Markets live chat transcript for the chat ending at 12:09 on 21 Sep 2009. Participants in this chat were: Bryce Elder (BE) Miles Johnson, FT (MJ)
BE:
Good morning
BE:
And welcome to Markets Live
BE:
FT Alphaville’s daily wander round the markets
BE:
Joining me today is Miles
MJ:
Hi
MJ:
Lots ot talk about today
MJ:
RBS, BHP, Tullow, Wellstream …
MJ:
So, where do you want to start?
BE:
Hang on there.
BE:
There’s a story breaking that we have to address.
BE:
A story from inside FT Towers itself
MJ:
Eh?
BE:
They’ve gotten rid of all the old sofas from the reception area.
MJ:
Er … What?
BE:
The low-slung Pieff leather jobs.
BE:
They were getting a bit tired, but they had character.
BE:
But as of this morning they’ve been replaced by Corbousier copies.
BE:
Dull black and chrome.
BE:
A DFS job lot.
MJ:
What on earth are you talking about?
BE:
Look, this is important.
MJ:
No it’s not. It’s not even slightly important
BE:
You might think so. But the old sofas are worth £1,295 each
BE:
Look
BE:
And there was, I’d guess, at least a dozen of them in reception
BE:
So that’s about £15,000 worth of sofa.
MJ:
I see. Not much gets past you
MJ:
So where have they gone?
BE:
Onto Ebay, hopefully.
BE:
With that kind of cash we could afford some decent computers.
MJ:
Now you’ve slandered both the office managers and the IT department, can we move onto the market now?
BE:
I guess so.
11:08AM
BE:
Wider market, Miles?
MJ:
We are down
MJ:
For the first day in seven
MJ:
FTSE off 41 points to 5131
BE:
And why?
MJ:
Why indeed
MJ:
Similar story to when the index was rising all last week really
MJ:
Just reversed
BE:
Great.
BE:
Very profound.
BE:
Miners leading us down, right?
MJ:
Yup, and metals prices are a bit softer
MJ:
Dollar is stronger overall
MJ:
Which obviously has an impact there
BE:
So – it’s all a bit of a Monday market.
BE:
Let’s move on to something more interesting.
11:11AM
BE:
So what have you been scratching around in this morning Miles?
MJ:
Well, talking of miners, we have a fair bit of mining M&A speculation going on
MJ:
Quite dizzying in fact
BE:
(Bob Pesto – settle down.)
BE:
Do share.
MJ:
Hmm… where to start
MJ:
Well, Anglo came out on Sunday to deny a story in the Observer that it was going to request a put up or shut up order from Xstrata
MJ:
Then this morning we have the Independent reporting that Mick and co are getting fed up and are likely to walk away in the coming weeks
MJ:
Which itself comes off the back of a rather good mining sector consolidation note that came out of BarCap
MJ:
And that note was written because of an article in the WSJ
MJ:
suggesting BHP Billiton has amassed an $18bn war chest it is desperate to splurge
BE:
Hold on, hold on. This is all getting a bit confusing.
MJ:
You’re telling me
MJ:
Someone writes something speculative
MJ:
which is followed by someone writing another speculative piece speculating about more speculation
BE:
Sounds like journalism to me.
MJ:
Anyways, the WSJ piece was a goodie, so I should put some of that up
MJ:
LONDON — BHP Billiton, the world’s largest miner, has built up about $18 billion in cash during the last year and expects to use some of it, along with additional borrowings, to acquire large rivals, possibly setting in motion a new round of acquisitions in the mining sector.
BHP, which launched the last major cycle of industry mining mergers when it went after its chief rival, Rio Tinto in 2007 with a $68 billion bid, said it has identified “four or five opportunities”, all large mining, oil or gas companies, or assets in those sectors, more likely in mining. It would expect to make a move within the next 12 months.
BHP, which launched the last major cycle of industry mining mergers when it went after its chief rival, Rio Tinto in 2007 with a $68 billion bid, said it has identified “four or five opportunities”, all large mining, oil or gas companies, or assets in those sectors, more likely in mining. It would expect to make a move within the next 12 months.
MJ:
“We have no pressure to do it. But I can tell you we have done a lot of work,” said BHP’s Chief Commercial Officer, Alberto Calderon, who is spearheading the company’s acquisitions efforts.
Mr. Calderon said that BHP has set aside about $10 billion this fiscal year, which began July 1, for development of new projects and expansion of existing ones.
Mr. Calderon said that BHP has set aside about $10 billion this fiscal year, which began July 1, for development of new projects and expansion of existing ones.
MJ:
The question on everybody’s lips is obviously what these “four or five opportunities” BHP has identified are
BE:
You were saying BarCap had done a good note on this?
MJ:
Well it certainly is comprehensive
MJ:
Goes through every possible target, giving a sort of likelihood mark to each
BE:
And what is the take-away?
MJ:
(@ Rosencruz – that is ENRC not Vale, though they were said to have taken a look)
MJ:
Well for starts BarCap play down any chance of a white knight bid from BHP for Anglo
MJ:
And, somewhat gallingly for Xstrata, they say its assets aren’t really up to scratch to justify the premium it would have to pay
BE:
Then there is the Glencore stake, and the agreements it has with XTA which it wouldn’t be keen to give up. Sounds like fantasy M&A to me.
