Markets live chat transcript for the chat ending at 12:14 on 13 Nov 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)
NH:
and time for another edition of Markets Live
NH:
Miles returns from injury to take his place in the starting line up today
NH:
So Europe’s out of recession then
MJ:
but get the terminology right
MJ:
and GDP rose at an annualised rate of 0.4% in Q3
MJ:
and that was below expectations
MJ:
and I imagine it will have little impact on ECB policy
MJ:
because they are looking for stabilisation and then recovery before making any moves
NH:
but it still leaves the UK as the odd one out
NH:
any impact on the Euro?
MJ:
it’s weaker against sterling
MJ:
euro buys 0.89p at the moment
NH:
(Hello SilverFox at least someone has bothered to log in today)
MJ:
(I think we might have a copycat SF)
MJ:
this is really exciting
MJ:
up 9.3 points at 5285
MJ:
but in spite of that reading
MJ:
there is actually quite a bit going on this morning
NH:
obviously we have the BA/Iberia merger details
NH:
shall we do close the chat
NH:
and just do it on Skype
MJ:
We could have a special exclusive chat for SF I suppose
NH:
and his many relatives that are appearing
MJ:
Markets Live – fun for the whole family
NH:
any idea what the problem is?
NH:
we seem to be fine this end
NH:
we should get on with things
MJ:
and what a complex deal that is
MJ:
three different boards
MJ:
deal won’t complete for a year
MJ:
not under the jurisdiction of the UK Takeover Panel
MJ:
Iberia can veto the whole thing if they don’t like the outcome of the BA pension review
NH:
there’s a lot packed into the MOU
NH:
what are we going to call this thing??
NH:
and I am considering doing a Baberia
NH:
re-domiciling to Madrid to take advantage of the lower tax rate and the better weather.
NH:
been raining for the past 12 hours in London
NH:
in spite of the all the obstacles
NH:
the market seems to think the deal will go through
MJ:
although off their highs
NH:
Miles that short position
NH:
I thought you could only lose money on airlines being long
MJ:
But thats why were journos no?
MJ:
Always liable to blow up
NH:
this synergy target looks ambitious
NH:
given that the two airlines aren’t really going to be merged
NH:
both brands will be kept
NH:
as evidenced by the fact
NH:
that THERE IS NO NAME
NH:
staff will be handled locally etc
NH:
how the hell are they going to wring costs savings from that?
MJ:
but the figures are close to the estimates of most analysts
MJ:
here’s Merrill on the deal
MJ:
Management has indicated the potential combined entity could generate annual synergies c. €400mn (close to our initial estimate of £380mn/€425mn) by year five (slightly longer than our initial estimate). This is to include one third in revenue synergies (€133mn and close to our estimate £134/€150mn) with the remaining two thirds of synergies in costs (€267mn, close to our estimate £248/€278mn). Associated
costs are expected to be €350mn (below our estimate of (£400mn/€448mn). We
think it is worth noting other airline merged entities have surpassed original
conservative synergy targets (e.g. AF-KLM).
MJ:
Key details for the merger between British Airways (BA) and Iberia are as follows:
MJ:
-The deal is expected to be completed in late 2010.
-Synergies of €400m, which is just less than 3% of joint revenues (slightly below the Air France KLM deal). Discounted over five years, taxed and capitalised at 5x, we calculate this as c.42p per BA share and 55c per Iberia share (broadly as expected). Approximately one-third of the synergies are expected to be revenue- related (joint selling, network and revenue management benefits), with the
balance coming from cost synergies in areas such as IT, fleet, maintenance and back office functions. Implementation cash costs will be up €350m.
NH:
So synergies worth 42p a share
MJ:
MOU signed
British Airways and Iberia have announced this morning that they have
signed an MOU for a proposed merger. The deal will create a business with
15bn of revenues, 419 aircraft serving 205 destinations. It will be Europe s
3rd largest airline. The merger ratio is 55% BA, 45% Iberia broadly inline
with expectations. The merger is expected to be completed by early
November 2010.
400m synergies anticipated
Management anticipates 400m of synergies could be realised by year 5.
The cash cost of achieving these will be some 350m. Roughly a third of
synergies are expected to come from revenues; 2/3rds will come from cost
savings. We have included our merger model which will need some
updating but it shows pro-forma financials for BA-Iberia and then the
impact of the Iberia merger and the impact of an AntiTrust immunity deal
with American Airlines (also anticipated to be approved shortly).
