FT Alphaville » Markets Live transcript 2 Mar 2010

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Markets Live transcript 2 Mar 2010

Posted by Neil Hume on Mar 02 11:03.

Markets Live chat transcript for the chat ending at 12:18 on 2 Mar 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Good morning

and welcome to Markets Live

FT Alphaville’s daily amble around the markets

Bryce is here

morning everyone

hello Bryce

right

A bit calmer out there this morning

No massive deals have been announced

and no bank results

and sterling is flatlining after yesterday’s sharp sell off

And the market is ….. up

the rally goes on

(XWAP – explain. The Daily Mail?)

FTSE up a further 26 points at 5432

right

where shall we start?

Pru?

11:05AM

Well, shares have been hit again

And I reckon management must be getting a tad nervous

Prudential Plc (PRU:LSE): Last: 498.10, down 31.9 (-6.02%), High: 536.00, Low: 486.30, Volume: 27.17m

yes, this transformational deal has not gone down the way the Pru expected

(XWAP – see the transcript of yesterday’s results statement.)

stock off 18% since it was announced

Ouch.

indeed

and I wonder

Just wonder

is the Pru now vulnerable to a bid?

Hm ………..

Who would buy Pru?

Who could afford it?

dunno

but this all reminds a bit of Nat West bidding for Legal & General 10 years ago

that was an ambitious deal

buying a company of the same market cap

and it had the same reaction

shares fell 20%

and that prompted a counter bid from Bank of Scotland

and then another from RBS

Indeed.

But can lightning strike twice?

I know, I know

Anyway, none of that explains why the shares are weak this morning.

nope it doesn’t

that’s down to the lukewarm press reaction

and the timetable of this deal

so it is being funded primarily with a rights issue

right.

which doesn’t start till May and ends in June

and that’s the issue

the further the Pru share price drops between now and then

the more stock it has to offer

and the more dilutive the deal

and

the Pru doesn’t have a great track record with cash calls

anyway

all of this was nicely summed up in Merrill note today

they are bullish

but clearly worried

There is an unusually long period of time between the announcement of the deal
and the end of the rights issue period, which is expected to be ‘early June’. The
shares are likely to remain somewhat in limbo over this period of time and it is
reasonable to expect high volatility. Current investors are less likely to be buyers
over this period in the knowledge that a cash call is on the way, possibly leaving
the shares more vulnerable than usual to speculative interest.

Given that our pro-forma valuation of the company is dependent on the number of shares issued as part of the deal, our fair value of the company will fluctuate more than usual over the coming weeks as the Prudential share price moves. This is not the same as saying that the price of the rights matters (a common misconception, as this merely affects the bonus element of the rights), but the share price at the time of the rights issue does matter. Of course current investors will see the benefit of a higher share count, but the share issuance to AIG does mean that more value is being passed away as the Prudential share price falls, in our opinion.

Our PO is reducing from 820p to 750p reflecting a lower than expected EV figure from Prudential and the greater dilution from the drop in the share price
yesterday. However, we remain positive on the AIA deal and believe that
Prudential’s shares remain fundamentally undervalued. At our PO, the implied
earnings multiple is 14x for Pru on a standalone basis and 17x on a fully diluted
pro-forma basis. Given that 65-70% of the value of the combined business will
stem from a pre-eminent Asian franchise, we think this is reasonable.
We continue to think investors who keep a cool head throughout this period of
volatility and look for opportunities to add to weightings on weakness will be
handsomely rewarded. Reiterate Buy.

Yeah. That’s all fair.

Some questions from the ROTR

yes, this deal is about three times more expensive than it was

but then the Pru share price

was 200p at the time

Yup – and shareholders would have never backed the deal back then.

although one could say

it is ominious that the first thing the new young CEO does

when he has an acqisition currency

is get out there and bid

and this will be a huge deal to integrate

massive

Hugely compex, yeah.

There’s a good comment from Andy Hughes, formerly of JP Morgan and now at Icap.

Who makes some sensibly cautious noises about the combination.

Of course, it’s all long-game stuff, but worth reading nevertheless.