MJ:
It is really
MJ:
But in an informative way. Here is the bit on Anglo
MJ:
Anglo American
It is possible that Anglo American approached BHP as a potential white knight after Xstrata proposed a nil-premium merger of equals with Anglo in June 2009 (Xstrata press release, Approach to Anglo American, 21 June 2009). Based on our analysis, Anglo American’s portfolio includes some tier-one assets that would likely be highly desirable to BHP Billiton (the Los Bronces copper mine, a 44% stake
in the Collahuasi copper mine, a 33% stake in the Cerrejon coal mine, a 63% stake in Kumba Iron Ore, and a 45% stake, through DeBeers, in the Jwaneng and Orapa diamond mines). However, we believe an acquisition of Anglo American in its entirety does not make strategic sense for BHP at this time.
It is possible that Anglo American approached BHP as a potential white knight after Xstrata proposed a nil-premium merger of equals with Anglo in June 2009 (Xstrata press release, Approach to Anglo American, 21 June 2009). Based on our analysis, Anglo American’s portfolio includes some tier-one assets that would likely be highly desirable to BHP Billiton (the Los Bronces copper mine, a 44% stake
in the Collahuasi copper mine, a 33% stake in the Cerrejon coal mine, a 63% stake in Kumba Iron Ore, and a 45% stake, through DeBeers, in the Jwaneng and Orapa diamond mines). However, we believe an acquisition of Anglo American in its entirety does not make strategic sense for BHP at this time.
MJ:
And Xstrata
MJ:
Xstrata
Xstrata is one of our top picks in the mining sector as the company has substantial financial and operating leverage and has high exposure to our preferred commodities (especially copper and coal, which combined account for approximately 80% of the company’s EBITDA). Furthermore, on our estimates, Xstrata shares are very inexpensive (9.3x 2010E P/E, 5.6x 2010E EV/EBITDA) relative to
shares of most other miners in our coverage. However, we believe that Xstrata has very few assets outside of its world class coal business that would be attractive to BHP. Consider the following factors:
Copper business is relatively high cost: Most of Xstrata’s copper assets sit on the top half of the cost curve, based on our alysis, and are therefore unlikely to meet BHP’s definition of “tier-one”. On the other hand, the company owns stakes in the high quality Antamina (as does BHP), Alumbrera, and Collahuasi mines, all of which we consider to be relatively high quality.
In addition to these mines, and unlike BHP, Xstrata also has several large copper mine projects (Antapaccay, El Morro, El Pachon, Freida River, Las Bambas, and Tampakan). These projects are mostly relatively high risk and likely to have high capital costs but may be somewhat appealing to BHP as the company believes high cost, high risk copper projects will need to be developed to balance the market.
Xstrata is one of our top picks in the mining sector as the company has substantial financial and operating leverage and has high exposure to our preferred commodities (especially copper and coal, which combined account for approximately 80% of the company’s EBITDA). Furthermore, on our estimates, Xstrata shares are very inexpensive (9.3x 2010E P/E, 5.6x 2010E EV/EBITDA) relative to
shares of most other miners in our coverage. However, we believe that Xstrata has very few assets outside of its world class coal business that would be attractive to BHP. Consider the following factors:
Copper business is relatively high cost: Most of Xstrata’s copper assets sit on the top half of the cost curve, based on our alysis, and are therefore unlikely to meet BHP’s definition of “tier-one”. On the other hand, the company owns stakes in the high quality Antamina (as does BHP), Alumbrera, and Collahuasi mines, all of which we consider to be relatively high quality.
In addition to these mines, and unlike BHP, Xstrata also has several large copper mine projects (Antapaccay, El Morro, El Pachon, Freida River, Las Bambas, and Tampakan). These projects are mostly relatively high risk and likely to have high capital costs but may be somewhat appealing to BHP as the company believes high cost, high risk copper projects will need to be developed to balance the market.
MJ:
Nickel business probably not attractive to BHP: We believe that BHP does not have a positive view on the outlook for nickel prices and may consider its own nickel business to be non-core. We are not convinced that BHP would be interested in Xstrata’s nickel mines, including the company’s Koniambo nickel project in New Caledonia.
Platinum business probably not attractive to BHP: Although Xstrata’s platinum business is relatively small, with estimated total PGM production of 237k ounces in 2009, BHP is probably not interested in this business due to serious operating risks and health and safety issues in platinum mining. We also do not see any reasonable strategic reason for BHP to own Xstrata’s
25% stake in Lonmin.
High premium necessary: Despite the strong performance in recent months, Xstrata’s share price is still 61% below its high of 2008. In our view, we are in the midst of a synchronized global economic recovery. We would not expect Xstrata to sell itself at this point in the cycle unless offered a very high premium.
Glencore’s stake and marketing rights: BHP has its own marketing business and is unlikely to offer marketing rights for any of its production to Glencore. In this case, Glencore may be very reluctant to sell its 34% stake in Xstrata unless being offered a very high premium.
Platinum business probably not attractive to BHP: Although Xstrata’s platinum business is relatively small, with estimated total PGM production of 237k ounces in 2009, BHP is probably not interested in this business due to serious operating risks and health and safety issues in platinum mining. We also do not see any reasonable strategic reason for BHP to own Xstrata’s
25% stake in Lonmin.
High premium necessary: Despite the strong performance in recent months, Xstrata’s share price is still 61% below its high of 2008. In our view, we are in the midst of a synchronized global economic recovery. We would not expect Xstrata to sell itself at this point in the cycle unless offered a very high premium.