MJ:
Pre-conditions and approvals required
There are a number of pre-conditions before they formally sign the merger
agreement in Q1. These principally relate to civil aviation authority approvals
and limited due diligence. The merger is subject to appropriate regulatory
and antitrust clearances and approval of shareholders and there is a bailout
clause if the BA pension scheme discussions become materially detrimental
to the economic premises of the proposed merger.
Merger will move returns back towards economic levels
Both BA and Iberia s returns (along with most of their peers) are currently
well below economic levels. The revenue environment appears to have
stabilised and both management teams have plans in place to cut costs. To
turbo-charge a return to economic returns we have long held that BA and
Iberia both need this merger and need the Antitrust immunity with American
Airlines. In the case of BA, against its current returns of 3.4%, the merger
will add some 320bp. Our 302p price target for BA assumes both deals
will happen, as does our 2.50 target for Iberia.
NH:
but I still don’t think the merger synergies will surprise on the upside from this deal
NH:
when and if it goes through
NH:
this does not look very clean
NH:
more of alliance than a merger as someone said on the right
NH:
and it will prove a nightmare to run
NH:
if I was Willie Walsh
NH:
I’d consider moving on, once the deal is done
MJ:
For those wanting short data on BA
MJ:
Data Explorers rather handily just sent some through
MJ:
British Airways and Iberia merger
BA’s (BAY) merger with Iberia (IBLA) has been taken well by the markets, with share prices of both companies up sharply. The possible synergies cover flight connections, landing slots, balance sheet, cash flow and pension funding. The short base in BA is 16.4%, up from 16% a week ago. This represents just over half of the available inventory. The short base in Iberia peaked at 2% about a month ago, and currently stands at 0.9%.
NH:
the Iberia shares price
MJ:
what’s O’Leary had to say about the deal?
NH:
he was speaking on CNBC earlier
NH:
and said it was a logical deal, complementary networks etc
NH:
BA had to do something
NH:
but he simply couldn’t resist a dig
NH:
said it was like two drunks propping each other up
NH:
and one was likely to fall over very soon
MJ:
so quite restrained then
MJ:
and no mocking press release
NH:
busted a couple of ribs
NH:
Ryanair, the world’s favourite airline, today (13th Nov 09) welcomed the inevitable merger of British Airways and Iberia – two of Europe’s high fares, fuel surcharging airlines. This merger is the latest in a long line of European high fares airlines merging because they can’t compete with Ryanair’s lowest fares and no fuel surcharge flights.
NH:
In recent years Lufthansa has taken control of Swiss, Austrian, SN Brussels and BMI while Air France has bought KLM and Alitalia. Ryanair believes that all of these mergers will lead to higher fares and even more fuel surcharges from these flag carriers.
Today’s announcement bears out Ryanair’s forecast that there will be just four large EU airlines – BA, Air France, Lufthansa and Ryanair, and of these four only Ryanair is committed to low fares and no fuel surcharges. The combined BA / Iberia will carry approximately 60m pax pa with traffic declining by 4% /10% currently while Ryanair will still be bigger carrying over 66m pax this year as we grow by 15% p.a.
MJ:
Yes. I see. Rib achingly funny.
NH:
there is a bit of other Ryanair news
NH:
you know THAT charity calendar
MJ:
I might have looked at it
NH:
if you haven’t seen it )and most of our Long Room readers have)
NH:
anyway someone sent me this earlier
NH:
from the Liverpool Echo
NH:
HANNAH Darbyshire will bring a ray of sunshine to chilly January as one of the Ryanair calendar girls.
The 22-year-old cabin crew member who flies out of Liverpool John Lennon airport is Miss January for the Ryanair 2010 charity calendar launched this week.
More than 800 cabin crew applied to take part in the calendar project which aims to raise almost £100,000 for the charity Kids, which provides support to disabled children throughout the UK.
The third annual Ryanair calendar was shot at Ryanair’s Alicante base in September.
Kids boss Kevin Williams said: “Our thanks go to all the crew who took part – it’s great when a bit of fun can serve such a serious purpose.”