While commentators may applaud the transaction combining number one and two insurers in Asia, we have a lot of sympathy with the statement that AIG got more from Prudential that they would of done from an IPO. Given Prudential’s EV assumptions of 5.7% discount rate in Hong Kong and the 1.69x multiple paid (42% of AIA’s EV is Hong Kong) this does not seem a cheap acquisition. Axa’s offer to Asia Pacific and other deals need to be viewed in this context (Axa Asia uses a 10% discount rate, making its 2.7x offer broadly equivalent to 1.7x in this case in our opinion).

(LawnMover – they are bringing them to take up the rump we believe. a lot of US shareholders on’t be able to back this)

The AIA transaction may bring long term value to the group in excess of the $35bn paid, however it seems in the near term it has brought a lot of additional risk to the group with the capital position “A” range post the transaction and a very large rights issue which will make the share price highly geared to market conditions. Prudential have committed to the same dividend policy on the combined group. Cash flow is now under strain given the maintained dividend policy post transaction with and we estimate £500m pa negative cash impact from the deal. In our view Prudential’s share price could suffer considerably if concerns over a double dip in the economy emerge, given the asset risk in AIA which we look at in detail..

We see quite a difference between Prudential’s equity linked business in Asia and AIA’s mainly traditional and protection business. Prudential has in the past stressed the strength of equity linked business over the higher guarantees based traditional products, now it has bought the largest provider of these products reflecting the fact that their own business is moving away from the equity linked market. However AIA’s new business margin is 31% post tax compared to 57% pre tax at Prudential. A potential turnaround story hardly feels consistent with a 1.69x EV purchase price. We are also concerned that with 21% of the EV from Thailand, political risk may not be priced in. Thai stocks trade at around 10.6x ’11 to reflect this risk, not the 24x paid here.

While we feel management are probably holding back in terms of synergies, and possible tax gains from a future redomicle, this seems to be a growth market price for business in uncertain times. Our expectation is that in the next few weeks Prudential’s share price, will underperform given the high price paid, high risk nature of the share due to the need to fund the large rights issue.

thanks for that

someone was asking about the short interest in Pru

it was tiny before the deal was announced

according to DataExplorers it was around 1.3% of the shares outstanding

and available to be loaned

so not massive

Hm. Will be interesting to see where that stands by the end of the week.

yes

was just about to say that

very interesting

11:16AM

Right

a few quick admin messages

because we had another Registration outage here at FT.com yesterday

I suggest people clear their FT cookies

that should allow you to log back into ML

also

we have a new started

A new Sam Jones

his name is Joseph Cotterill

he started yesterday

and comes from the same gene pool as Sam, Tracy and Stacy

and one more thing

Sam Jones has done an excellent piece on CDS today

shooting down the idea that naked buying of CDS

should be banned

well worth reading

http://ftalphaville.ft.com/blog/2010/03/02/161556/the-benefits-of-naked-cds/

11:19AM

Okay that’s out the way

where to now?

Vedanta?

11:19AM

Oop – accidental page break.

Yes, Vedanta seems a good idea.

Shares getting stuffed at the moment.

Vedanta Resources PLC (VED:LSE): Last: 2,513, down 128 (-4.85%), High: 2,670, Low: 2,483, Volume: 2.68m

on the back of big CB issue?

Yup – $775m

to refinance debt and for “general corporate purposes”

hmmm

they did a $1bn isse back in June

and now another deal

just days after analyst returned from a get together

Yeah – a week-long junket

and I didn’t read anything

from the analysts who went

that suggested another CB was comoing

Nope. Likewise.

Lots of stuff about releasing value by spinning the various dicisions off.

But somehow, they forgot to mention they need another $775m immediately.

it can happen

anyway

do we have some comment on this?

Well, people are still picking over this it seems.

No comment worth posting that I have seen.

fair enough

let’s move on

11:23AM

Okay

thhe market has justed moved up a bit

FTSE 100 24 points higher at 5,429

and I getting mailed stuff like this

futures spiking because of better credit feel, Greek 10yr CDS -6% 2.96 last, sub 300 1st time since Feb 15th

Greece CDS below 340bps (cmadatavision)

not sure

why the CDS should be reacting in this way

there is some chatter about another Greek austerity package

this one at around Eur 4bn

The new Greek package is likely to include an increase in the current value-
added tax rate of 19% by two percentage points, more cuts in civil service
entitlements, a freeze in pensions and higher duties on luxury items

Due to be announced tomorrow, according to reports.