Glencore’s stake and marketing rights: BHP has its own marketing business and is unlikely to offer marketing rights for any of its production to Glencore. In this case, Glencore may be very reluctant to sell its 34% stake in Xstrata unless being offered a very high premium.
BE:
So if we believe Barcap, those can be pretty much ruled out.
BE:
So can Vale.
BE:
Who do they say BHP could actually go for then?
MJ:
Well there have been rumours about BHP having a look at Mosiac or Potash corp for ages
BE:
Uh oh.
BE:
Could this contribute to the strange trend among certain bandits over the past year to become overly preoccupied with the potash industry?
MJ:
MJ:
You’re not referring to K+S, Compass Minerals and all that malarkey are you?
BE:
Among others, yes.
MJ:
Well BarCAp do note that BHP management have appeared quite keen on potash recently
MJ:
See here
MJ:
Mosaic and Potash Corp of Saskatchewan
BHP Billiton management has recently discussed the company’s positive view on the outlook for potash. In some ways, potash is similar to iron ore in that the industry is highly consolidated and China is a large net importer. BHP currently does not produce any potash but considers its Jansen potash project to be a “potential mega mine”. This potential 8m tonne potash mine is unlikely to come online before 2015 and could cost $10bn to build, based on our estimates. Since BHP is not yet a producer of potash, synergy potential between BHP and either Mosaic or Potash Corp of Saskatchewan (POT) would likely be limited. We would not expect BHP to acquire either of these companies at a price that implies a premium that significantly exceeds the present value of the expected synergies to BHP. On the other hand, an acquisition at a modest premium, if possible, cannot be ruled out. In the case of Mosaic ($24bn market cap), Cargill owns a 64% stake. If Cargill wishes to monetize this stake, we would not rule out BHP as a potential buyer. In the case of POT ($29bn market cap), the company has large tier-one assets with significant growth potential in an industry where building new capacity requires a long ramp-up period and very high capital costs. We believe these would be attractive assets to BHP. Again, the key question here is probably price.
BHP Billiton management has recently discussed the company’s positive view on the outlook for potash. In some ways, potash is similar to iron ore in that the industry is highly consolidated and China is a large net importer. BHP currently does not produce any potash but considers its Jansen potash project to be a “potential mega mine”. This potential 8m tonne potash mine is unlikely to come online before 2015 and could cost $10bn to build, based on our estimates. Since BHP is not yet a producer of potash, synergy potential between BHP and either Mosaic or Potash Corp of Saskatchewan (POT) would likely be limited. We would not expect BHP to acquire either of these companies at a price that implies a premium that significantly exceeds the present value of the expected synergies to BHP. On the other hand, an acquisition at a modest premium, if possible, cannot be ruled out. In the case of Mosaic ($24bn market cap), Cargill owns a 64% stake. If Cargill wishes to monetize this stake, we would not rule out BHP as a potential buyer. In the case of POT ($29bn market cap), the company has large tier-one assets with significant growth potential in an industry where building new capacity requires a long ramp-up period and very high capital costs. We believe these would be attractive assets to BHP. Again, the key question here is probably price.
MJ:
And to round off this journey into fantasy M&A, another one they see as a possibility is a story you have been following for a while
BE:
Which is that then?
MJ:
BHP and Woodside Petroleum
BE:
Yawn.
BE:
We’ve been running that one up and down the flagpole for years.
BE:
Might happen, might not. Political risks, intransigent shareholders, etc etc etc
BE:
For the sake of completeness, we may as well have a read of Barcap’s thoughts
MJ:
According to BHP Billiton (Proposed DLC Merger Circular to Shareholders, April 2001), the company had discussions with Woodside
Petroleum in 2001 regarding a potential merger or other cooperation between the two companies. Since then, Woodside has often
been mentioned as a potential target for BHP as the companies would probably have significant synergies and BHP has clearly
indicated interest in this combination in the past. In addition, an acquisition of Woodside ($31bn market cap) would be large enough
that it would arguably be transformational to BHP’s petroleum business. When we consider BHP’s positive view on the outlook for
energy prices, the fact that BHP and Woodside have discussed a possible combination in the past, the synergy potential between these
two companies, and the size of Woodside, we believe that an acquisition of Woodside by BHP would be strategically sensible. One
caveat to this is that Shell owns a 34% stake in Woodside and may not be a seller unless offered a very high premium. Perhaps the
biggest hurdle to a BHP acquisition of Woodside would be price. We would not expect BHP to pursue what would clearly be a dilutive
and value-destructive acquisition.
Petroleum in 2001 regarding a potential merger or other cooperation between the two companies. Since then, Woodside has often
been mentioned as a potential target for BHP as the companies would probably have significant synergies and BHP has clearly
indicated interest in this combination in the past. In addition, an acquisition of Woodside ($31bn market cap) would be large enough
that it would arguably be transformational to BHP’s petroleum business. When we consider BHP’s positive view on the outlook for
energy prices, the fact that BHP and Woodside have discussed a possible combination in the past, the synergy potential between these
two companies, and the size of Woodside, we believe that an acquisition of Woodside by BHP would be strategically sensible. One
caveat to this is that Shell owns a 34% stake in Woodside and may not be a seller unless offered a very high premium. Perhaps the
biggest hurdle to a BHP acquisition of Woodside would be price. We would not expect BHP to pursue what would clearly be a dilutive
and value-destructive acquisition.
MJ:
Comprehensive, as I warned
BE:
Right.
BE:
Cheers for that.
