Markets live chat transcript for the chat ending at 12:14 on 14 Sep 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ) Paul Murphy (PM)
NH:
surprise
NH:
its 11.01am
NH:
and time for Markets Live
NH:
FT Alphaville’s daily stroll around the markets
NH:
and Murph’s back
NH:
or at least we think he his
NH:
apartment sorted
NH:
kids at school
NH:
and first day in the NY office for our glorious leader
NH:
and there have been reports over the weekend that he will make a guest appearance on this morning’s show
NH:
but I am not holding my breath
NH:
for one thing it is 6.00am
NH:
and two, I can’t see Murph’s lap top doing the job
NH:
anyway, Miles is here and raring to go
NH:
or at least he was until he computer crashed
NH:
so he has just plugged the plug out of the back and is booting the system up again
NH:
which should take
NH:
what all of 20mins
NH:
Miles
NH:
is it working yet?
NH:
the answer to that question is NO
NH:
from what I can see
11:04AM
NH:
while we wait for Miles
NH:
lets have a quick look at the wider market
NH:
FTSE 100 down 40 points at 4,971.13
NH:
a bit of profit taking
NH:
but the volumes are incredibly light
NH:
RBS the most active stock so far
NH:
with 37m shares traded
11:05AM
NH:
actually I have some RAW from NY
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:
apparently Murph is shocked at rental prices
NH:
going to gobble up half his meagre FT salary
NH:
I feel so sorry for him
NH:
Miles
NH:
are you up and running yet
MJ:
Right im in
MJ:
But I don’t have a script
NH:
Miles, you are not supposed to say that
NH:
this is, er live
NH:
a live chat between you and me
MJ:
Right, erm, of course
MJ:
Anyway Neil, what is all this 11 on the dot business?
NH:
new regime
NH:
I am implementing a few changes round here
NH:
cracking the whip a bit
NH:
(not at the FT, FatDaz)
MJ:
Anyways morning everyone
MJ:
So Neil, what is going on with Cadbury’s?
NH:
well
NH:
there’s been some more letter writting over the weekend
MJ:
They are so old fashioned
MJ:
haven’t they heard of email. Or a phone
NH:
and this time it’s Roger Carr at Cadbury firing off a missive to Kraft
MJ:
epistolary M&A
MJ:
yeah, saw that
MJ:
basically said we don’t want to become part of a low growth conglomerate and the offer is pitiful
NH:
yep, the incredible, shrinking offer
NH:
now stands at around 707p I think when you factor in currency and the recent fall
MJ:
hadn’t realised that
MJ:
that’s a long way to the 850p most shareholders seem to want
MJ:
up 3p at 778.5p
MJ:
what’s that all about?
NH:
well, I reckon its Carr’s letter
NH:
it does leave the door ajar for a higher offer
MJ:
so the ball is back in Kraft’s court
NH:
yep, Come on Irene, up your bid!
NH:
actually, got some good comment on the letter
NH:
from Andrew Wood at Bernstein Research
NH:
he’s the sector’s top rated analyst
MJ:
yeah, and the only who thinks Cadbury is worth more than £10
NH:
true, and he’s also hosting a conference this week at which the Cadbury boss Todd Stitzer is expected to outline his future plans for the confectioner
MJ:
ok, where’s the note
NH:
here it is
NH:
Yesterday (Saturday) Cadbury released a fairly short letter from Roger Carr, Cadbury’s Chairman, to Irene Rosenfeld, Kraft’s CEO. It responds to Rosenfeld’s letter of September 7th in which she makes the proposal to bid for Cadbury, and it follows on from Carr’s letter of August 31st rejecting Kraft’s initial approach. While there is nothing massively surprising in the letter, there are some interesting aspects which deserve some commentary.
NH:
Here are 3 overriding perspectives:
NH:
- This letter is clearly a case of Cadbury taking a more active approach to responding to numerous, quite aggressive public statements by Kraft over the last week, at least two of which are erroneous, in our view… Kraft’s belief that the current bid is fair, and that Cadbury has limited opportunities as a stand-alone company. While a formal defence document will probably only be required/released if a formal bid is made, we do expect Cadbury to aggressively explain to investors the strength and inherent value in its business, a process which is likely to continue during the participation of Cadbury’s CEO and CFO in our European Strategic Decisions Conference on Wednesday.
NH:
- The language in the latter was strong and not very friendly. For example, while stating that the bid “is unattractive and fundamentally undervalues Cadbury” is not a surprise, describing Kraft as a “low growth, conglomerate business” is strong language, although arguably true. The strong tone is probably a result of the decision by Kraft’s CEO to not engage in a longer, more constructive dialogue with Cadbury before going public with the proposed offer, and so blind-siding Cadbury management in the process. Kraft’s argument that it wants the process to be “friendly” has, so far, not really been matched by actions or words…and has undoubtedly led to this public tit-for-tat. We feel sure that Carr has received the support from Cadbury’s shareholders to aggressively push back on Kraft.
