder approval, by way of a deeply-discounted rights offering in order to partly repay the Bonds.
PM:
I dont quite see how they can do this at this late stage
PM:
Anyway, let’s stop talking down the price of hacks
NH:
OK
PM:
(Prometheus — what do you think? )
)PM:
break
11:53AM
11:53AM
NH:
Last week
NH:
we had results from Tesco and Sainsbury
NH:
and were were debtating how everyone in food retailing seems to be taking market share
NH:
and producing very healthy like for like sale figures
PM:
Well you should read this stuff out of JPM this morning
PM:
Alastair Johnson of JP Morgan – come out with quite a tome on UK food retailing.
NH:
Chuck it up.
PM:
Hang on — it’s 40 pages
PM:
PM:
The UK sector is going to see food deflation in 1H10, gross margins
contract and ROIC diminish, our analysis shows. We reiterate our UW on
Tesco, downgrade Morrison from OW to N and keep Sainsbury as our only
OW in the UK market.
contract and ROIC diminish, our analysis shows. We reiterate our UW on
Tesco, downgrade Morrison from OW to N and keep Sainsbury as our only
OW in the UK market.
NH:
Yeah, but does it explain how all the supermarkets seem to have been able to claim that they are all doing well??
PM:
It does in a way. Basically, food price inflation has masked everything.
PM:
Living in an inflation bubble. UK food inflation remains high due to
the impact of sterling’s collapse in 2H08, but this effect will soon be
cycled and we see no reason then for the UK to look any different from
France, Spain, Germany or the US which are all seeing food prices fall
at around a 5% annualized rate.
Big 4 in aggregate are enjoying high returns vs. WACC-like returns
in 2006. The EBITDA of the Big 4 was 22% higher in 2008 than in
2006. Market-share losers, like Co-op and Tesco, are posting margin
increases. There has not been a profits warning in the sector for years.
As inflation falls, we expect the market to get more competitive.
Inflation has masked underperformance, in our view, but signs of gross
margin pressure are emerging at the peripheral players. M&S’s food gross
margin shrank 235bp last year, and it will come down again in FY09/10.
Waitrose has launched its Essentials range. Co-op/Somerfield may have
buying benefits to reinvest. We expect the acceleration of capacity
increases from Sainsbury and Morrison to add to competitive pressure.
the impact of sterling’s collapse in 2H08, but this effect will soon be
cycled and we see no reason then for the UK to look any different from
France, Spain, Germany or the US which are all seeing food prices fall
at around a 5% annualized rate.
Big 4 in aggregate are enjoying high returns vs. WACC-like returns
in 2006. The EBITDA of the Big 4 was 22% higher in 2008 than in
2006. Market-share losers, like Co-op and Tesco, are posting margin
increases. There has not been a profits warning in the sector for years.
As inflation falls, we expect the market to get more competitive.
Inflation has masked underperformance, in our view, but signs of gross
margin pressure are emerging at the peripheral players. M&S’s food gross
margin shrank 235bp last year, and it will come down again in FY09/10.
Waitrose has launched its Essentials range. Co-op/Somerfield may have
buying benefits to reinvest. We expect the acceleration of capacity
increases from Sainsbury and Morrison to add to competitive pressure.
PM:
Trading up / end of trading down. By virtue of lower inflation and
perhaps a better macroeconomic backdrop, we think the tendency of
value-oriented banners to triumph over the rest of the market will
moderate or even reverse. We expect Aldi and Asda to be negatively
affected by this shift and Sainsbury to benefit.
UK grocery outlook bleak. The full force of bad news on the UK sector
might take six months or more to arrive, but we are turning more
cautious now. Sainsbury remains our preferred stock in the space as we
expect it to emerge a clear market-share winner. We downgrade
Morrison from Overweight to Neutral on the basis that its sales are set to
slow and that consensus earnings estimates look quite optimistic. Tesco
is the stock we would avoid — we can see a time approaching when
Tesco will choose to rebase its margin to keep LFL sales growing so we
reiterate our Underweight rating.
perhaps a better macroeconomic backdrop, we think the tendency of
value-oriented banners to triumph over the rest of the market will
moderate or even reverse. We expect Aldi and Asda to be negatively
affected by this shift and Sainsbury to benefit.