11:25AM
BE:
To the ROTR: this is NOT “random bid suggestion day”
BE:
Please don’t say anything that might be misinterpreted, otherwise we’ll have to get the zapper out of its case
MJ:
And just to address somthign on the right regarding Accor Hotels
MJ:
There is an interesting special situation goign on there at the momeny
MJ:
On the back of this story from last month
MJ:
PARIS — French hotels and services company Accor SA said Thursday it may seek a split of its businesses into two separate companies, as it posted a €150 million ($214 million) net loss in the first half from restructuring costs and asset-impairment losses in addition to weak business in its hotels.
Accor said its board approved a proposal by Chairman and Chief Executive Officer Gilles Pelisson to assess the possibility of splitting the company into two separate businesses, which would mean separating Accor’s highly profitable vouchers, or services, division from its hotels operations. The announcement brings a long-standing issue to the table, as the idea has gained popularity among analysts and investors in recent months as a means to lift Accor’s share price.
It is also a sign of influence of Accor’s main shareholders — U.S. private-equity firm Colony Capital and French investment company Eurazeo, which together own 30% of the company and hold four of 12 board seats.
MJ:
The split has interetsing implications for the company’s debt and equity, but now is not really the place to talk about it
BE:
Agree.
BE:
Happy to pick up the theme in the Long Room though, if anyone’s keen.
11:29AM
MJ:
So Bryce, where to next?
BE:
Tullow Oil
BE:
Getting hit after Eni apparently decided it was too expensive.
Tullow Oil (TLW:LSE): Last: 1,148, down 31 (-2.63%), High: 1,164, Low: 1,137, Volume: 1.55m
BE:
This is from the WSJ over the weekend
BE:
Eni has decided it would be too costly to try to take over Tullow Oil after studying the company and its African oil development prospects, a person familiar with the matter said on Friday.
BE:
Eni is interested in buying stakes in Tullow’s oil blocks and partnering to build a proposed $3bn pipeline and a refinery, the source said.
MJ:
Did anyone really expect Eni to bid?
BE:
No-one we talked to, certainly.
BE:
Most people agreed it was too big a gamble, even with the oft-discussed potential for a grand slam in Africa.
BE:
And there was the news on Friday that Tullow’s chairman Pat Plunkett had cashed in a quarter of his stake for £3.1m
BE:
Which is not generally the kind of thing you do when in talks about a potential takeover.
BE:
UBS, however, continues to punt the idea that China might come in for them some time.
BE:
We agree that ENI is probably just interested in an asset acquisition (and not a corporate deal) and their interest lies in Uganda where Tullow is a) looking to farm down (reduce equity) in its licenses and b) needs a partner to help build a refinery and pipeline. We think newsflow on a Ugandan deal is likely before the end of the year. In our view, Tullow remains an M&A candidate at the group level, particularly as its West African offshore strategy continues to gain success, but the National oil companies and the Chinese in particular are most likely bidders.
11:33AM
BE:
Miles wants to mention gold.
MJ:
It has recently dropped back below $1000 a troy ounce
MJ:
Anyways, moving swiftly back on topic
BE:
Ok then – we can wrap up the oil and gas theme
BE:
With a look at Wellstream
BE:
Which had a big run last week on bid rumours
MJ:
And today?
BE:
Today, this
BE:
Announcement from Wellstream Holdings plc
Wellstream Holdings plc announces that its Chief Executive Officer, Gordon Chapman, has recently undergone surgery and is now recovering at home.
BE:
During his absence, which is anticipated to be until January 15, 2010, Mr Alasdair MacDonald is appointed to the Board as a director and Acting Chief Executive Officer, reporting to John W Kennedy, Chairman.
There are no matters to be disclosed under LR 9.6.13.
MJ:
So that’s taken the wind out of the bid theories
BE:
Indeed it has.
BE:
Chapman’s hugely important at the group, apparently.
BE:
Been there since 1990, including a spell employed by Candover and through the IPO.
BE:
The read is that anything big happening rather depends on him.
MJ:
Any comment on this?
BE:
Not really. Just a quick line from Citigroup’s Kenan Najafov to state the obvious
BE:
We expect the temporary absence of the influential CEO to relieve (or postpone) some of the recent M&A speculation/premium, thus potentially offsetting some of recent increases in the share price following weak 1H09 results and a poor outlook for the next 12-18 months. We do not anticipate a
major risk to the company’s operations, as Wellstream seems a well-functioning company with its processes and systems in place.
major risk to the company’s operations, as Wellstream seems a well-functioning company with its processes and systems in place.
BE:
The Acting CEO’s biography has not been published yet, but we are aware of Mr Alasdair MacDonald, Senior Vice President Corporate Development.
We wish Mr. Chapman a swift recovery.
We wish Mr. Chapman a swift recovery.
MJ:
Right. What about on the bid speculation?
BE:
Well, Evolution put out a line before the news on Chapman became known
BE:
The rumours of a Saipem bid for Wellstream do not want to lie down – the reason is there is a strong industrial logic for Saipem to complete such a deal. Firstly there is the completion of a product offering for subsea installation – flexible pipes are a gap in a portfolio which includes rigid pipes and deep water installation capability. Secondly, the “local content” of a manufacturing plant in Brazil and a close relationship with Petrobras would put Saipem on a par with Technip in what is likely to be the largest deep offshore development market in the world for the next 10 years. An 800p bid implies 10x 2012 earnings – not too much of a stretch.