- The language in the latter was strong and not very friendly. For example, while stating that the bid “is unattractive and fundamentally undervalues Cadbury” is not a surprise, describing Kraft as a “low growth, conglomerate business” is strong language, although arguably true. The strong tone is probably a result of the decision by Kraft’s CEO to not engage in a longer, more constructive dialogue with Cadbury before going public with the proposed offer, and so blind-siding Cadbury management in the process. Kraft’s argument that it wants the process to be “friendly” has, so far, not really been matched by actions or words…and has undoubtedly led to this public tit-for-tat. We feel sure that Carr has received the support from Cadbury’s shareholders to aggressively push back on Kraft.
NH:
- We are clearly not surprised the Board believes that prospects for Cadbury as an independent company remain healthy, with a strong set of targets and with a strong track record of achieving these targets. We were intrigued at the longer term focus of the comments (from the acquisition of Adams in 2003)…even though arguably Cadbury had hit-and-miss performance until 2007, since when performance has indeed been very strong. We do agree that prospects remain strong for Cadbury, and we have long-believed that the Vision into Action restructuring plan will be successful up to and including 2011. However, it also seems clear that Cadbury will soon have to start explaining its longer-term vision for Cadbury, beyond 2011.
NH:
As explained in our report from earlier this week (“Cadbury: Investors should hold out for a +£9.00 offer from Kraft”…the link is below) we believe that a £9.00 bid for Cadbury by Kraft will allow this deal to get done. In our view, this price, while still fundamentally under-valuing Cadbury, will be satisfactory to both sides. Cadbury shareholders would be getting a massive upside to where the stock was trading just 10 days ago …although they would be accepting less than what Cadbury is truly worth. While Kraft would be paying 20% more than its initial bid for Cadbury…it would be getting a “once in a lifetime” asset and a “compelling” acquisition for just 13.6x 2009E EBITDA, or 19.9x 2010 earnings.
MJ:
so he thinks 900p gets it now
NH:
yep, although it undervalues the company, obviously
NH:
but I am not sure Kraft can go to 900p
NH:
without an equity issue
MJ:
actually
MJ:
Citi have published on Nestle this morning
MJ:
It looks quite intresting
NH:
it is. Now, I haven’t really followed Nestle too much
NH:
but it seems they could soon be sitting on a huge pile of cash
NH:
Citi reckons they will sell their remaining stake in something called Alcon early next year
NH:
which will give them $29bn of cash to go and buy things
MJ:
Burning a hole in their pocket
MJ:
So what do you think they would look at?
NH:
Where to begin? In undertaking our analysis of potential acquisition
opportunities, we thought it best to consider a number of different
perspectives. More specifically:
opportunities, we thought it best to consider a number of different
perspectives. More specifically:
NH:
1. We investigate Nutrition (as it is here than most of Nestle’s recent
acquisition activity has taken place).
2. We investigate major categories (in which it is present) in which Nestle is
not global number 1 or number 2.
3. We consider scale (Alcon proceeds of c.SFr29.4bn are material by any
consumer staples benchmark). To do so, we analyse the relative
attractiveness of the top 20 food companies in the world.
4. Last, but not least, we examine L’Oreal (OREP.PA; €67.55; 3M) (given
Nestle’s “strategic” ownership of c.31% of its equity).
In aggregate, we analyse over 30 individual acquisition opportunities.
acquisition activity has taken place).
2. We investigate major categories (in which it is present) in which Nestle is
not global number 1 or number 2.
3. We consider scale (Alcon proceeds of c.SFr29.4bn are material by any
consumer staples benchmark). To do so, we analyse the relative
attractiveness of the top 20 food companies in the world.
4. Last, but not least, we examine L’Oreal (OREP.PA; €67.55; 3M) (given
Nestle’s “strategic” ownership of c.31% of its equity).
In aggregate, we analyse over 30 individual acquisition opportunities.
NH:
there you go
NH:
30 companies
MJ:
(@Lorkan – not if they sell off the UK choc business. They could then keep the gum part)
MJ:
Wow – that is some list
NH:
yep
MJ:
Not sticking their neck out too far then I see
NH:
and guess what
NH:
Cadbury not mentioned
NH:
because Citi are restricted
NH:
advising Kraft on their bid
MJ:
NH:
actually on that subject
11:19AM
NH:
International Power
NH:
there were rumours around on Friday that it could be a takeover target
MJ:
Yeah I remember
NH:
well, talk in the market is that Citigroup are Catergory 1 restricted in the name
MJ:
MJ:
er, but what exactly does that mean?