11:26AM

Sorry

just been off screen

Man Utd

supposed to have issued results at 11.00am

but they don’t appear to be on the site yet

http://www.mufplc.com/

But “Red Knights” have confirmed they’re looking at a bid

yes they have

this is Keith Harris

Not Orville

and Jim The Bric O’Neill

RTRS-RED KNIGHTS SAY LOOKING AT FEASIBILITY OF BID FOR MANCHESTER UNITED
11:25 02Mar10 RTRS-RED KNIGHTS SAY THESE TALKS ARE AT EARLY STAGES AND NO CONTACT HAS BEEN MADE WITH GLAZER FAMILY

We have been chatting about this possibility of a bid today

apparently the bonds have some horrible make good provisions in them

so I am not sure how a deal would be structured

and it’s all academic if the Glazer’s don’t want to sell

but Harris

has an interesting background

not only has he advised on just about every big football deal

over the past few years

but he used to work at Drexel with Mike Milken

Yup – he made Seymour Pierce the football club’s broker of choice

Back to Man Utd

still noting on the site

by here are the details

for anyone that wants to log iin

MU Finance PLC financial results for the second quarter and half year ended
31st December 2009.
MU Finance PLC announces that it will release its Financial Results for the quarter
and half year ended 31st December 2009 on 2nd March 2010.
The Earnings Release will be made available on the MU Finance PLC website
(www.mufplc.com) at approximately 11:00 GMT (06:00 EST) on 2nd March 2010.
This will be followed by a conference call and presentation to investors at
13:00 GMT (08:00 EST).
Participants will need to register for the conference call online and will be able to do so until 18:00 GMT (13:00 EST) on 1st March 2010. Registration can be completed using the following address:
https://eventreg1.conferencing.com/webportal3/reg.html?Acc=694225&Conf=171638
Date of call: Tuesday, 2 March 2010
Time of call: 13:00 GMT London, 08:00 EST

Oo. Ta for that.

(an interest idea Taxloss – buy the Pik notes and the squeeze the company)

11:31AM

Right

getting some sensible comment on the Ved convert

from Liberum

they call it a surprise

which is a surprise

because Ved are always surprising people

so it should be much of a surprise

that they do something surprising

if you see what I mean

VED have just announced a surprise convertible offer $775m due 2017. This comes after three CBs from Vedanta group companies last year ($1.25bn in Ved, $500m in Sesa and $500m in Sterlite) and after the company reiterated on its site visit that its current capex plans were fully funded. The market is taking the news poorly as it seems a surprise and there presumably is a fair amount of delta hedging going on. Why do the CB now?

As at September the company had c>$900m of debt maturing within 12m, so with c.$560m already repaid, some of the CB proceeds will be used to refinance some $340mn debt due later this year.

They have repaid $1.1bn last month ($540mn converts recalled + $560mn bonds redeemed). Last months’ bond recall was less successful than hoped (c.25% acceptance – so perhaps why they feel the need to offer another CB).

These new converts are cheaper at 3.5%-4.0% and less dilutive (5.2% total dilution at the plc level) compared to the converts recalled last month (4.6% coupon and 5.4% dilution).

Whilst the use of proceeds for of some $435m excess cash raised is a little unclear, speaking to the company they say it is NOT for M&A. Additional cash at the Plc level will help cover the dividends (Mar YE coming) and improve liquidity

Using these converts, coupled with the recalled bonds last month, the company has reduced the overhanging dilution by 0.2%, reduced the borrowing cost by 0.6% (assuming 4% coupon for the new issue) and increased cash position (net) at the PLC by $234mn.