UK grocery outlook bleak. The full force of bad news on the UK sector
might take six months or more to arrive, but we are turning more
cautious now. Sainsbury remains our preferred stock in the space as we
expect it to emerge a clear market-share winner. We downgrade
Morrison from Overweight to Neutral on the basis that its sales are set to
slow and that consensus earnings estimates look quite optimistic. Tesco
is the stock we would avoid — we can see a time approaching when
Tesco will choose to rebase its margin to keep LFL sales growing so we
reiterate our Underweight rating.
NH:
That is quite aggressive.
NH:
would not mind seeing a full copy of that
PM:
it will be in the usual place – bit later
NH:
I note that Waitrose
NH:
have also been bragging about risinig sales today
NH:
there Essentials range
11:55AM
PM:
Right Neil — we are almost done
PM:
Got any RAW before we finish
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
For our insatiable readers
PM:
??
NH:
no
NH:
very quiet on that fron this morning
NH:
a couple of bits from last week came out
NH:
very low ball offer for Brixton from Segro
NH:
32% below Friday’s close pirce
NH:
although Brixton remains above the offer price
NH:
but I reckon a counter bid won’t happen
NH:
and Brit have made their move for Chaucer
NH:
0.23
NH:
question now is whether they have to increase it to 0.27
PM:
(Praxis22 — good luck –sounds ominous)
11:58AM
PM:
Neil — let’s sign off on a positive note today
NH:
oh yes, let’s have a look at the market
PM:
FTSE 100 4283 -62.32
NH:
and Yell
Yell Group (YELL:LSE): Last: 26.75, down 2.75 (-9.32%), High: 29.25, Low: 26.25, Volume: 6.21m
PM:
Enterprise Inns 119 – 7.36
Punch Taverns (PUB:LSE): Last: 101.25, down 1.75 (-1.70%), High: 107.75, Low: 97.25, Volume: 1.22m
NH:
actually there is a story around on Punch
NH:
that it is going to sell a load of pubs to some Aim listed company
NH:
forgotten its name
NH:
will have it tomorrow
12:01PM
PM:
Right — we are done
PM:
Just a reminder from Fitz et al
PM:
NAMARAMA drinks on Friday
NH:
oh one more thing. For small cap corner.
PM:
Be there at 5pm if you can
PM:
I cant sadly
NH:
David Schawtz strikes again
PM:
Neil — go on quickly
NH:
Filtronic up 11% at 38.25p
NH:
after this tip
NH:
One important positive factor for Filtronic is the impending arrival of 4G. Many investors believe the economic slowdown is delaying the next generation of telecoms infrastructure spending. Not so. Leading network providers know that they must upgrade to 4G in order to increase profits. Also, 4G is a less expensive evolutionary advance, unlike 3G which required huge investment. If the experts are right about 4G, revenues will begin to flow to Filtronic in the next six to nine months. Given the forward-looking nature of the stock market, I expect that the shares will probably begin to rise much sooner. In fact, their current strength might be the first leg of this rally.
NH:
Another issue catching my eye is that Filtronic sits on a 22p per share cash pile. Putting it another way, my investment last week at around 31p per share bought me a healthy wad of cash with a profit- making company thrown in almost for free.
The good news continues. In April, Filtronic expected second-half profits to break even. But its June statement reported that it now expects a small second-half operating profit, in spite of weak industry trends. The City took little notice of this significant change in outlook.
And finally, the company just signed a major contract in the airborne electronics sector, a new source of revenue. Filtronic has the potential to expand this area of business. One analyst recently stated the new contract had the long-
term potential to be a game-changing opportunity for the company.
The good news continues. In April, Filtronic expected second-half profits to break even. But its June statement reported that it now expects a small second-half operating profit, in spite of weak industry trends. The City took little notice of this significant change in outlook.
And finally, the company just signed a major contract in the airborne electronics sector, a new source of revenue. Filtronic has the potential to expand this area of business. One analyst recently stated the new contract had the long-
term potential to be a game-changing opportunity for the company.
NH:
There are eight market makers that trade Filtronic shares, quite high for such a small company. But I suspect that my investment will not rocket ahead. A slow and steady advance is more likely. Given current stock market uncertainty, this suits me just fine
PM:
Shrewdie our Mr Scharwtz
PM:
Right — gottta go
NH:
see u all tomorrow
PM:
Thanks for joining us
NH:
bye
PM:
Thanks for all the comments
PM:
Apols about the probs earlier
PM:
We will be back tomorrow at 11am
PM:
seeya