NH:
anyway, I think we had better move on
NH:
before we are accused of sexism or something
MJ:
actually Tracy has been listening to the conference call
MJ:
and has made some notes
MJ:
here are some highlights
MJ:
Shareholder meeting in summer (Q3), close deal in Q4
On Pensions – there’s no specific threshold for what’s considered unreasonable by IBLA. BA is in discussions with trustees over size of pension deficit as at March 31 (when triennial valuation was undertaken). Iberia also has their own actuaries looking at BA’s deficit.
Heathrow is full, opportunity to acquire slots is difficult. BA sees growth potential in North America (3 or 4 more destinations). Growth in Asia, and Latin American. Given restricted nature of slots at LHR, BA needs to grow via other routes — so address LatAM market by creating Madrid hub.
MJ:
Convertible includes specific language to cover the Iberia merger — i.e. conversion into equity of TopCo.
WW: “It doesn’t mean that we’ve changed our view in relation to BMI”. If Lufty wants to dispose BA is “definitely interested” in acquiring it.
Reaction from employees “generally positive”. Concerned that airline had been left behind in consolidation game (yeah right)
Deadline on pension (June 10) is to finalise the pension recovery plan (not announce deficit, apparently).
“Challenging cost reduction efforts” and industrial relations? WW “satisfied” that we have plenty of management capacity within BA and within Iberia to do both. 80 per cent of BA `solution’ still comes from restructuring within BA. “Talent” within both companies to do this. “Carefully project managed”.
MJ:
Greatest threat to deal going ahead? WW: “Personally really relaxed. I think the pension deficit will get a lot of media attention, but that’s no great surprise given it gets alot of media attention already.” Pension deficit would need to be resolved anyway, etc.
Timeframe – would like to progress more quickly, but have to go through regulatory approval and conclude discussions with pension trustees. Most realistic timeframe for completion is the one set out. “If it was possible to do it quicker” BA would.
Fleet commitments over the next 3-5 years are “unilikely” to change. However, do see opportunity in terms of fleet coordination (so economy of scale in plane orders, etc.)
Remuneration for people in charge of delivering synergies? “Will be an issue for the new board.” Robert and Jose have a “strong track record.” “Incentivisation is something” that will have to be approved by the TopCo board.
MJ:
Like to see actuarial deficit announced this side of Christmas, but equally dependent on trustees. After those discussions there will be discussions with trustees about length of repayment period and amount of money BA will pay on an ongoing basis.
Iberia want to understand what the cash contribution will be – because that will impact results of single economic entity.
NH:
what about a trip down pit?
MJ:
the miners? Sounds good to me
NH:
yes, just been looking at Xstrata because Mick, the miner, Davis
NH:
has lobbed out some more stock
NH:
quite a bit of actually
NH:
3. Name of director
Mick Davis
4. State whether notification relates to a person connected with the director named in 3 and identify the connected person
Notification does not relate to a person connected with the director named in 3.
5. Description of shares (including class), debentures or derivatives or financial instruments relating to shares
Ordinary shares of US$0.50 each in Xstrata plc
6. Name of registered shareholder
K.B. (C.I.) Nominees Limited
7. State the nature of the transaction
The exercise of 755,910 options granted under a Service Contract Arrangement on 10 September 2001 which became exercisable from 1
Xstrata (XTA:LSE): Last: 1,023, down 9 (-0.87%), High: 1,034, Low: 1,010, Volume: 3.37m
MJ:
(BigDunc – Bowleven coming up)
NH:
and while we are in the mining the world
NH:
that company whose name I can’t pronounce looks more likely to head in to the FTSE 100 next month
MJ:
Petropavlovsk you mean?
MJ:
the former Peter Hambro Mining
NH:
came out on RNS earlier today
NH:
Redemption Notice of US$140,000,000 7.125 per cent Guaranteed Convertible Bonds Due 2010 (ISIN: XS0224133099) (Bonds) issued by Peter Hambro Mining Group Finance Limited (Issuer) and guaranteed by and convertible into ordinary shares (Ordinary Shares) of Petropavlovsk PLC ( Guarantor )
NH:
13 November 2009
Given that the Aggregate Value1 per Bond has traded above $150,000 for more than 20 of the last 30 dealing days , the Company has decided to exercise its option to redeem the Bonds. Set out below are details of the redemption notice, which is also being posted to Bondholders in full. The Company has opted to give an optional redemption notice period to Bondholder s of 31 days (being not less than 30 days nor more than 90 days ) as required under the terms of the Bonds . In the event that Bondholders wish to convert their B onds into the Ordinary S hares as opposed to having their Bonds redeemed , they have up to and including 8 December 2009 to convert those Bonds.