BE:
And here’s a very long note from Cazenove from Friday.
BE:
Beware – this is VERY LONG – so apologies to all who don’t give a stuff about flexible pipes.
BE:
Shares for Wellstream have risen by 38% since 27 August – the stock now trades on a 2010E PER of 18.5x – a 40% premium to the sector average. It appears that much of the share price outperformance has been due to bid speculation with Saipem [SPMI.MI, €19.57, IN-LINE] now mentioned as a possible acquirer (source – FT Alphaville). Perhaps more rational would be Subsea Umbilicals Risers and Flowlines (SURF) contractors that have existing exposure to the flexibles market (such as Acergy and Subsea7)
BE:
Saipem’s vessels are dedicated to rigid pipe lay which has no overlap with Wellstream’s flexible product. We understand that Subsea7 bid for Wellstream prior to the IPO (April 2007, priced at 320p), at a much lower price, and we believe it is very unlikely to reappear as a suitor. Acergy owns 49% of NKT Flexibles – one of Wellstream’s two competitors (the other being Technip), and thus also appears unlikely to bid, in our view.
BE:
Saipem management has been quite vocal this year about its interest in increasing exposure to the Brazilian deep water – this is, after all, a huge growth opportunity within the SURF market, and installation contracts can be very profitable. We have assumed that Saipem’s focus would remain focused on rigid risers and flowlines, and on installation capacity i.e. vessels. Saipem has indicated a desire to build a large and versatile deepwater development vessel specifically for the Brazilian ultra-deepwater market (primarily the subsalt), but we understand the investment would not precede a long term contract with Petrobras. Such a vessel or vessels could be owned through a joint venture with Petrobras. Saipem is currently building a deep water field development vessel (FDS2), at an expected cost of €380m. This vessel will be used for global operations.
BE:
With respect to its strategy for Brazil, Saipem has often highlighted the advantages of using rigid (as opposed to flexible) risers and dry trees on ultradeepwater developments – this allows much more efficient re-entry of wells for workovers and also larger diameter tubing which is particularly beneficial in very high production wells (see attached report for more details). Even so we have seen an increased focus on the benefits of bundling products and services. We note that this was the primary driver behind Baker Hughes’ acquisition of BJ Services announced last month.
BE:
Wellstream currently lacks any significant installation capacity. It relies on a joint venture with
Seastream (which has no capability for deepwater projects), although the vast majority of
Wellstream’s pipe is sold directly to oil companies and installed by one of Wellstream’s
competitors. The apparent weakness of this position has been highlighted recently by Wellstream outlining plans to invest in a large vessel dedicated to the installation of flexible pipe – no such vessel exists today. Wellstream has, of course, not outlined this strategy in such a defensive light, and an acquisition of Wellstream would no doubt necessitate a vessel building programme.
Seastream (which has no capability for deepwater projects), although the vast majority of
Wellstream’s pipe is sold directly to oil companies and installed by one of Wellstream’s
competitors. The apparent weakness of this position has been highlighted recently by Wellstream outlining plans to invest in a large vessel dedicated to the installation of flexible pipe – no such vessel exists today. Wellstream has, of course, not outlined this strategy in such a defensive light, and an acquisition of Wellstream would no doubt necessitate a vessel building programme.
BE:
The design that Wellstream has in mind is a dual deck vessel in which 28 reels can be stored and transported on the first level and virtually the entire package of subsea production equipment (subsea trees, manifolds etc) can be stored on the second. For remote fields (such as West Africa were Wellstream currently has limited exposure) we believe the economic advantage of using a sngle large vessel can be material. There are a number of subsea vessel owners (such as Global ndustries) that have the necessary execution capabilities to operate such a vessel. We estimate a vessel cost of c. £100-150m.
BE:
While we see no synergies to Saipem on Wellstream’s current manufacturing business, the ability to provide a packaged installation capability appears to match and likely exceed Wellstream’s own ambitions. We have sensed nervousness in the market at the prospects of Wellstream manoeuvring in to the more capital intensive and (usually) more competitive installation segment – we believe the reverse move, by one of the world’s most capable offshore contractors would not be viewed in the same way. Such a deal would no doubt dilute near term earnings for Saipem.
BE:
However such a deal would elevate Saipem relative to its arch rival Technip in the SURF market, and support longer term growth opportunities in Brazil.
BE:
In its Q2 2009 results Saipem reported net debt of €2,751m – a net debt/equity of 92%. We do not see Saipem having any difficulty raising capital, but note that ENI owns 43%. Other potential acquirers could be other subsea equipment manufacturers – particularly those
involved in the design of subsea production trees and manifolds and associated equipment. Here we would include FMC Technologies and Cameron International – both US listed companies.
involved in the design of subsea production trees and manifolds and associated equipment. Here we would include FMC Technologies and Cameron International – both US listed companies.
BE:
We recently downgraded Wellstream to Underperform recently on the back of a significant
valuation premium which we felt did not reflect the level of earnings risk in 2010.
Our negative stance on the stock does not, however, account for our M&A ranking where we
placed Wellstream in top position – this is the best way and one of the few ways to play potential consolidation in the European oilfield services sector, in our view.
valuation premium which we felt did not reflect the level of earnings risk in 2010.
Our negative stance on the stock does not, however, account for our M&A ranking where we
placed Wellstream in top position – this is the best way and one of the few ways to play potential consolidation in the European oilfield services sector, in our view.