NH:
that their research analysts can’t write on it, I think
NH:
they have to blank out any mention of its name in a research report
MJ:
And that has happened only recently?
NH:
I believe it has
NH:
now, if this is true it is interesting because Citi aren’t broker to IPR
NH:
the brokers are JP Morgan Caz and Morgan Stanley
MJ:
Hmmmm
NH:
and, there were rumours a year ago that a middle eastern infrastructure fund was preparing a bid
NH:
not sure, think it might have been credit crunched
NH:
and I seem to remember that Citi might have been involved in a financing capacity in that earlier bid
MJ:
Ok
MJ:
but look, we should not get carried away here
MJ:
Citi could be restricted for any number of reasons, some of which could quite mundane
NH:
sure
NH:
this RAW needs to be treated with extreme care
NH:
but interesting because if there is one company in the FTSE 100 that could be a target
NH:
IPR is one of them
MJ:
Shares are down today off 1.6p to 291.8p
NH:
yeah, but it did have a big move on Friday
NH:
and in heavy volume
NH:
three times the daily average I think
11:24AM
NH:
some discussion on the right about ITV
NH:
and product placement
NH:
one broker I have been chatting to this morning
NH:
reckons the market could be worth around £100m
NH:
of which ITV gets £50m
NH:
and given what ITV is expected to earn this year is pretty material
NH:
it would double forecast 2010 PBT
NH:
and probably explains why the shares were a good market first thing
NH:
eased back a bit now
ITV (ITV:LSE): Last: 54.65, up 0.15 (+0.28%), High: 58.65, Low: 53.30, Volume: 12.29m
MJ:
I’ve got a bit of comment from Canaccord
MJ:
· This week is likely to be a busy week for the broadcaster, with two key announcements on advertising and a new CEO appointment expected.
· The Competition Commission is about to publish its preliminary findings on the Contract Rights Renewal system, having previously recommended an easing of the current mechanism to allow ITV to have greater flexibility in airtime pricing.
· New Culture Secretary Ben Bradshaw is also set to announce a consultation process over product placement in TV.
· Finally, ITV is widely expected to confirm Tony Ball as the new CEO this wee
· The Competition Commission is about to publish its preliminary findings on the Contract Rights Renewal system, having previously recommended an easing of the current mechanism to allow ITV to have greater flexibility in airtime pricing.
· New Culture Secretary Ben Bradshaw is also set to announce a consultation process over product placement in TV.
· Finally, ITV is widely expected to confirm Tony Ball as the new CEO this wee
MJ:
Canaccord Adams view
· The only announcement this week that will impact short term forecasts is the CRR review findings, as it has some bearing on the 2010 advertising budget negotiations between ITV and the agencies. Our forecasts assume a continuation of the existing regime, so any easing will prompt an upgrade to forecasts once we have been able to digest the detail around the ‘additional safeguards’ previously recommended by the CC.
· Clearly the announcement of a new CEO has a major strategic impact on the business, with Mr Ball expected to radically review strategy, implement a rights issue and possibly make disposals (such as the Global Content unit). The stock has run up on the back of this expectation, but we remind investors that it will be some time before definitive strategy announcements are made.
· The review into product placement will be welcomed by ITV, which has long argued for UK commercial broadcasters to be allowed to engage in this. Estimates of the net impact on ITV vary from £30 million to £60 million, but the true figure will clearly depend on the stance of the government’s policy and the extent of cannibalism of existing advertising revenues. With so many questions unanswered at this stage it is not possible to assess the impact on ITV’s earnings.
· The only announcement this week that will impact short term forecasts is the CRR review findings, as it has some bearing on the 2010 advertising budget negotiations between ITV and the agencies. Our forecasts assume a continuation of the existing regime, so any easing will prompt an upgrade to forecasts once we have been able to digest the detail around the ‘additional safeguards’ previously recommended by the CC.
· Clearly the announcement of a new CEO has a major strategic impact on the business, with Mr Ball expected to radically review strategy, implement a rights issue and possibly make disposals (such as the Global Content unit). The stock has run up on the back of this expectation, but we remind investors that it will be some time before definitive strategy announcements are made.
· The review into product placement will be welcomed by ITV, which has long argued for UK commercial broadcasters to be allowed to engage in this. Estimates of the net impact on ITV vary from £30 million to £60 million, but the true figure will clearly depend on the stance of the government’s policy and the extent of cannibalism of existing advertising revenues. With so many questions unanswered at this stage it is not possible to assess the impact on ITV’s earnings.
MJ:
Valuation
· Ahead of the publication of these announcements we remain Sellers of the stock, but we will be reviewing our numbers as more details are published. The stock has benefited from the expectation of the new CEO and is currently trading on F2010 EV/EBITDA of 14.2 times or a PE of 42.2 times.