MJ:
so some of its CB are being converted into equity
NH:
and that will push up the shares in issue up
NH:
and make the company no one can pronounce big enough to go into the FTSE 100
MJ:
what’s the market cap at the moment?
NH:
around £2.2bn I think
NH:
FTSE review due in a month
NH:
actually I have some earlier predictions on that
NH:
but before I put those up
NH:
here’s what Liberum made of the news
NH:
As expected Petropavlovsk has today served the mandatory redemption notice on its $140m 7.125%convertible bond. This will convert the debt into 10.847m shares (c.6.5% of shares outstanding) bringing its pro forma market cap to £2.3bn. The mandatory conversion will take place within 31 days, but we would expect the vast majority of the equity to convert within 5 days (bond holders will not be ‘paid’ to own them so will convert asap). This will leave the company debt free and in a great position to join the FTSE 100 in December (it would currently just make it at position 90th). Petropavlovosk remains our standout precious metals pick of the majors trading on a spot PER of 11.9x 2010E. With a distinct lack of non specialist UK investors invested in gold shares, we expect the technical squeeze to continue on the sector. There are few other company announcements today, other than the news that Xstrata’s Mick Davis has exercised another material tranche of share options – netting £7.7m.
MJ:
so this thing is going to be a blue chip
Petropavlovsk (POG:LSE): Last: 1,241, down 35 (-2.74%), High: 1,286, Low: 1,240, Volume: 302.48k
NH:
and the amazing thing is
NH:
aren’t JORC compliant
NH:
I think they use some Russian mining equivalent
NH:
trying to find something on this
NH:
here’s some more on those FTSE reshuffle changes
NH:
they are a month away
MJ:
Neil is just digging those out
MJ:
has misplaced his spreadsheet
NH:
The next FTSE Quarterly Review of UK Indices is due to take place on Wednesday 9 December (based on the previous day’s closing prices), with changes to take effect after Friday 18 December.
The attached file provides an estimate of potential changes based on current market caps.
For clarification, for a company to be promoted to the All Share at this review, it has to have passed the relevant liquidity tests at the last Annual Review in December 2008. Below are a number of companies which would appear near the top of our list on market cap grounds, however we believe they have failed the liquidity tests, and as such are not inlcuded on our list.
NH:
Microgen
Dialight
AEA Technology
SR Europe IT
Gartmore Growth Opportunities
Queen’s Walk
Carclo
Office2Office
NH:
AIM transfers to Main Market
Previously, when a company transferring to the Main Market had a trading record of at least 20 days on the Main Market, only the liquidity of Main Market trading was used for the liquidity test. Under the new test, liquidity for the full twelve months up to the quarterly index review will be assessed, meaning both AIM and Main Market volumes will be used for the first quarterly review test. If the company fails on that basis, at the next quarterly review, only Main Market trading will be used. To be considered, a company must still have a trading record of at least 20 days on the Main Market.
NH:
At the last quarterly review there were three companies which had recently transferred to the Main Market (Booker, Omega Insurance and LMS Capital). All failed the liquidity test for the full twelve months previously. They will be assessed at this review only on their liquidity on the Main Market. We estimate that Booker will pass the requirements and go straight into the FTSE 250. However we estimate that both Omega Insurance and LMS Capital have not satisfied the requirements, and therefore will next be assesses at the Annual Review in June 2010.
NH:
By the next quarterly review, we believe three companies (Hansteen and Centamin Egypt and Afren) will have transferred to the Main Market. We have reviewed the liquidity of each of these companies, and believe that only Centamin Egypt will have satisied the liquidity requirements. Hansteen’s liquidity has not been sufficient, and as such will be reviewed again at the March review. Afren will not have had the required 20 trading days on the Main Market, so will also be initially assessed at the March review.