MJ:
Wow. That was a long note. Thanks for that. We should give the readers a minute to takw that all in I think
BE:
Sure.
11:40AM
BE:
LorcanRK: what’s this about Lex on Bloomberg?
BE:
The assimilation box is on the other side of the office.
BE:
Miles is just running off to check now.
MJ:
Right I’m back
BE:
And the Lex people are kept in a seperate area of the office, to save them from being sullied by our newsish ways.
BE:
Miles – anything?
MJ:
Well, no. Not that I could find
MJ:
Bob Pesto – Bryce is weilding the zapper with menace
11:44AM
MJ:
Right we should give RBS’ latest plan a mention
BE:
We should
Royal Bank of Scotland Group (RBS:LSE): Last: 53.20, down 3.1 (-5.51%), High: 56.90, Low: 52.30, Volume: 128.16m
MJ:
Market not very happy
MJ:
As you can see
MJ:
No official comment from RBS yet about the share placing
BE:
That’s after reports RBS has been sounding out investors on a £3-4bn share issue.
MJ:
Royal Bank of Scotland is to consider a £3bn-£4bn share issue to reduce the stake it would hand to the government for joining its toxic assets insurance scheme and has approached its biggest investors about the idea.
Plans are “tentative” and Stephen Hester, RBS’s chief executive, is still “putting out feelers” to its shareholders about a “modest-sized” share issue, according to a person familiar with the situation.
BE:
That was following a Sunday Times story saying things similar,
MJ:
STRNS had it very small though. Not even on the front. I wonder why?
BE:
Hm.
MJ:
Will remain a mystery me thinks
BE:
Hm.
MJ:
Anyways, Bryce I am sure the readers would like to see a bit of comment on RBS
BE:
Hm.
BE:
This is from Jason Napier at Deutsche Bank.
BE:
These reports seem
credible to us, for the following reasons: (1) RBS management have advised
the market that the company expects to sign up to the Asset Protection
Scheme largely as announced in March 2009 (and in contrast to Lloyds
Banking Group which on Friday confirmed that it was looking at APS alternatives);
(2) The March announcement has RBS issuing £19.5bn of B shares
to government to recapitalise the bank and help pay for the £6.5bn APS fee;
(3) These B shares were to be struck at 50p a share and convert to ordinary
equity if the RBS price remains above 65p for an extended period; (4) Should
this conversion take place, government would own 83% of the bank, reducing
free float below the 25% requirement, raising the need we believe
for a UK Listings Authority waiver in order for RBS to remain listed OR the
placement of 7bn shares to reduce government holdings to 75%; (5) At the
current price, a 7bn share placement amounts to £3.9bn in proceeds.
credible to us, for the following reasons: (1) RBS management have advised
the market that the company expects to sign up to the Asset Protection
Scheme largely as announced in March 2009 (and in contrast to Lloyds
Banking Group which on Friday confirmed that it was looking at APS alternatives);
(2) The March announcement has RBS issuing £19.5bn of B shares
to government to recapitalise the bank and help pay for the £6.5bn APS fee;
(3) These B shares were to be struck at 50p a share and convert to ordinary
equity if the RBS price remains above 65p for an extended period; (4) Should
this conversion take place, government would own 83% of the bank, reducing
free float below the 25% requirement, raising the need we believe
for a UK Listings Authority waiver in order for RBS to remain listed OR the
placement of 7bn shares to reduce government holdings to 75%; (5) At the
current price, a 7bn share placement amounts to £3.9bn in proceeds.
BE:
No changes to forecasts, stock view
We would expect a placing of this kind to succeed given a recovering bank
equity market, fairly illiquid RBS share (~150m shares traded a day) and need
for investors to build stakes in a very large bank in the benchmark (diluted
market cap is £52bn). However, the potential placing of these shares, even
at a substantially better price than was announced, would not materially
impact our forecasts. We believe the core RBS bank can earn 10p of EPS,
but we expect a very significant drag from non-core operations until late
2010 at least. Hold.
We would expect a placing of this kind to succeed given a recovering bank
equity market, fairly illiquid RBS share (~150m shares traded a day) and need
for investors to build stakes in a very large bank in the benchmark (diluted
market cap is £52bn). However, the potential placing of these shares, even
at a substantially better price than was announced, would not materially
impact our forecasts. We believe the core RBS bank can earn 10p of EPS,
but we expect a very significant drag from non-core operations until late
2010 at least. Hold.
BE:
And this is from Carla Antunes Da Silva at JP Morgan
BE:
Who, incidentally, mailed out the note on Sunday.
BE:
Which deserves a hat tip.
MJ:
True dedication
BE:
In this note we review 3 main issues;
• RBS’ strategic plan – With 40 new divisional targets and additional Group
targets we see some of these as easily achievable, whereas others are more
challenging. We expect retail RoE to beat the min 1% tgt in 2011E (JPM
4.5%), but given increasing regulatory capital requirements we expect GBM
to fall short of its 15% 2011E profitability target (JPM 12.8%). At the
Group level we welcome the restructuring and longer term, the run-off of
non core should enable a structural improvement in the funding position.
Nevertheless, even in a more positive economic environment we are shy of
the aspirational 15% RoE (JPMe 10%).
• RBS’ strategic plan – With 40 new divisional targets and additional Group
targets we see some of these as easily achievable, whereas others are more
challenging. We expect retail RoE to beat the min 1% tgt in 2011E (JPM
4.5%), but given increasing regulatory capital requirements we expect GBM
to fall short of its 15% 2011E profitability target (JPM 12.8%). At the
Group level we welcome the restructuring and longer term, the run-off of
non core should enable a structural improvement in the funding position.
