Markets live chat transcript for the chat ending at 12:08 on 11 Sep 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)
NH:
Hello again
NH:
its 11.03am
NH:
and that means it is time for Markets Live
NH:
FT Alphaville’s gentle stroll round the markets
NH:
in the company of Miles Johnson
NH:
our new boy
NH:
and me
MJ:
Hello
MJ:
Right Neil – no messing around this morning
NH:
No
NH:
We have been inundated with RAW this morning
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
now that can happen on a Friday
NH:
but this has all got a bit silly
MJ:
Phones are dripping with RAW
NH:
specially about a FTSE 100 bid that is supposed to be in the pipeline
NH:
and the result is
NH:
we have a real guessing game on our hands
NH:
People out there throwing darts at a list of blue chips. Lots of bandits going into overdrive. Usual routine.
MJ:
Must be hard to get a mobile signal in certain well-heeled parts of London this morning
MJ:
Whole networks must be jammed
MJ:
So, any idea who it could be?
NH:
Well one name people are mentioning is Smith and Nephew. Shares are strong again this morning. Had a roaring run of late.
MJ:
Indeed. Shares have gained 11 per cent this week
MJ:
Currently up 18p 577.5p
NH:
but S&N is the hardy perennial of bid stories
MJ:
Yeah I was looking this morning
MJ:
There were stories going back to 1996
NH:
NH:
told you
NH:
old as the hills
MJ:
This from the Indie, 8 Feb 1996
MJ:
Smith & Nephew is once again attracting takeover speculation. The health care group has aroused fervent interest on many occasions with Johnson & Johnson and Procter & Gamble, the US giants, invariably named as the most likely bidders.
The Americans are known to be anxious to expand. And they are particularly keen on Europe. With Smith’s shares up 5p at 189.5p, a two-day gain of 9p, the J&J drum is being banged yet again.
NH:
and guess what?
NH:
J&J being mentioned again this morning
NH:
along with Biomet
NH:
and Stryker
NH:
apparently Lazard advising one of the bidders
11:09AM
MJ:
Good market in Man Group as well this morning
MJ:
Shares up 20p at 287p
MJ:
Could well be off the back of Sam’s story about ‘Arry Hedge Fund and his mates trumping Brussels
MJ:
Several of London’s big hedge funds are poised to launch onshore funds in order to trump new regulations expected from the European Union.
Cheyne Capital, the $6bn hedge fund manager, is set to become the latest high-profile London name to launch a so-called Ucits III fund, people told the Financial Times.
Man Group, which with $43.3bn in assets under management is Europe’s largest hedge fund operation, is to announce the launch of a similar fund – its second – on Monday.
Hedge funds hope to use the structure, which has been laid down in European law since 1985, as both a means of avoiding heavy future regulation and attracting back conservative investors still shellshocked by the financial crisis.
Cheyne Capital, the $6bn hedge fund manager, is set to become the latest high-profile London name to launch a so-called Ucits III fund, people told the Financial Times.
Man Group, which with $43.3bn in assets under management is Europe’s largest hedge fund operation, is to announce the launch of a similar fund – its second – on Monday.
Hedge funds hope to use the structure, which has been laid down in European law since 1985, as both a means of avoiding heavy future regulation and attracting back conservative investors still shellshocked by the financial crisis.
NH:
hmmm
MJ:
Here is the link: http://www.ft.com/cms/s/0/47362ca4-9e6a-11de-b0aa-00144feabdc0.html
NH:
thanks
NH:
although there has deffo been bid rumours around in Man this morning
NH:
have a look at this
NH:
- more bid spec going around in the name today (it’s Friday after all); some
pointing to the stock looking more interesting after the BARCLAYS sale of
iShares. (NB was the subject of unconfirmed talk that it might attract the
interest of Goldman Sachs back in July)
- On a more recordable basis there is a positive Telegraph article today
suggesting that the company should attract more inflows:
pointing to the stock looking more interesting after the BARCLAYS sale of
iShares. (NB was the subject of unconfirmed talk that it might attract the
interest of Goldman Sachs back in July)
- On a more recordable basis there is a positive Telegraph article today
suggesting that the company should attract more inflows:
NH:
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6169347/Man-
Group-heralds-return-of-institutions.html
Group-heralds-return-of-institutions.html
MJ:
Didn’t that come out yesterday lunchtime?
NH:
it did
NH:
not sure that can really be moving it
NH:
I think a big sellers has been cleared
NH:
and traders have had another look at the name
NH:
and decided it has been a bit left behind and bid it up
MJ:
But it could also be an oil stock
NH:
what makes you say that?