NH:
and if you are wondering
NH:
what might go into and out of the FTSE 100
NH:
THOMAS COOK GROUP out
NH:
and potential FTSE 250 changes
NH:
CHAUCER HOLDINGS
MORGAN SINDALL
JPMORGAN JAPANESE
AVIS EUROPE
out
NH:
CENTAMIN EGYPT NPV (LON)
BOOKER GROUP
UNITE GROUP
INTEC TELECOM SYS.
in
NH:
people asking about Bowleven
NH:
and yesterday’s bid rumours
NH:
I can think there a cobblers
NH:
there could be a farm out deal coming for the EOV permit
MJ:
Lets a have look at the shares
MJ:
So you seem pretty confident there is no deal brewing here
NH:
I talked a few people who know the company
NH:
and they weren’t getting any vibes about a bid
NH:
this is the sort of feedback I have been getting on this rumour
NH:
started up in Scotland
NH:
and
NH:
was quickly on the case
MJ:
Who, the taxi driver?
NH:
Interesting moves in BLVN yesterday – despite finishing up 5% at 97.75, it had been much higher, peaking at 104.75 intraday. Largely driven by one of two rumours: Total in for it (because Cameroonians speak French, it’s obvious, isn’t it? Much like when Kevin Hart said last year that he was learning Spanish, so the Repsol for BLVN rumours started…) or a mystery Chinese buyer.
NH:
Even if we’re wrong about the specifics – we don’t believe a word of it – it’s worth using this as an opportunity to review what cash-rich buyers are really going for, beyond the hype and fluff. And the answer is simple: cash buyers are looking for PRODUCTION and RESERVES. Not rocket science, is it?
NH:
We haven’t seen these buyers go for pure exploration (although we’re convinced they will eventually) – they wait for things to be drilled, proved up a bit, and then get involved, using a low-to-nonexistent cost of capital to pay through for the discoveries. Evidence? Well: Sinopec / Tanganyika, Sinopec / Addax, KNOC / Harvest, Sinochem / Emerald would be a good start. Looking further back, PetroKazakhstan, Karazhanbas, lots of Kazakh stuff. They don’t need to take the risk on pure exploration yet, so they don’t.
NH:
no there are soom good points in there
NH:
that the Chinese want production and reserves
NH:
from the same sector watcher
NH:
Speaking of M&A, DGO LN still a BUY here. The opposition to the 455p takeout price is fully justified in our view – ENOC look to be trying to get it on the cheap, and a genuinely competitive situation would put the price well north of £5 on our numbers. Yes, the stock might have one bad day if ENOC fails, but we’d expect another bidder to step up to the plate.
NH:
Now don’t get me wrong – BLVN is one of our favourite names for 2010 for the drilling campaign in Cameroon, and we still think the stock is cheap below 100p. Whatever the truth or otherwise of the current rumours, BLVN will be a core BUY for 2010, and we’d expect it to get taken out on drilling success. BUY BLVN – but maybe wait for a more attractive entry point towards the end of the year.
Dragon Oil (DGO:LSE): Last: 430.75, up 1.75 (+0.41%), High: 433.75, Low: 429.00, Volume: 531.20k
NH:
I have something for fans of Regal
NH:
now, we have been waiting for more drilling news for a while
NH:
some could soon be on the way
NH:
A lot of people are asking us about this one, and I think it’s still good value as it approaches 100p. We’re looking at the next operational update as key here: more news on the MEX-106 flow rate from the B sands, which was steadily improving from the last update, and maybe news of when the T and D sands will be tested, but really the story will be around SV58.
NH:
We know that the B24 sand interval there is extremely promising, and if it represents a contiguous reservoir sand across the license, the flow rates should be very exciting, even before we consider the upside from the Ts and Ds. I’ve said it before, I’ll say it again: this is a very accomplished management, operationally speaking, and they are best-placed to drive the value from what is now effectively a resource play. Wait for the details on the SV61 drilling too, which will prove the point: this is going to be the fastest well ever drilled to these depths in Ukraine, and when you compare the timing with MEX 106 and SV58, you’ll see that the management team is driving relentless operational improvement. BUY RPT in advance of this update.
Regal Petroleum (RPT:LSE): Last: 96.25, down 1 (-1.03%), High: 97.50, Low: 95.00, Volume: 814.24k
NH:
I hope all that helps
MJ:
I’ve always wondered, does
have a bloomberg terminal inside his minicab?
NH:
not sure where he gets his pricing from
MJ:
I suppose he might crash if he did
MJ:
and the unathorised trading
NH:
FSA fines and bans former UBS employee for helping conceal unauthorised trading losses
The Financial Services Authority (FSA) has banned and fined Andrew Cumming, a former client adviser at the London branch of UBS AG (UBS), for his role in the activities that led to the firm receiving an £8 million fine earlier this month for systems and controls failings.