· We have re-run our sum-of-the-parts model following the market rerating, raising our target price from 31p to 39p
· Ahead of the publication of these announcements we remain Sellers of the stock, but we will be reviewing our numbers as more details are published. The stock has benefited from the expectation of the new CEO and is currently trading on F2010 EV/EBITDA of 14.2 times or a PE of 42.2 times.
· We have re-run our sum-of-the-parts model following the market rerating, raising our target price from 31p to 39p
NH:
what
NH:
a PE of 42
NH:
wow
MJ:
Cripes
NH:
a lot of recovery in the price at ITV
NH:
let’s hope it can deliver
NH:
talking of telly
11:28AM
NH:
Miles
MJ:
yes?
NH:
what are you doing on Wednesday night?
MJ:
er, dunno
MJ:
probably watching the Arsenal champions league match
MJ:
although after Saturday’s result I might give it a miss
NH:
good
NH:
because there’s something else you can watch
NH:
might make a good post
NH:
although
MJ:
What is it?
NH:
Dating in the Dark
NH:
you’ll need Sky though
NH:
on Living TV (channel 112)
MJ:
Right – now why would I want to watch a thing like that?
NH:
well, it will probably be more entertaining that watching Arsenal play well and then implode when the going gets tough
NH:
but also
NH:
because a City analyst is appearing
NH:
one we have quoted a few times
MJ:
!!!
MJ:
Albert Edwards?!?
NH:
no, no, no, no
NH:
he got married a while back
NH:
this guy is not nearly so high profile
NH:
but good in his field
NH:
called Phil Corbett and he covers the oil field services sector at RBS
NH:
and he is one of the contestants
MJ:
Just looking at some blurb about the programme
MJ:
according to a recent article in the Guardian was devised by the same chap who invented Big Brother
MJ:
claims to explore “that million dollar question – do looks matter? Just how important is aesthetic attraction when it comes to achieving an emotional intimacy? Is attraction all in the pheromones? We will be questioning these theories as we offer singletons a totally unique way of meeting a special someone”
NH:
MJ:
hang on here’s a bit more
MJ:
Dating in the Dark is as cruel a dating show as you can get – I can’t wait to tune in again
Brilliantly awful … Dating in the Dark
Last night’s television saw a man correctly predict the winning lottery numbers and England managing to qualify for a major sporting tournament without ballsing anything up. And yet by far the weirdest thing on TV last night was Living’s Dating in the Dark.
Brilliantly awful … Dating in the Dark
Last night’s television saw a man correctly predict the winning lottery numbers and England managing to qualify for a major sporting tournament without ballsing anything up. And yet by far the weirdest thing on TV last night was Living’s Dating in the Dark.
MJ:
If you missed it, Dating in the Dark is basically Blind Date but, since this is 2009, the contestants don’t go home with an underwhelming camping weekend for two in Norfolk; instead they go home clutching the remnants of their shattered heart. Metaphorically speaking, at least. Because, you see, Dating in the Dark is awful. Brilliantly awful
MJ:
The premise is a simple one: people go on a series of dates in total darkness and then fall in love at the end when the lights come on, proving once and for all that some things are more important than physical beauty. It’s an amalgamation of several dating shows that came before it: it takes the idea that you don’t need to see someone to fall in love with them from Blind Date; the idea that it’s possible to love someone from outside your usual social group from Beauty and the Geek; and the endless, slow-motion, arms-out, clumsy stumbling from the as-yet unaired dating show The Zombie Bachelorette. It also throws in one brand new ingredient: total, soul-crushing emotional rejection.
NH:
and just think what happens when they find out Corbett is an investment banker
MJ:
he’ll be evicted
MJ:
actually I think the Telegraph City diary beat us to the story
MJ:
looks to have been in the paper on Sat
NH:
ah yes they did. amusing though
MJ:
Though Lemmy makes a good point
MJ:
Would be a great way to resolve the Cadbury-Kraft stand off
NH:
it would be
NH:
moving swiftly on
11:34AM
NH:
Miles what else have you been looking at
MJ:
Well
MJ:
Good note from Andrew Lapthorne of Soc Gen today
MJ:
He makes the point that the rally will have left scores of analysts needing to up their price targets
MJ:
But, as no one so far has come up with a convincing argument for equities keep going up,
MJ:
these same analysts are having to concoct some fruity justifications for their upgrades
NH:
Just making it up as they go along then?
MJ:
Pretty much.
MJ:
We fear many analysts are going to be very busy creating credibility-stretching justifications for increasing price targets. Pushing up earnings forecasts is simplest, especially if the EPS numbers themselves are not particularly in focus – so the strong momentum in 2010 EPS expectations will likely be part of this process. Other techniques could also be on the rise, such as “changing risk profile” or “removing the cyclical discount”, but our favourite however is “change of valuation methodology” which in our experience certainly brings the biggest groans at most morning meetings.