MJ:
Well the other day Korea National Oil Corporation said it had four foreign oil companies in its sights
MJ:
That will obviously will be interpreted as good news for Gulfsands punters and the like
NH:
yeah, remember KNOC were one of the bidders for Burren Energy
NH:
lost out to ENI in the end
NH:
I wonder if they might have look at Soco as well
NH:
keeping with this M&A theme
NH:
the chief executive of ABB says he is looking for a large acquisitions.
NH:
which is bound to rekindle the Invensys takeover story
NH:
and then there is this funny one
NH:
story going round about someone taking a look at Logica. Theory is it could be BAE Systems.
MJ:
Interesting, but what would BAE want with a company like Logica?
NH:
Not quite sure. Not really an intuitive deal.
NH:
but BAE have been pushing more into IT and battlefield communications
NH:
Logica would bring some of that
NH:
but also
NH:
a lot of boring IT service workl
NH:
that I can’t believe BAE would want
MJ:
And Logica is pretty limp this morning
MJ:
Shares down 6p at 125.6p
11:15AM
NH:
actually Miles have you seen this note from Andrew Garthwaite
MJ:
the strategy guy at Credit Suisse
NH:
that’s the one
NH:
he’s also been looking at M&A
MJ:
isn’t everybody
NH:
true
NH:
but he has taken a rather more sophisticated look at M&A
MJ:
as you would expect
NH:
and he reckons the key driver behind M&A is not the giant egos of CEO’s
NH:
or fee hungry bankers
NH:
but the gap between the free cash flow yield and the corporate bond yield
MJ:
whoa
MJ:
hang on a moment
MJ:
wasn’t this the metric used by PE companies to justify their spree during the credit boom?
NH:
I think it was
NH:
however, Garthwaite’s point is that the gap in the US is the highest it has ever been
NH:
and that means
NH:
deals are going to happen
MJ:
But we already new that beacuse Pestowire told us earlier in the week
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
NH:
that’s true
MJ:
got the Garthwaite note?
NH:
I have
NH:
pasting now
NH:
We believe the key driver of M&A is the gap between the FCF yield and
the corporate bond yield. In the US, this gap is the highest it has ever
been on our data (which goes back to the early 1990s, Figure 2), helped by
the fact that investment grade bond yields are close to 30-year lows (Figure
3). US corporate leverage is also below trend levels.
the corporate bond yield. In the US, this gap is the highest it has ever
been on our data (which goes back to the early 1990s, Figure 2), helped by
the fact that investment grade bond yields are close to 30-year lows (Figure
3). US corporate leverage is also below trend levels.
NH:
Global M&A is particularly depressed: it is down 35% YTD (compared to
the same period in 2008, Figure 6) . and is at the bottom-end of its range.
US cash-financed bid activity is also very close to a 10-year low (Figure 7).
the same period in 2008, Figure 6) . and is at the bottom-end of its range.
US cash-financed bid activity is also very close to a 10-year low (Figure 7).
M&A lags the cycle: in the past upturn, it has troughed eight months after
the ISM new orders (the average over the past two cycles is slightly more
than a year, Figure 8). This suggests M&A should start picking up now. M&A
activity also benefits from a rising market (Figure 1).
NH:
Some indicators of corporate optimism (such as CEO business
confidence, Figure 9) have rebounded sharply, suggesting that corporates
are more willing to spend
confidence, Figure 9) have rebounded sharply, suggesting that corporates
are more willing to spend
Reasons for more caution with regard to Continental European led M&A:
Continental European companies are more indebted than their global and, especially
their US peers, looking at net debt relative to EBITDA, EV and market cap (Figures 10 – 12). Additionally, the gap between the FCF yield and the corporate bond yield in
Europe is not at an all-time high, as it is in the US (Figure 1). This suggests that
bidders are more likely to be US companies.
NH:
More positive on the UK
■ We would note the difference between Continental Europe and the UK, with the
leverage charts referred to above (Figures 10 – 12) highlighting that the UK has lower
leverage than Continental Europe and similar to that of the US. Also the gap between
he FCF yield and the corporate bond yield is higher in the UK than in Continental
Europe and the US. Moreover, the financial balance of the UK corporate sector is at
an all-time high, suggesting there is plenty of cash that could potentially be used for
acquisitions (Figure 13).
■ We would note the difference between Continental Europe and the UK, with the
leverage charts referred to above (Figures 10 – 12) highlighting that the UK has lower
leverage than Continental Europe and similar to that of the US. Also the gap between
he FCF yield and the corporate bond yield is higher in the UK than in Continental
Europe and the US. Moreover, the financial balance of the UK corporate sector is at
an all-time high, suggesting there is plenty of cash that could potentially be used for
acquisitions (Figure 13).