NH:
Cumming has been fined £35,000 and prohibited from performing any regulated function for a minimum period of five years on the grounds that he is not fit and proper.
Paperwork signed by Cumming, who worked in UBS’ international wealth management business, helped to document false loans which were used to conceal losses arising from unauthorised trading.
Customers whose funds were used were told they were providing loans to other UBS customers with promises of high rates of interest. To make these ‘loans’ appear official, documents were produced using UBS headed paper and sent to customers stating that the ‘loans’ were guaranteed by the firm.
NH:
The FSA’s investigation concluded that Cumming signed these documents on seven occasions between October 2005 and October 2007 having been asked by a senior colleague to do so, even though he knew the ‘loans’ were not authorised by UBS.
By late 2007, Cumming was fully aware that the ‘loans’ were being used to conceal losses which had arisen as a result of unauthorised transactions but he failed to escalate this knowledge. Instead, Cumming signed a further ‘loan’ and allowed the ruse to continue.
MJ:
Any background on this guy
NH:
Well, he did appear in the Telegraph City Diary once
NH:
he might have been something of a character
NH:
Despite attending a public school, driving a Volkswagen car and nurturing a boyhood dream to become a pilot, Andrew Cumming squirms at the suggestion that he fits the stereotype of a privately educated person.
Mr Cumming, 28, who works as a client adviser for the wealth division of the bank UBS, said: “I may own a home, but I have a big mortgage on it. I work my butt off for this company and I don’t have a trust fund. I don’t think of myself as public school in the way that most of the country probably thinks a person would be.”
NH:
He views himself as an average sort of person who happened to go to a fee-paying school called Canford near Wimbourne in Dorset, which he describes as “not the most academic place on Earth, but a nice school”. But Mr Cumming does fit neatly into The Privileged Youth report as it goes some way to challenge many of the myths about the products of Britain’s public schools.
He drives a Volkswagen but wants to upgrade to a BMW Z3M Coupe. “It’s terrible, but true – I do drive a Golf. But does it still count if I’m trying to get rid of it?” he said.
NH:
e also dreamed of being a pilot, a common fantasy among people from public schools and more popular than those who said that they wanted to be rich when they grew up. He tried to get into the services as well as applying to British Airways.
To complete the three standard measures of public school status, as set down by The Privileged Youth report, he clubbed together with a friend to buy a home in Clapham, south London last year. The one big difference? He is a talented carpenter who makes his furniture which he sells to family and friends.
MJ:
When was that written?
NH:
I do drive a Golf. But does it still count if I’m trying to get rid of it?” he said.
NH:
just trying to look him up
MJ:
Cant find him actually
MJ:
Could be there though – search is not very good
MJ:
Blue smarties though has found his Linked In
MJ:
#
Owner
Hawkley Global Ltd
(Research industry)
Currently holds this position
#
Client Advisor
UBS
(Research industry)
1999 — 2008 (9 years )
#
office boy
Mobil Oil (NZ) Ltd
(Research industry)
1997 — 1997 (less than a year)
MJ:
And Taxloss has found the FSA register entry
MJ:
Well, how about a bit of Friday RAW?
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:
well I have an update
NH:
on some RAW from yesterday
NH:
the UU/ Warren Buffett rumour
MJ:
the Puffett speculation
NH:
they are telling clients to sell UU
NH:
We expect Ofwat’s final determination to be close to the draft
Over recent price reviews, there has been little precedent for major changes to the regulator’s view between draft and final determinations. This, along with the fact that macro conditions have not significantly changed since the draft, leads us to expect that Ofwat will not make major changes to its draft in the final determination of tariffs.
NH:
Based on precedents, we see scope for further underperformance
The water companies have underperformed the utilities sector by 10% ytd (and 17% since the draft determination was published in July). Given the water subsector underperformed 34% in the year the
regulator last cut the allowed rate of return, and the fact that dividend yields for the water companies remain below average for regulated stocks, we expect further underperformance from water stocks over the next 12
months.
NH:
Catalyst – final determination November 26
If the final determination is close to the draft, as we expect, both United Utilities (UU) and Severn Trent (SVT) will likely need to cut their dividends 20%. Furthermore, we believe that UU will need to raise capital either via
a rights issue or a sale of non-core assets, which would result in a greater earnings shortfall and potentially a greater dividend cut.