NH:
What with Edwards, Lapthorne, SocGen are a sceptical lot aren’t they?
MJ:
Yeah I wonder what their sales guys are like with clients?
MJ:
“Jesus, have you seen what Albert’s written today? Now I’m not being funny mate, but I’d get underweight quick time or its hair shirt o’clock”
NH:
Maybe they’re more like “risk advisors”.
MJ:
No, to be fair they have a house view and the opinions of their strategists. And Lapthorne isn’t even that bearish
NH:
That reminds me, didn’t you say there was a good piece out of ING today
MJ:
In terms of bearish explanations for the rally, I think this one raises some good questions
MJ:
ING argue that the upturn in corporate earnings is really just down to cost cutting and cannot continue as there is no real top line growth.
MJ:
This is, they reckon, one of the most compelling bear arguments going
MJ:
As a statement of current fact this is broadly correct. While European
earnings surprises returned to positive territory for the majority of stocks in
2Q09, this was not the case for sales surprise. 56% of companies reported
lower-than-expected sales. Quarterly sales for non-financials fell by 14%
year-on-year, with an annual decline of 4%, worse than in 2002.
earnings surprises returned to positive territory for the majority of stocks in
2Q09, this was not the case for sales surprise. 56% of companies reported
lower-than-expected sales. Quarterly sales for non-financials fell by 14%
year-on-year, with an annual decline of 4%, worse than in 2002.
MJ:
But they also say that this is “normal at this stage in the cycle”, and that in the last recession
MJ:
“there was a six-month lag between earnings momentum and surprise balances turning positive and sales surprises and momentum doing the same”
NH:
all fair points
NH:
but it seems to me that this rally is being driven by liqudity
NH:
all the cash that the world’s central banks have thrown at the problem
NH:
is lifting markets
NH:
not just equities but everything
NH:
and that’s why it will probably continue
NH:
of course, the downside is
NH:
we are replacing one bubble with an offer
NH:
but was there or is there an alternative
NH:
actually
NH:
got a good note from the prop team at Nomura
NH:
they have been looking at the impact of this wave of liquidity on their sector
MJ:
And?
NH:
hang on
NH:
here it is
NH:
So much for the stock market adage ‘Sell in May and go away, stay away till St Leger’s Day’. It worked to July when the REITs and wider equity market ‘flat-lined’. The £50bn of additional quantitative easing (QE) in August promoted both, with 10year Government bond yields correcting from 4% to 3.5% before backing up to 3.7%. It looks like price dips are buying opportunities as long as ‘Greenspanomics’ (Federal Reserve Chairman Alan Greenspan 1987-2006 whose policies contributed to the bubble) prevail.
NH:
We anticipated a repricing of commercial property back in February on a central thesis that a highly leveraged market would be promoted to a lead cycle performer as access to capital improved, and break with its ‘traditional’ late cycle asset class role when rents are the governing dynamic. Then real estate yields were 8% and were unsalable, 10 year gilts were sub 3% and REITs traded at (average) 7% yields and 40% discounts to NAV. Now with others belatedly upgrading the sector which has more than doubled from its March lows, prime real estate yields are sub 7% and are being competitively bid for, 10 year gilts yield have tested 4% and REITs are trading on (average) 10% premium to our higher than consensus NAV estimates and dividend yields ranging 4% to 5% (only British Land yields over 5% but is thinly covered).
NH:
We are conscious that the QE stimulus package is finite. The 1993 property price recovery hit the buffers after Fed funds were raised by 25bps (having been 3% for 18 months to Feb 1994) without warning. Stephen Hester, CEO of RBS last week warned of a further economic downturn if the UK consumers ‘spend-not-save’ culture persisted. He said the priority for the UK was to reduce the indebtedness of the public sector, households and businesses and warned the UK could face a ‘Japanese-style lost decade’
MJ:
So, if you are calling this rally to go on it must be time for a short
NH:
yeah, yeah, very funny.
NH:
that’s my call
NH:
but not an offical H&M Capital Management stance
MJ:
Right , so not the house view then
11:41AM
NH:
no, not the house view
MJ:
Now, you know the readers love a spot of RAW on a Monday
MJ:
you hearing much?
NH:
nope
NH:
gone from feast to famine
NH:
more rumours than you could shake a stick at on Friday
NH:
and this morning
MJ:
nothing?
NH:
nothing
NH:
just analysts shooting down Friday’s tittle-tattle
NH:
for example, Cazenove have been looking at the Smith & Nephew rumours
MJ:
and…
NH:
won’ happen because of anti-trust considerations mainly
NH:
and also because the only obvious buyer – Bioment – is owned by a private equity group and saddled with loads of debt
MJ:
How much?