NH:
The positive take-away points from the announcement of Kraft and Cadbury:
■ It shows the general attractiveness of companies that are relatively non-cyclical with high FCF, low leverage and some growth. Cadbury.s 2009E FCF yield is 5.5% (with 1.4X net debt to EBITDA), compared to Kraft.s 2009E FCF yield of 6.6% (on Credit Suisse estimates). We note that the bull market of 1982 to 1990 was led by the rerating of companies with high FCF yield, as the cost of debt fell (the best performing sectors were tobacco, food and beverages). We are overweight food producers as cheap indirect plays on emerging market growth . and note that defensives in general do not look unattractive: a) on valuations relative to cyclicals (Figure 14); and b) given that cyclicals trade in line with their warranted level on our cyclicals price model
(based on IFO, bond yields, earnings momentum and risk appetite; Figure 15).
■ It shows the general attractiveness of companies that are relatively non-cyclical with high FCF, low leverage and some growth. Cadbury.s 2009E FCF yield is 5.5% (with 1.4X net debt to EBITDA), compared to Kraft.s 2009E FCF yield of 6.6% (on Credit Suisse estimates). We note that the bull market of 1982 to 1990 was led by the rerating of companies with high FCF yield, as the cost of debt fell (the best performing sectors were tobacco, food and beverages). We are overweight food producers as cheap indirect plays on emerging market growth . and note that defensives in general do not look unattractive: a) on valuations relative to cyclicals (Figure 14); and b) given that cyclicals trade in line with their warranted level on our cyclicals price model
(based on IFO, bond yields, earnings momentum and risk appetite; Figure 15).
■ We take it to be a sign of returning confidence that corporates are willing to finance
their bids with cash.
MJ:
hmmm, interesting
MJ:
does he list any stocks as potential takeover candidates?
NH:
oh, forgot to have a look at that
NH:
hang on
NH:
er, this lot have a FCF yield above the corporate bond yield and low leverage to boot
MJ:
(Neil having some tech probs)
NH:
right
NH:
we are back
NH:
sorry about that
NH:
the whole FT network went down
NH:
everything
NH:
the lot
NH:
not one knows why
MJ:
Tech meltdown
MJ:
Everyone just sitting with their hands on their heads
NH:
right
NH:
bear with us
NH:
we are not seeing everything that is going up
NH:
Miles you there?
MJ:
Im here
MJ:
Right where were we?
MJ:
Show must go on
NH:
I think were talking about those companies Garwaite said were potential M&A targets
NH:
and they were
NH:
Sanofi-Aventis, Bae, Vivendi, Pearson. Elisa Corporation, Smiths Group
Glaxosmithkline, Publicis Groupe Assa Abloy, Compass Group,Schneider Electric Reckitt Benck Grp, Nestle, Lvmh Moet Hennessy
Glaxosmithkline, Publicis Groupe Assa Abloy, Compass Group,Schneider Electric Reckitt Benck Grp, Nestle, Lvmh Moet Hennessy
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
MJ:
OK, ta
NH:
good point DJP – the BG rumour is going round again. Exxon being mentioned
11:31AM
NH:
Right
NH:
wider market
NH:
Miles have you got a functioning Reuters screen?
MJ:
Managing to use matchsticks, tinfoil and a mars bar
MJ:
I can get us a quote for the Footsie
MJ:
showing we are up 37 points to 5025
MJ:
Above 5000 again
NH:
yep
no stopping this bull market
no stopping this bull market
MJ:
NH:
Right
NH:
Miles
NH:
I can’t see anything I am posting
NH:
or your replies
MJ:
Running blind
NH:
flying blind here
11:35AM
NH:
right, there’s no getting away from this
NH:
we have to look at a muppet stock
MJ:
Muppet stock??
NH:
sorry, I should explain
NH:
that was a term Murphy coined for stocks retail punters would try and puff on ML
NH:
such as PartyGaming
MJ:
right
MJ:
stock really moving this morning
NH:
sorry I meant 888
NH:
still can’t see anything I am typing
MJ:
888 is u 9.5p at 94.8p
MJ:
hat’s a move of over 10%
MJ:
they looked to have some signed some deal with Harrah’s
NH:
yes, but it is not any old deal apparently
NH:
it is a transformational one, no less
MJ:
says who
NH:
the company flak
NH:
analysts
NH:
traders
MJ:
well I guess a tie up in the US is always going to be a positive for 888 given the sectors history
MJ:
his deal is to provide Harrah’s Interactive Entertainment with Total Gaming Services
MJ:
which means “the group will support the launch of Harrah’s poker (World Series of Poker) and casino (Caesars) products in the UK”
MJ:
and that’s transformational
NH:
apparently
NH:
have a look at his from KBC
NH:
Today’s deal with Harrah’s is transformational. Harrah’s
addresses two key issues; firstly, the continued credibility
of the B2B strategy and secondly, the strategy not to
aggressively pursue a settlement with the DoJ. This should
be the catalyst for a re-rating and we upgrade to a Buy
addresses two key issues; firstly, the continued credibility
of the B2B strategy and secondly, the strategy not to
aggressively pursue a settlement with the DoJ. This should
be the catalyst for a re-rating and we upgrade to a Buy
NH:
NH:
Dragonfish hits the jackpot. 888 has secured a long-term deal to provide
Harrah’s Interactive Entertainment with Total Gaming Services. The group will
support the launch of Harrah’s poker (World Series of Poker) and casino
(Caesars) products in the UK.