We expect the companies’ responses in the weeks and months following the final
determination could prove to be significant negative catalysts.
Maintain United Utilities on Conviction Sell List
NH:
We continue to view United Utilities as the water company which is most exposed to the price review. UU is the only water company where we forecast regulatory gearing to significantly breach the regulator’s threshold, and as a result we would expect a rights issue or the sale of non-core assets to reduce gearing.
Additionally, we would expect a sale of the non-core business at the level assumed in our SOTP to be earnings dilutive, and to increase the size of the dividend cut needed.
Risks
The key risk to our view is a better-than-expected final determination. However, we estimate that minor improvements in regulation would be insufficient to obviate the need for dividend cuts (UU & SVT) and a
capital raise at UU. Higher-than-expected inflation is a further risk to our view.
MJ:
Yeah – but there are Chinese Walls in place
MJ:
So this doesn’t mean anything conclusive
NH:
is anyone going to bid before the regulatory stuff
NH:
as readers said yesterday
United Utilities Plc (UU:LSE): Last: 470.90, down 1 (-0.21%), High: 473.30, Low: 467.50, Volume: 970.42k
NH:
about these bid rumours
NH:
Utilities aren’t as cash generative as they were
NH:
although it does look cheap
NH:
Severn Trent is on an 8% discount to RAB, UU is 7% and Pennon 3%
NH:
so it could be worth a punt I guess
NH:
on a good outcome from Ofwat
MJ:
we could pop back to that dark glasses story you mentioned a couple of sessions back
NH:
What, the story about Essilor looking at some tiny US sunglasses company?
MJ:
Essilor, French glasses group having a sniff round DGX International, which is listed on Nasdaq
NH:
the ultimate dark glasses story!
MJ:
normally this would be too small and weird to warrant a second look at
MJ:
But, I was idly having a look at the price action late on yesterday
MJ:
and saw that DGX shares had gone bananas
MJ:
Were up almost 20 per cent since Monday. So, I did a bit of digging
NH:
And what did you find?
MJ:
Well the story is – and I must add this is mooing RAW –
MJ:
– is that Rothchild were advising Essilor on a bid for DGX
MJ:
The two boards were meant to be in discussions over price, with something near $18 a share being pitched
MJ:
But, after putting in some calls
MJ:
I get the feeling this one could have fallen over
NH:
What, they couldn’t agree on a price?
MJ:
Both companies obviously wouldn’t comment when I called
MJ:
But the price action in DGX shares would suggest someone knows its off
MJ:
They were up 6 per cent at one point, then the DGX board had a meeting
MJ:
And the shares fell. Closed down for the day
MJ:
Anyway, just to satisfy my own curiosity
MJ:
if anyone has a take on this do get in touch.
NH:
sounds like you did quite a bit of work on that
MJ:
Just a bit of idle time after the UK close last night
NH:
(looks like we have a lot of frustrated Red Top sub-editors on the right today
)
NH:
another Falkland Islands company
NH:
but this one is searching on the north side
NH:
where the water is very deep
NH:
that they will need a semi-subermisble rig
MJ:
(@soothsayer – drop me an email miles.johnson@ft.com
)
MJ:
Right so what is this thing called?
NH:
I mean the south side
NH:
talk in the market is that they are trying to raise some cash
NH:
which sounds too much
NH:
apparently Mirabuad are involved
NH:
and have been taking them to meet potential investors this week
NH:
I think this company have a good management team
NH:
when I called about this rumour last Friday
NH:
following another meeting
NH:
but odd it has come round again
MJ:
What are the shares doing?
NH:
they are down 0.5p at 45.5p.
NH:
anything to finish up on
MJ:
Liberty Global buying Unity Media is something we should touch on
MJ:
Actually quite a bullish signal in some ways
NH:
Unity Media was in the IPO pipeline of course.
NH:
But BC Partners and Apollo have gone and sold it to a strategic buyer instead.
MJ:
So, this shows that if credit conditions continue to improve
MJ:
private equity will have other exit options aside from IPOs
NH:
and there was some interesting financing on this deal, no?