NH:
what debt you mean?
MJ:
Yeah
NH:
at Biomet is it 6.5 times net debt/ebitda
MJ:
ah, that does present a bit of problem,
MJ:
With that sort of leverage you can’t just go around buying other people up
NH:
nope
NH:
you can’t
MJ:
So what are the shares doing?
NH:
S&N shares are down 5.5p at 553p
MJ:
And the Caz note?
NH:
hang on a moment
NH:
Following the return of some apparent M&A activity in the wider market, Smith & Nephew appears to be a name that is repeatedly mentioned in the market as a potential acquisition target on the back of cheap valuation, attractive fundamentals and potential for synergies.
As we have stated previously, we believe there is little intra-sector potential from M&A due to anti-trust considerations. The only combination of significant size we see as possible is that Biomet/S&N come together. However, commentary of a Biomet takeover of S&N seems to ignore Biomet’s trailing net debt/EBITDA of 6.5x and lack of publicly listed equity.
As we have stated previously, we believe there is little intra-sector potential from M&A due to anti-trust considerations. The only combination of significant size we see as possible is that Biomet/S&N come together. However, commentary of a Biomet takeover of S&N seems to ignore Biomet’s trailing net debt/EBITDA of 6.5x and lack of publicly listed equity.
NH:
In our view, the most likely source of a bid is therefore from outside the orthopaedics sub-sector. However, this inevitably restricts the potential for synergies. We believe investors should question which asset an external player looking at the orthopaedics space might look to acquire:
S&N is the number 4 player in orthopaedics
S&N is now trading at a premium to the market leaders Stryker and Zimmer
NH:
In our view, a third party would prefer to acquire a sector leader than a number 4 player. We remind investors that the last significant acquisition in the sector was the private equity takeover of Biomet. This was executed in late 2006/early 2007 (i..e at the top of the market and when debt was cheap and widely available) on an EV/EBITDA multiple of 13.8x – a price that S&N itself decided not to outbid and the private equity buyers are probably now regretting. 13.8x EV/EBITDA implies a share price of 825p for Smith & Nephew on current forecasts.
NH:
The orthopaedic market however has slowed significantly since 2006/07 as price and mix gains have become more difficult to come by and volumes have also slowed. Combined with a more difficult financing environment, we believe an EBITDA acquisition multiple of 12x is more appropriate. This implies a takeout price of 710p. If we apply a typical 25% takeout premium on announcement of an ACTUAL deal, this implies an undisturbed price of c570p i.e. the current share price. Given the 19% run in the shares over the last month, coupled with some short term downside risk to elective procedures from Swine flu, we believe investors should consider locking in profits.
MJ:
Ouch – that is a pretty comprehensive smack down of that rumour
MJ:
very interesting though
MJ:
so, if anyone bids it must come from leftfield, and Abbot Labs or someone
NH:
yep
MJ:
What else?
NH:
Gulfsands Petroleum
NH:
that’s this Syrian oil play
NH:
everyone seems convinced is going to get bid for
NH:
well
NH:
the two founders have both sold stock today
NH:
so clearly they don’t believe it
MJ:
I see
11:48AM
NH:
KP, we have nothing on Caledon.
NH:
right
NH:
let’s start tidying things up
NH:
Miles
NH:
what else should we be looking at today
MJ:
Hiedelberg Cement have announced that rights issue we were talking about last week
NH:
really
MJ:
(Bloomberg) — HeidelbergCement AG, the German cement maker owned by the Merckle family, plans a two-for-one share sale to raise funds that will help cut debt.
Major shareholders and “certain banks” that own holdings in Germany’s largest cement maker have pledged their rights to additional shares to institutional investors, the Heidelberg- based company said in a PR Newswire statement late yesterday
MJ:
and in weirder news, Libya have taken a 10 per cent stake in Wienerberger, the Austrian brick maker after it launched a €326m cash call.
NH:
Libya eh. Can’t keep out of the news at the moment.
MJ:
Why they are going in for a brick maker is beyond me
MJ:
But who am I to question Mr Gaddafi’s judgement.
MJ:
Suppose we should also chuck in the fact the Liverpool have got a new sponsor
NH:
So Carlsberg have pulled out and Standard Chartered have come in for four seasons.
NH:
don’t what’s worse for your health
NH:
drink or investing in banks
NH:
I will take the booze
MJ:
So what are saying Neil, that they shoul;d ban bank advertising on football shirts?
NH:
yeah, at least as dangerous as drink
NH:
more so
NH:
ban them
MJ:
Well Liverpool haven’t said how much they flogged it for, only that it is “the largest commercial agreement” in the history of Liverpool FC
MJ:
Rafa will no doubt be chuffed
NH:
Right, the extra dosh will allow him to spend even more money on mediocre full backs and then complain that the owners won’t give him enough cash.