Harrah’s Interactive Entertainment with Total Gaming Services. The group will
support the launch of Harrah’s poker (World Series of Poker) and casino
(Caesars) products in the UK.
• Major boost to credibility. 888 has secured a deal with one of the world’s
leading bricks & mortar gaming groups against what is likely to have been stiff
competition. This deal is both a vindication of the B2B strategy and the quality of
the group’s software. Mitch Garber, CEO of Harrah’s Interactive Entertainment,
was previously CEO of PartyGaming and many had thought that 888’s
competitor was the US group’s most likely partner.
NH:
DoJ strategy also vindicated. We see this deal as not only vindicating 888′s
B2B strategy but also its stance with the DoJ. Clearly Harrah’s had no qualms
about 888’s lack of settlement with the DoJ.
B2B strategy but also its stance with the DoJ. Clearly Harrah’s had no qualms
about 888’s lack of settlement with the DoJ.
• Financial impact. The deal is unlikely to be financially significant in the shortterm. The UK/European market is competitive and we believe that it will take
time to grow the business online. Clearly, the biggest potential comes from the
US market opening up.
NH:
Transformational. In the past there has been some criticism of the
management that many of its B2B contract wins sound great but contribute little
to the bottom line. In the short-term, we don’t believe that this matters with
today’s announcement. There is a much bigger message in the deal with
Harrah’s, which in our opinion justifies the group’s strategy, technology and
stance with the DoJ. Buy.
management that many of its B2B contract wins sound great but contribute little
to the bottom line. In the short-term, we don’t believe that this matters with
today’s announcement. There is a much bigger message in the deal with
Harrah’s, which in our opinion justifies the group’s strategy, technology and
stance with the DoJ. Buy.
NH:
and Numis thinks much the same
NH:
888 has announced an important breakthrough contract with Harrah’s Interactive
Entertainment (HIE) as HIE makes enters the online gaming market. Dragonfish,
888’s independent B2B division, has signed a long-term agreement for HIE to use
Dragonfish’s “Total Gaming Services” approach to support the UK launch and
roll-out of the World Series of Poker (“WSOP”) and Caesars Casino brands.
Entertainment (HIE) as HIE makes enters the online gaming market. Dragonfish,
888’s independent B2B division, has signed a long-term agreement for HIE to use
Dragonfish’s “Total Gaming Services” approach to support the UK launch and
roll-out of the World Series of Poker (“WSOP”) and Caesars Casino brands.
We see this is an important endorsement of 888 and its B2B capability by a very important US gaming operator which could lead to much bigger things if the US on-line gaming market is regulated. The contract will also provide comfort for 888
shareholders who might have feared that the fact that 888 has not followed
PartyGaming in reaching a non-prosecution agreement with the US Department of
Justice would limit its ability to do B2B deals with US companies.
MJ:
OK
MJ:
I get the idea
11:40AM
NH:
this is proving impossible
NH:
that whole chat about 888
NH:
did not see a word of it
NH:
just type into the box
NH:
and I never see it again
NH:
and I have no prices
NH:
what’s the market doing Miles
NH:
where are 888 now?
MJ:
Still the biggest riser in the FTSE 250
MJ:
Neil is proving his ML mastery by using just a keyboard and no screen
MJ:
Like a shaolin monk
MJ:
(doo dee doo doo dah: ML is currently experiencing technical problems)
NH:
hey
NH:
back in
NH:
seeing this?
MJ:
Wow he’s back
11:44AM
NH:
right
NH:
what else shall we look at?
NH:
what about Mad Ashley
NH:
and his brush with the SFO?
MJ:
Always worth a look that is
MJ:
Sports Direct down again
MJ:
market does not like this one bit
MJ:
Off 1.9p to 107p
NH:
ha
NH:
that’s is amusing because all the analysts are saying the declines have been overdone
NH:
now, that might be the case for JJB
NH:
they have cut a deal with the OFT
NH:
and have some degree of immunity
NH:
not sure the same can be said of Sports Direct
MJ:
Were these the same brokers telling people to buy in the run up to results?