Nevertheless, even in a more positive economic environment we are shy of
the aspirational 15% RoE (JPMe 10%).
BE:
Underlying earnings potential – With revenue contribution from GBM
(accounting for 40% of operating revenue 09-11E), we expect provisions to
peak in H1 2010E and an accumulated net attributable loss of £16bn for
09/10E and for RBS to break even in 2011E. On a through-the-cycle basis
we reach 4.4p of earnings in 2013E, although note that there are risks from
increased regulation (e.g. dynamic provisioning) and to a lesser extent, EU
sanctions.
(accounting for 40% of operating revenue 09-11E), we expect provisions to
peak in H1 2010E and an accumulated net attributable loss of £16bn for
09/10E and for RBS to break even in 2011E. On a through-the-cycle basis
we reach 4.4p of earnings in 2013E, although note that there are risks from
increased regulation (e.g. dynamic provisioning) and to a lesser extent, EU
sanctions.
BE:
To APS or not to APS – With Lloyds looking to change its terms and
participation in this note, we have looked at similar scenarios for RBS. RBS
seems intent on maintaining its terms, there are likely fewer issues from a
competition point of view and even without the Asset Protection Scheme,
the government stake would still be well above 50%. On our estimates, if
the APS were to be completely removed, then we would expect a
challenging £22.0-28.5bn of capital needs to be raised. It could also explore
the impact of a preference share conversion, although we note this would
only partially plug the hole.
participation in this note, we have looked at similar scenarios for RBS. RBS
seems intent on maintaining its terms, there are likely fewer issues from a
competition point of view and even without the Asset Protection Scheme,
the government stake would still be well above 50%. On our estimates, if
the APS were to be completely removed, then we would expect a
challenging £22.0-28.5bn of capital needs to be raised. It could also explore
the impact of a preference share conversion, although we note this would
only partially plug the hole.
BE:
Conclusion – We increase our Dec 09 SOP-based PT to 38p (from 26p),
but with a fully diluted market cap back to Dec ‘06 pre crisis & pre
ABN levels, we remain UW. We expect reported NAV to trough at 40p
in 2010E.
but with a fully diluted market cap back to Dec ‘06 pre crisis & pre
ABN levels, we remain UW. We expect reported NAV to trough at 40p
in 2010E.
MJ:
Pakora Mix makes a good point, in that 3/4bn is peanuts in comparison to what they could have to ask shareholders in the long term
MJ:
A sticking plaster at best
BE:
Yeah
BE:
You have to think the main incentive to print new equity now is simply to see if they can.
BE:
If Lloyds does it, then RBS may as well.
MJ:
So we should be expecting a RNS from RBS in two weeks or so?
BE:
That’s a rather cynical way to look at it.
BE:
So: yes, probably.
11:54AM
BE:
Anything else to look at, Miles?
MJ:
While we are on banks
MJ:
JP Morgan produced a handy cheat sheet on the Basel Commitee’s recomendations for the G20 published last week
BE:
Anything that means not ploughing through the original is going to be a boon.
MJ:
My sentiments exactly
MJ:
So here is a brief excerpt
MJ:
Summary of 10 recommendations in Basel document:
1. National authorities should have appropriate tools to deal with financial institutions in difficulties.
2. Each jurisdiction to establish a national framework to coordinate the resolution of financial groups within its jurisdiction.
3. Convergence of national resolution tools.
4. Better co-ordination among national authorities in cross-border resolutions
5. Reduction of complexity and interconnectedness of group structures that are “too complex to permit orderly resolution”
6. Financial institutions to provide advance wind-down contingency planning.
7. Improved cross border information sharing.
8. Strengthened risk mitigation mechanisms (see key points above)
9. Authorities to have ability to delay operation of termination clauses, to transfer financial contracts in an orderly way.
10. Clarification of principles for exit from public intervention.
1. National authorities should have appropriate tools to deal with financial institutions in difficulties.
2. Each jurisdiction to establish a national framework to coordinate the resolution of financial groups within its jurisdiction.
3. Convergence of national resolution tools.
4. Better co-ordination among national authorities in cross-border resolutions
5. Reduction of complexity and interconnectedness of group structures that are “too complex to permit orderly resolution”
6. Financial institutions to provide advance wind-down contingency planning.
7. Improved cross border information sharing.
8. Strengthened risk mitigation mechanisms (see key points above)
9. Authorities to have ability to delay operation of termination clauses, to transfer financial contracts in an orderly way.
10. Clarification of principles for exit from public intervention.
BE:
Thanks for that.
11:57AM
MJ:
We will clearly have more G20 related shenanigans over the week
BE:
Great
BE:
That’s nearly as exciting as Davos
BE:
But for today, I guess we’re nearly done.
BE:
Just time to stick up this note on Marks & Spencer which is getting some attention.