MJ:
Hm, we should probably leave that seeing our bias.
MJ:
But I think that leveraged buy outs of premier league football clubs will be seen as loopy in a couple of years
MJ:
They are rooted in the idea that the Premier League “brand” will forever be the most lucrative in world football
MJ:
But, as we saw in the 80′s and 90’s, these things change with a fair bit of regularity
MJ:
If the Sky money goes, so does the Gillett and Hicks investment.
NH:
And the new UK tax regime does not help I imagine. Players don’t like that one bit. Liverpool should know – didn’t Xabi Alonso say the other day that was one of the main reasons for him ditching Anfield.
MJ:
He did indeed
NH:
good point Tuna
NH:
don’t tell the Uzbek
NH:
we need his cash
11:53AM
NH:
Right
NH:
so what else is moving today
NH:
Looks IMI, which we tipped as a takeover target a while back
NH:
is on the march again
NH:
this time thanks to Citi
NH:
Upgrade to Buy — We upgrade IMI to Buy from Hold. Recent strong 1H09 results
suggest that demand is stabilizing and we now see 2009E EPS as the likely trough
(rather then our previous 2010E forecast). Despite recent strong share price
performance we see further upside potential and our revised target price is £5.50
(previously £2.70).
suggest that demand is stabilizing and we now see 2009E EPS as the likely trough
(rather then our previous 2010E forecast). Despite recent strong share price
performance we see further upside potential and our revised target price is £5.50
(previously £2.70).
NH:
2009 Trough — Demand appears to have stabilized for IMI in 2Q09. There is likely
to be some 2H09/2010 softening in Indoor Climate and Severe Service. However,
the level of any such weakness looks set to be less pronounced than previously
anticipated and in areas such as Fluid Power (which has already seen revenues fall
organically by 36% in 1H09) the next move looks set to be upwards. While we do
not expect a rapid rebound in overall profitability the implication is that 2010E EPS
should show some progress versus 2009E. After the strong 1H09 report we
upgrade slightly our previously upper end of the range 2009E EPS and we raise our
2010E EPS by 29%, 2011E by 24%.
to be some 2H09/2010 softening in Indoor Climate and Severe Service. However,
the level of any such weakness looks set to be less pronounced than previously
anticipated and in areas such as Fluid Power (which has already seen revenues fall
organically by 36% in 1H09) the next move looks set to be upwards. While we do
not expect a rapid rebound in overall profitability the implication is that 2010E EPS
should show some progress versus 2009E. After the strong 1H09 report we
upgrade slightly our previously upper end of the range 2009E EPS and we raise our
2010E EPS by 29%, 2011E by 24%.
NH:
Valuation Supportive — Based on our revised forecast of a trough EPS of 38p, IMI
is trading on a P/E of only 12x 2009E, attractive versus our UK Engineering
coverage on 25x2009E and 15x 2010E. IMI is actually trading on only 8.5x 2008A
EPS (a proxy for peak) versus our average Pan-European coverage on 11x 2008A.
IMI’s long term average 12 month forward P/E is 12x – applying this to 2011E EPS
(a proxy for more “normal” trading) and then discounting it back to today supports
our target price of £5.50. At this level a dividend yield of 3.8% would remain
supportive and sit comfortably within its historic trading range.
is trading on a P/E of only 12x 2009E, attractive versus our UK Engineering
coverage on 25x2009E and 15x 2010E. IMI is actually trading on only 8.5x 2008A
EPS (a proxy for peak) versus our average Pan-European coverage on 11x 2008A.
IMI’s long term average 12 month forward P/E is 12x – applying this to 2011E EPS
(a proxy for more “normal” trading) and then discounting it back to today supports
our target price of £5.50. At this level a dividend yield of 3.8% would remain
supportive and sit comfortably within its historic trading range.
IMI (IMI:LSE): Last: 472.20, up 17 (+3.73%), High: 479.80, Low: 460.30, Volume: 1.20m
11:54AM
NH:
Right
NH:
Miles what the world’s new carry currency doing
MJ:
Well dollar index is actually up today by 0.5 per cent
MJ:
Gainst the GBK the dolar is also up to $1.6543
NH:
hmmm
NH:
Right
NH:
I did think that we were going to have a special guest appearing on today’s show
NH:
one who had some pretty strong views to share with us
PM:
Hello
NH:
ah
NH:
he’s here
NH:
the bear is back
NH:
Murph
NH:
hello
PM:
Not quite sure i remember how this thing works
MJ:
Like magic
MJ:
Hi Paul
NH:
11.57
NH:
Murph
NH:
you are on both sides of the chat
NH:
comments
NH:
and writing
NH:
we are confused
PM:
Yeah sorry
PM:
will stay here
PM:
If im welcome
NH:
you are
NH:
but one thing
PM:
Couldnt get on the machine
NH:
that short position
PM:
Kids doing last minute home work
NH:
we are worried
NH:
market keeps rising
PM:
Anyway, my machine is brokenshowing Footsie somewhere near 5k
PM:
Wot?