NH:
they were
NH:
they seem to think that nothing much will come from this investigation
NH:
and looking back
NH:
that has been the case
NH:
but this one feel different
NH:
especially as JJB is working with the OFT
NH:
anyway
NH:
here’s the DON’T PANIC comments
NH:
from analysts
NH:
Numis
NH:
Both Sports Direct and JJB have confirmed that they are assisting the OFT in an
investigation into the sports retail market. We believe that Sports Direct could be
faced with a maximum possible fine of 10% of turnover (c.£150m). With precedents
suggesting that an acceptance of liability would result in a 50% reduction in any
fine, we believe the fall in the share price is overdone. ADD.
investigation into the sports retail market. We believe that Sports Direct could be
faced with a maximum possible fine of 10% of turnover (c.£150m). With precedents
suggesting that an acceptance of liability would result in a 50% reduction in any
fine, we believe the fall in the share price is overdone. ADD.
NH:
OFT investigation underway: Both Sports Direct and JJB have confirmed that they
are assisting the OFT in an investigation into the sports retail market in relation to a
suspected agreement or concerted practice to dampen competition in the sports retail
market. In response to enquiries, the Serious Fraud Office has confirmed it is
investigating JJB and Sports Direct, following a referral from the OFT.
n Maximum fine 10% of turnover: Following the grant of an immunity marker from the
OFT, and with respect to other considerations, the directors of JJB have stated their
belief that any financial impact from the matter is unlikely to be material. Without this
immunity, Sports Direct may be liable for a fine from the OFT, up to a maximum of 10%
of turnover.
are assisting the OFT in an investigation into the sports retail market in relation to a
suspected agreement or concerted practice to dampen competition in the sports retail
market. In response to enquiries, the Serious Fraud Office has confirmed it is
investigating JJB and Sports Direct, following a referral from the OFT.
n Maximum fine 10% of turnover: Following the grant of an immunity marker from the
OFT, and with respect to other considerations, the directors of JJB have stated their
belief that any financial impact from the matter is unlikely to be material. Without this
immunity, Sports Direct may be liable for a fine from the OFT, up to a maximum of 10%
of turnover.
NH:
Precedents point to 50% exposure: Precedents from the pub sector would suggest
that the chances of prosecution are low, while the building industry has seen
companies accept liability in return for a 50% reduction in the fine. Moreover, any OFT
investigation would be likely to drag on for a number of years, with the chance to
appeal likely to lengthen this process.
n Reducing TP, still an Add: We continue to base our Sports Direct TP on 6x Apr-11
EBITDA but, given the risk associated with the OFT investigation, factor a 50% chance
of a (maximum 10% of turnover) fine, reducing the our valuation by £75m. As such, our
TP falls to 130p from 145p and our recommendation from Buy to ADD.
that the chances of prosecution are low, while the building industry has seen
companies accept liability in return for a 50% reduction in the fine. Moreover, any OFT
investigation would be likely to drag on for a number of years, with the chance to
appeal likely to lengthen this process.
n Reducing TP, still an Add: We continue to base our Sports Direct TP on 6x Apr-11
EBITDA but, given the risk associated with the OFT investigation, factor a 50% chance
of a (maximum 10% of turnover) fine, reducing the our valuation by £75m. As such, our
TP falls to 130p from 145p and our recommendation from Buy to ADD.
NH:
Altium
NH:
Altium view: JJB released a statement yesterday noting that it had notified the OFT
at the end of January that it might have been involved in ‘competition dampening’
behaviour during Chris Ronnie’s reign as CEO. Its cooperation with the OFT has
earned it immunity from fines. However, that offers no protection against subsequent
lawsuits should they emerge: it is impossible to assess the likelihood or scale of this
problem given how little we know about the nature of the alleged offences. Later in the
day it emerged that the Serious Fraud Office is also investigating the situation.
at the end of January that it might have been involved in ‘competition dampening’
behaviour during Chris Ronnie’s reign as CEO. Its cooperation with the OFT has
earned it immunity from fines. However, that offers no protection against subsequent
lawsuits should they emerge: it is impossible to assess the likelihood or scale of this
problem given how little we know about the nature of the alleged offences. Later in the
day it emerged that the Serious Fraud Office is also investigating the situation.
NH:
Implications for estimates / valuation / recommendation: There will, clearly, be
costs associated with cooperating with the various enquiries. These will probably not
be material in the context of expected trading losses this year. At least JJB has
eliminated any uncertainty about its potential exposure to an OFT fine. It may also
result in damage to a major competitor. Despite these positive outcomes, we continue
to believe the shares are overvalued. We project losses this year of c.£28m. Recovery
from that level will be slow if the company cannot secure additional capital. It will not
want to waste the opportunity to capitalise on England’s World Cup success, even if
the long-term plan is to reduce dependence on such events. We therefore continue to
anticipate a fundraising, which we expect to be dilutive. We remain SELLers
costs associated with cooperating with the various enquiries. These will probably not
be material in the context of expected trading losses this year. At least JJB has
eliminated any uncertainty about its potential exposure to an OFT fine. It may also
result in damage to a major competitor. Despite these positive outcomes, we continue
to believe the shares are overvalued. We project losses this year of c.£28m. Recovery
from that level will be slow if the company cannot secure additional capital. It will not
want to waste the opportunity to capitalise on England’s World Cup success, even if
the long-term plan is to reduce dependence on such events. We therefore continue to
anticipate a fundraising, which we expect to be dilutive. We remain SELLers
NH:
oh, actually they are sellers
11:48AM
MJ:
Right
MJ:
Cadbury-watch time
NH:
what’s the latest?