MJ:
********NEW HY ISSUE FOR UNITYMEDIA VIA CS********
Issuer: Unitymedia Hessen GmbH Unitymedia GmbH
Sec Type: Senior Secured Notes Senior Notes
Distribution: 144A and RegS (no Reg Rights)
Amount: EUR1,900,000,000 equiv. EUR600,000,000
Currency: EUR / USD EUR
Target split: EUR1.4bn / $750mm EUR600mm
Expected Ratings: B1 / BB- B3 / B-
Maturity: 8 Years 10 Years
Optional Redemption: NC3 (par + full coupon) NC5 (par + half coupon)
Use of Proceeds: Finance acquisition of Unitymedia by LGI
Timing: European and US roadshow 13th / 16th November Pricing early next week
Bookrunners: Credit Suisse / DB / GS / JPM
MJ:
From what I understand
MJ:
Unity Media was primed for IPO, and could easily have launched within weeks
MJ:
If Liberty hadnt come in
NH:
(Bohemia that’s exactly what the PR guy said, added they would also need a farm out. Rig could come from Gulf of Mexico though)
NH:
a few more thinks to check on
NH:
looks like Nelson Peltz has cut his stake
NH:
Nelson Peltz cuts his Kraft stake by 29%, according to a quarterly disclosure by his Trian fund last night. As of Sep 30, he owned 6.58mn shares
Cadbury (CBRY:LSE): Last: 776.50, up 1.5 (+0.19%), High: 777.00, Low: 771.00, Volume: 480.64k
NH:
and on the Tandberg bid situation
NH:
John Chambers was talking last night
NH:
he’s the boss of Cisco
NH:
At yesterday’s AGM, Cisco CEO John Chambers said it would walk away from Tandberg before paying too high a price and pointed out that it has walked from two other deals this year due to unreasonable demands
NH:
Tandberg holders are “going to test us” Chambers said, but he sees a “healthy give and take” and added that “I believe we will find a way to get the deal done, but we don’t do it at a price that’s not good for our shareholders,”
NH:
Chambers also noted that Tandberg’s location in Norway was a factor in the offer price, saying “If it’s too far away the risk goes up,” “That’s why you pay less for a company that’s in Norway than one that’s close by.” Cisco CFO Frank Calderoni, speaking earlier at the meeting, said acquisitions are the best use of Cisco’s cash. A replay of the webcast will be available from today at 10.00 am PT at http://www.cisco.com/go/investors
NH:
and what about Rexam miles
MJ:
Well – its the buggest faller in the FTSE 100
NH:
Another FTSE 100 CEO gone.
NH:
After Ian Smith at Reed was dragged outside and shot earlier this week.
MJ:
Now, I have been told in no uncertain terms
MJ:
that these two incidents are very different
NH:
By the
MJ:
Leslie Van de Walle was at Rexam for three years, not eight months
MJ:
So the timing here is unfortunate for Rexam
MJ:
But you do get the feeling there are going to be more CEOs being show the door over the next year
NH:
Shareholders may have supported all these cash calls at the time, but that doesn’t mean they were happy about it.
MJ:
certain CEOs in certain sectors should be out pressing the flesh right now
MJ:
beaming some “I’m your guy for the recovery” smiles to investors
MJ:
Its like if your kid calls up saying they hitchhiked to Blackpool and are stranded and penniless
MJ:
You are going to pay for them to come home
MJ:
but you are not going to be happy about it
NH:
there are some in the housebuilders, media and the industrial sector that look vulnerable to me.
NH:
Could well see a couple go from there.
NH:
Anyway, what are Rexam shares doing off the back of this mornings regime change?
MJ:
Anyways – Rexam down 9.5 p to 280p
NH:
Bit more on Cumming’s Hawkley Global – agency …
NH:
£30hr off peak to £75/hr peak, not including membership fee.
NH:
“Hawkley Global will provide any service to members (or their ‘Agreed User’s’) on the basis that they are lawful, proper and moral.”
NH:
“Hawkley Global will provide any service to members (or their ‘Agreed User’s’) on the basis that they are lawful, proper and moral.”
NH:
we are done for today
NH:
thanks for logging on
NH:
we broke that Peltz story
NH:
and were stunned to see the demerger the next day
NH:
especially as we asked the question
NH:
Murph still not settled in yet
NH:
and the technology not quite up to scratch
NH:
but we are getting there
NH:
we zapped someone on Earthport
NH:
but have not checked them
NH:
but they sound unlikely
NH:
and very good CityUnslicker
NH:
have a good weekend everyone
MJ:
and thanks for the comments