NH:
no
NH:
it is not broken
NH:
it is working
NH:
was above 5,000 last week
PM:
The market is nuts
PM:
I’m just glad im short
NH:
We are short
NH:
and
PM:
remember Draaismaland — the original fantasy world?
Draaismaland – a warm and happy place, home of the former Super Bull, Teun Draaisma of Morgan Stanley. Sadly, it turned out to be make-believe
NH:
yep
PM:
It was the idea that if the stock market could wear the bit
PM:
hit even
PM:
applied back in the summer of 2007
PM:
then it could take anything
PM:
And we would have a new cult of the equity
PM:
Well it seems to have arrived, two yars late
PM:
years even
NH:
it does
PM:
Kraft bidding for Cadbury?
NH:
indestructable market
PM:
Which joker made that up?
NH:
true
NH:
£10.2bn deal
PM:
yeah i know
PM:
Why?
NH:
you’d better get used to it Murph
PM:
Why should Kfraft take over Cadbury
NH:
this is the new normal
PM:
I like Cadbury
PM:
Cheese doesnt go with chocolate
NH:
anyway, how’s NY?
PM:
NY is NY
PM:
I dont kow how they had a banking crisis out here
PM:
Banks are stuck in the 80s
NH:
what in terms of paper work
PM:
People keep asking me for checks
PM:
I say , wot, checks an dbalances
PM:
They mean those paper things you write out with a pen
NH:
really
NH:
they still use them
PM:
ANd there are so many rules
PM:
And you have to bribe everyone
NH:
even John Lewis has stopped that
PM:
It’s worse than africa here
NH:
bribes??
NH:
tips you mean surely
PM:
Yeah — bought a bed yesterday
PM:
Had to brive th
PM:
bribe the doorman to get it in the lift
PM:
literally
NH:
ha
NH:
other than that
PM:
“You can’t deliver large goods at the weekend
NH:
going well?
PM:
llo?
PM:
hellow
NH:
Ah, an Englishman in New York.
PM:
Hello even
PM:
Sorry, where’s Miles — i feel ive shouldered him out of the chat
MJ:
No no – I am having a good time reading you guys
MJ:
Feels like the old days
PM:
Food very good here, tho
PM:
If you can afford it
PM:
People told me NY cheap.
PM:
t’s cheap if you are taking taxis or buying energy
PM:
Otherwise it is ruinously expensive
NH:
oh dear, this isn’t going well is it
NH:
this overseas posting
NH:
is there anything you like?
PM:
Oh, also fine if you are buying clothes
PM:
But food etc is HUGELY expensive
MJ:
I hope you hedged your currency exposure
PM:
general living coss
PM:
bribing people
PM:
etc
PM:
expensive
PM:
=HB — have had some stunning steaks
NH:
so it’s like living in W1 or something?
PM:
Saw Al Pacino btw
MJ:
wow
MJ:
What was he doing?
PM:
Yeah, was having dinner in a place called Cafe Luxembourg
PM:
which i recommend
NH:
will google that
PM:
And the kids saw the filming of Gossip Gilrl
PM:
Oh
PM:
and saw…
PM:
The President
NH:
President of what?
PM:
Obama had been at the Walter Cronkite memorial
PM:
Repsect Neil
NH:
ah
PM:
You have to call him “The President” out here
PM:
And he drove past me, waving
MJ:
At you?
PM:
It was rather thrilling, actually
NH:
Okay, I can’t spend the rest of the day chatting with our overseas correspondent. I have things to do.
NH:
like checking out some funny small cap things called Kopane Diamonds
PM:
Made me feel sorry for Britian, having a clapped out government
NH:
Kopane Diamonds Offered $75M For Stake In Liqhobong – Source
PM:
Oka
PM:
fair enough
MJ:
Way to spoil the party Neil
PM:
I will go — speak later
NH:
you guys chat
NH:
I must dash
MJ:
We should probably call it a day
MJ:
Paul must be up at some godforsaken hour
NH:
good to have you back Murp
NH:
and Miles
NH:
it is 7.00am in NY
NH:
you and the girls are in the office by then
MJ:
Right – supose not too bad then
MJ:
OK – well we are off
NH:
see you tomorrow
NH:
thanks for joining us
MJ:
And thanks for all the comments
MJ:
Bye
NH:
bye