MJ:
Well there inevitably are more stories in the media this morning
MJ:
Bloomberg are running this story about large Cadbury investors, such as Mario Gabelli, supporting the rationale behind the Kraft bid
MJ:
They just want more money
MJ:
“All we want is a kiss from Irene,” said Gabelli, whose Rye, New York-based Gamco Asset Management Inc. owned almost 2.8 million American depositary shares of Cadbury and 1.1 million Kraft shares as of June 30, according to filings. “They just have to put a little more money on the table.”
NH:
A kiss from Irene?
NH:
WTF?
MJ:
I know. Pretty cringe-inducing stuff
MJ:
Aside from that, the point here is that Gabelli is a US investor holding ADRs
MJ:
He also holds Kraft shares already so won’t be too fussed about holding the paper of a combined entity
NH:
I thought the Nomura take that came out this morning was very good
NH:
the headline was a classic
NH:
kicking myself for not using it
NH:
Come on Irene!
NH:
Dealt at 850p
NH:
and I agree with it
NH:
Kraft goes to 850p
NH:
which it can, just about
NH:
and Kradbury shareholders back it
NH:
after all
NH:
50% premium to pre-bid price
NH:
I can see things playing out that way
NH:
and I am increasingly sceptical of a counter
NH:
here’s the Nomura note
NH:
With the stock trading close to the 805p value of our
probability weighted scenario analysis, we downgrade to NEUTRAL. We
ascribe the highest probability (60%) to Kraft sweetening its offer to
c.850p through a higher cash element and thus sharing the value of the
synergies more favourably with Cadbury shareholders. Although the
implied 13.5x 2009E multiple may not appease the Cadbury Board we
struggle to see how it can dissuade shareholders from not accepting a
50% premium to last week’s close. The main (upside) risk to this
scenario is the emergence of a counter- bid from a Nestle-Hershey combo,
incentivised by the threat of a more competitive environment and desire
for lower costs from production/brand sharing benefits. However,
complexities surrounding this consortium prevent us from committing new
money now to the name.
probability weighted scenario analysis, we downgrade to NEUTRAL. We
ascribe the highest probability (60%) to Kraft sweetening its offer to
c.850p through a higher cash element and thus sharing the value of the
synergies more favourably with Cadbury shareholders. Although the
implied 13.5x 2009E multiple may not appease the Cadbury Board we
struggle to see how it can dissuade shareholders from not accepting a
50% premium to last week’s close. The main (upside) risk to this
scenario is the emergence of a counter- bid from a Nestle-Hershey combo,
incentivised by the threat of a more competitive environment and desire
for lower costs from production/brand sharing benefits. However,
complexities surrounding this consortium prevent us from committing new
money now to the name.
NH:
Summary
* See KFT raising cost synergy target from $625m to $750m, with
cash element up from 300p to 440p. Equity component unchanged = 848p
with cash at 52%.
* Counter bid > 1000p unlikely due to KFT financing restrictions/
harder justification of premium multiples in more challenging op
environment.
MJ:
JP Morgan put out an interesting note on Nestle as well
MJ:
They are playing down the idea of Nestle coming in. They think that making a big move like that is not in the DNA of the company
NH:
do you have any of that
MJ:
Coming right up
MJ:
? Bottomline: Lowering the probability of a Nestle bid for CBRY, further.
? Sure, Nestle could do a deal if it wanted to. Yes, we believe Nestle could
fund a deal on its own, would face limited anti trust issues (should need to
divest only at most 7.5% of Cadbury revenues), and as a result would not need
to be part of a consortium. Moreover, there is no history that Nestle would not
want to be in gum (we understand that it did bid for the Adams gum business
earlier this decade, albeit it did not want it as badly as Cadbury, apparently).
? Sure, Nestle could do a deal if it wanted to. Yes, we believe Nestle could
fund a deal on its own, would face limited anti trust issues (should need to
divest only at most 7.5% of Cadbury revenues), and as a result would not need
to be part of a consortium. Moreover, there is no history that Nestle would not
want to be in gum (we understand that it did bid for the Adams gum business
earlier this decade, albeit it did not want it as badly as Cadbury, apparently).