Marks and Spencer Group (MKS:LSE): Last: 372.10, up 3.6 (+0.98%), High: 373.00, Low: 365.90, Volume: 1.58m
BE:
This is via SocGen
BE:
Update We raise our top-end-of-consensus current year PBT forecast by 10%, from
£596m to £654m (on a 53 week basis, 13% above £577m consensus on the same
basis). Like-for-like sales and gross margin assumptions are increased, partially offset
by higher operating costs. Soft 2-year comparatives in the key Christmas quarter and
firming UK consumer confidence combine to boost our expectations for UK like-for-like
sales in Q3 to end Dec, from -3% previously to +2%. At the same time, even the better
end of the companys existing gross margin guidance of -125bp now appears too
conservative, bearing in mind the companys cautious approach to General Merchandise
stock. Moreover, investment in lower food prices is now beginning to annualise. The
gross margin comparatives in H2 for General Merchandise are weak due to last years
Christmas Spectacular promotions. We now anticipate a 70bp fall in the UK gross
margin in the current year. If our forecasts are achieved, then we would expect higher
volume-related costs plus a normalised staff bonus of c.£35m to be paid, which is not
included in the companys cost guidance of -1% yoy.
£596m to £654m (on a 53 week basis, 13% above £577m consensus on the same
basis). Like-for-like sales and gross margin assumptions are increased, partially offset
by higher operating costs. Soft 2-year comparatives in the key Christmas quarter and
firming UK consumer confidence combine to boost our expectations for UK like-for-like
sales in Q3 to end Dec, from -3% previously to +2%. At the same time, even the better
end of the companys existing gross margin guidance of -125bp now appears too
conservative, bearing in mind the companys cautious approach to General Merchandise
stock. Moreover, investment in lower food prices is now beginning to annualise. The
gross margin comparatives in H2 for General Merchandise are weak due to last years
Christmas Spectacular promotions. We now anticipate a 70bp fall in the UK gross
margin in the current year. If our forecasts are achieved, then we would expect higher
volume-related costs plus a normalised staff bonus of c.£35m to be paid, which is not
included in the companys cost guidance of -1% yoy.
BE:
Impact Our year 2 PBT forecast is little changed at a high-end-of-the-range £673m.
Taking the annualisation of mortgage rate reductions and possible tax increases into
account, this is now based on flat LFL sales (versus +2% previously).
Target price & rating TP increased from 445p to 500p, still based on 16x P/E in
calendar 2010, representing a 30% premium to the UK FTSE 350.
Taking the annualisation of mortgage rate reductions and possible tax increases into
account, this is now based on flat LFL sales (versus +2% previously).
Target price & rating TP increased from 445p to 500p, still based on 16x P/E in
calendar 2010, representing a 30% premium to the UK FTSE 350.
BE:
Next events & catalysts Q2 sales due 30 September. Our forecasts are now -2.6% LFL
in General Merchandise (previously -3.2%) and -0.5% LFL in Food (previously -1.0%).
We believe the Christmas quarter (Q3, to end Dec, +2% LFL forecast) represents the
bigger newspoint for the stock, although anticipation of this may become priced in
ahead of the January trading statement. We expect the M&S Investor Day on 13 October
to flesh out some details of the 2020 plan, particularly with regard to supply chain and
systems investment, an integrated online/stores proposition and international.
in General Merchandise (previously -3.2%) and -0.5% LFL in Food (previously -1.0%).
We believe the Christmas quarter (Q3, to end Dec, +2% LFL forecast) represents the
bigger newspoint for the stock, although anticipation of this may become priced in
ahead of the January trading statement. We expect the M&S Investor Day on 13 October
to flesh out some details of the 2020 plan, particularly with regard to supply chain and
systems investment, an integrated online/stores proposition and international.
BE:
And we haven’t had time to visit small-cap corner, where our good friend Cadogan is taking a bit of a hit
MJ:
Are you sure you want to go there Bryce?
BE:
Probably not.
BE:
Will just cut and paste the news for anyone who has missed it.
BE:
Licence developments
Cadogan has been made aware of a resolution dated 26 August 2009 and published today on the web portal of the Ukrainian Government which supports a proposal by the Ministry for the Protection of the Environment to annul and transfer its special permits and licence interests with respect to Pirkovskoe, Zagoryanska, Bitlyanska, Monastyretske and Krasnoyilske to Naftogas of Ukraine, a state-owned oil and gas company, with effect from 23 September 2009. The Company has received no official notification of the resolution from any relevant authority.
Cadogan believes there is no legal basis for this action and is taking all available steps to defend its interests.
A further announcement will be made as appropriate.
Cadogan Petroleum (CAD:LSE): Last: 15.00, down 1.5 (-9.09%), High: 15.00, Low: 13.50, Volume: 601.45k
MJ:
Ouch
BE:
And I think that’s us done for today.
BE:
Very quiet start to Monday, so nothing raw to share
MJ:
Things tend to pick up as the week goes on
MJ:
Everything we are hearing this morning is too boring to share
MJ:
Hold on
MJ:
Breaking news
BE:
*DELL TO ACQUIRE PEROT SYSTEMS FOR $3.9 BILLION
BE:
It consultant
MJ:
Merger mondays, alive again eh?
BE:
Well, we’ve had one. Let’s not get carried away.
MJ:
Where now?
BE:
Lunch.
BE:
Thanks for all your comments.
BE:
Monkey – we’re still running all the ducks up the flagpoles for ML USA
BE:
Murph’s currently without an internet connection at home, so it’s a bit tricky for him at the moment.
BE:
But we’ll keep you updated
BE:
Dre: you’ll understand if we have no particular desire to waffle about Breakingviews beyond offering our sincerest congratulations both to Hugo and to Reuters on the reported deal.
MJ:
Right, bye everyone. Thanks for tuning in
BE:
And thanks for your comments.
BE:
Goodbye.
MJ:
Bye