MJ:
Moreover, on the surface, a bid would make strategic sense as Nestle
would jump to the #1 position in global chocolate with 20% share (does it
matter?) from 13% now (Mars is #1 with 15%); in particular it would gain
significant heft in key (albeit more matured) chocolate markets like the UK,
Australia, Canada, and Ireland. The Cadbury gum platform would also help
would jump to the #1 position in global chocolate with 20% share (does it
matter?) from 13% now (Mars is #1 with 15%); in particular it would gain
significant heft in key (albeit more matured) chocolate markets like the UK,
Australia, Canada, and Ireland. The Cadbury gum platform would also help
MJ:
A transaction could also be consistent with the type of portfolio
transformation that we would like to see, with Nestle exiting what we
estimate are only mid to high single digit EBIT margin categories (for
Nestle) like waters, ice cream, and frozen dinners, and expanding in higher
margin categories like chocolate (where industry consolidation should help
margins) as well as fast growth categories like baby nutrition and yoghurt.
transformation that we would like to see, with Nestle exiting what we
estimate are only mid to high single digit EBIT margin categories (for
Nestle) like waters, ice cream, and frozen dinners, and expanding in higher
margin categories like chocolate (where industry consolidation should help
margins) as well as fast growth categories like baby nutrition and yoghurt.
But a deal the size of Cadbury may not be in the Nestle DNA? The
Nestle M&A track record just in the last three years includes water (HOD
and bottled), RTD teas, chocolate, baby nutrition, RTE cereals, and pet care.
The KFT bid values the CBRY enterprise value at $20B; Nestle’s biggest
deals this decade have been Ralston Purina ($12B) and Gerber ($5.5B
NH:
thanks for that
NH:
not that I saw a word of it
NH:
until I lent over your screen
NH:
are the readers still commenting?
MJ:
They are
NH:
we should have just handed the floor over to the ROTR
MJ:
Anything else to round up on?
NH:
there are few bits and pieces
NH:
the Falklands Islands
NH:
is obviously the new hot place to explore for oil
NH:
Rockhopper up 50% this morning
NH:
on news of a farmout deal
NH:
although we are not sure who with
NH:
and the follows the Desire announcement yesterday
NH:
here’s a bit of comment on that
NH:
from Canaccord
NH:
actually
NH:
Desire contracts a rig to bring to the North Falkland Basin
NH:
Our view
· This will likely be viewed as a very positive, and much awaited, event for Desire Petroleum and the other E&P players in the Falklands area including Rockhopper, Borders & Southern Petroleum (BOR : AIM | Not Rated), and Falklands Oil and Gas (FOGL : AIM | Not Rated). However, we note that the Ocean Guardian is unlikely to be suitable to drill in the South Falklands Basin and that Rockhopper will require further funds if, as expected, it is called upon to pay 15% of the cost of two wells.
Key features
· Desire Petroleum (DES : AIM | Not Rated) has a signed a letter of intent with Diamond Offshore Drilling to bring the Ocean Guardian drilling rig to the North Falkland Basin for a minimum four well drilling programme with the option to drill a further four wells for itself and/or its partners. The Ocean Guardian, which is currently operating in the North Sea, will be mobilised in November and is expected to reach the Falklands in February 2010. Although the cost of the rig has not been revealed, we note that it is currently contracted to Nippon Oil for over US$290,000 per day.
· This will likely be viewed as a very positive, and much awaited, event for Desire Petroleum and the other E&P players in the Falklands area including Rockhopper, Borders & Southern Petroleum (BOR : AIM | Not Rated), and Falklands Oil and Gas (FOGL : AIM | Not Rated). However, we note that the Ocean Guardian is unlikely to be suitable to drill in the South Falklands Basin and that Rockhopper will require further funds if, as expected, it is called upon to pay 15% of the cost of two wells.
Key features
· Desire Petroleum (DES : AIM | Not Rated) has a signed a letter of intent with Diamond Offshore Drilling to bring the Ocean Guardian drilling rig to the North Falkland Basin for a minimum four well drilling programme with the option to drill a further four wells for itself and/or its partners. The Ocean Guardian, which is currently operating in the North Sea, will be mobilised in November and is expected to reach the Falklands in February 2010. Although the cost of the rig has not been revealed, we note that it is currently contracted to Nippon Oil for over US$290,000 per day.
NH:
Valuation
Using US$65 per barrel flat real and a 10% discount rate, we estimate a 150 mmbbl find in the North Falklands Basin could be worth US$1,636 million or just over £1 billion. Taking just 5% of this figure and adding the group’s net cash balances is equivalent to approximately 67p/share which is the basis of our target price. Our recommendation on Rockhopper is a SPECULATIVE BUY.
Using US$65 per barrel flat real and a 10% discount rate, we estimate a 150 mmbbl find in the North Falklands Basin could be worth US$1,636 million or just over £1 billion. Taking just 5% of this figure and adding the group’s net cash balances is equivalent to approximately 67p/share which is the basis of our target price. Our recommendation on Rockhopper is a SPECULATIVE BUY.
MJ:
This is all very well of course
MJ:
But no one knows what is down there yet
NH:
I know. it all feels very bubbly among this small caps at the moment
NH:
sticking with the small caps
NH:
some bid rumours around in Workspace
Workspace Group (WKP:LSE): Last: 26.00, up 0.75 (+2.97%), High: 27.50, Low: 25.25, Volume: 7.02m
NH:
the idea seems to be that Hansteen may come in for them
NH:
they are cashed up
NH:
something like £200m in the bank
NH:
and might look to put it to work
NH:
and I picked this up on British Airways
NH:
El Economista reports that the Chairman of Caja Madrid is under pressure to speed up the Iberia-BA deal in order to have a place on the board of the merged company. Notes that Iberia and BA heads met yesterday in Madrid and are aiming to reach an in principle agreement soon with the merger being legally completed next spring. Iberia last night announced that passenger traffic fell 6.5% in August from a year earlier.
11:58AM
MJ:
We should also probably mention that John Mack is stepping down
NH:
must be in digust over his portrayal in the Lehman movie
MJ:
Au contraire, Monsieur Hume
MJ:
I think after Mr Mack saw that film he was so confident that his place in history was assured he decided to call it a day
MJ:
No need to hang around really
NH:
well it will be interesting to see what the new man’s strategy is
NH:
limit MoST risk taking trading activities
NH:
actually the new man
NH:
likes to play up to the blunt speaking Aussie male image
NH:
doesn’t care who he offends
NH:
that sort of thing
12:00PM
NH:
also had something I wanted to share on ITV
NH:
which were down
NH:
the last time I had a screen to check a price
ITV (ITV:LSE): Last: 54.50, down 0.55 (-1.00%), High: 56.90, Low: 53.40, Volume: 14.26m
MJ:
Yeah they are still down
NH:
good. their COO popped into Caz last night
NH:
and seems that October advertising could be a bit disappointing
NH:
have a look at this
NH:
COO John Cresswell presented to our sales desk yesterday. We understand that overall advertising trends are broadly stabilising although October advertising is expected to be down 9-10% y/y compared to a 7% (or slightly better) y/y decline in September. The provisional CRR conclusions from the Competition Commission are expected shortly and management continues to argue the case for complete abolition in time for the 2010 deals with media buyers. Following the strong recent share price run we believe the shares look fully valued although we recognise they could see further near term upside if the Competition Commission abolishes CRR completely.
NH:
.
ITV has outperformed the UK media sector by 16% year to date and the FTAS by 19%. On our current forecasts, the shares trade on 13.7x 2010E EV/EBITDA and 55x 2010E EPS falling to 8.3x 2011E EV/EBITDA and 16x 2011E EPS as we forecast a rebound in the advertising market, further cost savings and a change to the CRR remedy.
ITV has outperformed the UK media sector by 16% year to date and the FTAS by 19%. On our current forecasts, the shares trade on 13.7x 2010E EV/EBITDA and 55x 2010E EPS falling to 8.3x 2011E EV/EBITDA and 16x 2011E EPS as we forecast a rebound in the advertising market, further cost savings and a change to the CRR remedy.
NH:
Following the strong recent share price run we believe the shares look fully valued although we recognise they could see further near term upside if the Competition Commission abolishes CRR completely.
Upcoming newsflow includes the Competition Commission’s provisional CRR report, the appointment of a new CEO and a likely IMS in early November.
Upcoming newsflow includes the Competition Commission’s provisional CRR report, the appointment of a new CEO and a likely IMS in early November.
MJ:
Hmmm
MJ:
We must also put out a plug for FT Alphaville’s own Lehman coverage
MJ:
Coming out later today
NH:
It will be good
NH:
the girls have been working very hard on this
MJ:
So Neil, are we done?
NH:
I think so
NH:
hearing something about Wellstream
NH:
being a possible target for Saipem
NH:
other than that
NH:
we are done
NH:
apart from mentioning one other Falklands stock
NH:
BPC
NH:
large overhang cleared yesterday
NH:
was owned by RAB Capital
NH:
stock pretty liquid now, am told
MJ:
Appologies for today’s massive tech blow out
NH:
yes sorry about that
NH:
quite novel typing blind
NH:
last comment I have is 11.44 from Itzman
NH:
Hang on
NH:
IT say the prob is resolved
NH:
not here it isn’t
NH:
i’m off
NH:
have a column to right
NH:
see u all on Monday
MJ:
Ta ta
MJ:
Thanks for the comments
NH:
bye
NH:
and to the best of my knowledge the FT is not seeing Regal today