The market perceives that the CB issue is driven by costs / timing overruns at the growth projects which seem erroneous. Instead the CB is likely about the refinancing and debt at the PLC level, in part because of the less than successful bond conversion last month. Having debt at the Plc level appears to be an unsustainable practice. The potential IPO of Konkola Copper and VAL could alleviate this problem as well as being a trigger to reduce the holding company discount. Overall, we see this as an annoying event but not something which changes the spectacular growth outlook. We would be buyers on weakness.

11:32AM

Right

GBK time

And?

that’s not the burger chain

but the Great British Krona

or Peseta

Ok then. What’s the Great British Dong doing today?

GBD

well

flatlining

at the moment

$1.4971

while a euro buys 0.9034

Right – so the GB Kip has found some kind of support.

yes

it has

but is this just the lull before another sell off?

I don’t know

against the dollar I can see it moving lower

but the euro?

Well, opinions seem polarised.

also worth noting

the euro is rubbish against the dollar

a nine and half month this morning

Hm.

sorry

that should have been low

Indeed.

Rather lively comment went out last night from David Bloom, HSBC’s currency person.

yes, we put that up on the site. attracted some interesting comments.

And, obviously, it has been noted that HSBC may have more than a wee bit of exposure to the Pru hedging agreements.

So add a pinch of salt if you want.

GBP crisis: are you living in cloud cuckoo land?

There is no doubt the UK data is weakening a little more than expected and more than expected compared to the eurozone and the US data. However, the talk of a GBP crisis seems like hysterical clap trap.

Currencies are a relative concept. So who is the UK and GBP going to have a crisis against – the euro? The analysts that are putting the GBP crisis view are the very same analysts who seem to be simultaneously predicting the break up of the euro and a GBP crisis whilst only last year telling us the USD was finished and losing its reserve currency status.

I fail to see who this golden child is that GBP will have this crisis against. I get very worried when I find that I am the voice of reason. Ok let’s indulge in fear and assume a hung parliament – well some economists argued in a recent tit for tat letter that to tighten fiscal policy too soon would be a disaster for the UK economy. Well a hung parliament removes that risk. Of course if the UK goes into a double dipper whilst the whole world recovers, then GBP would fall and the export sector would boom. Is that a crisis or the normal transmission mechanism in action?

Comments also worth reading on that

http://ftalphaville.ft.com/blog/2010/03/01/161656/talk-of-a-gbp-crisis-seems-like-hysterical-claptrap/

yes

and I have a bit of comment from BarCap

Shedding the pound
Will the GBP continue to fall sharply? Despite the generally poor sentiment about the GBP, we think the move caught most investors by surprise. It was clearly not due to data – the most important release yesterday was the strong manufacturing PMI. We find it difficult to believe that such a sharp fall was due to the opinion poll over the weekend. Political uncertainty is an issue for the GBP given the large fiscal deficit, but that probably set the scene for the sharp fall, rather than drove it, in much the same way as an unhealthy lifestyle makes someone more vulnerable to flu. The reason behind the move itself appeared to be large flows, perhaps related to M&A activity. These then led to models selling the GBP automatically. Because the move caught many people out and prospects for the UK economy remain cloudy, we think there is likely to be further pressure on GBP. But given the problems facing the eurozone, EUR/GBP above 0.90 seems much more of a stretch than cable below 1.50. For longer-term investors or companies that need to hedge, this is not a bad level to sell EUR/GBP, in our view, even though for short-term investors the risk-reward does not appear attractive. Against the USD, we would be surprised if GBP did not fall somewhat further: 1.47 is likely, 1.45 possible. Longer term, though, we expect GBP to appreciate from here.

and also

I note that the Aussie have increased interest rates again

ate 25bp to 4.00%

now at the risk of sounding boring

that’s not very good news

if you are about to move from the UK to Oz

No. No it isn’t.

on a premanant basis

not good at all

anyway

that’s an aside

11:39AM

Bryce

anything you want to look at?

How about a bit of high street?

OK, let’s go shopping then

Well, there’s a couple of interesting sellside comments around today.

First up, we welcome the return of Nick Bubb.

ah yes

at Arden Partners now

Bryce

you there?

Bryce?

he’s been locked out

not sure why

we have some technical issues

so I will push on

by myself

looks like FT.com

might have gone down again

Right – back now

Site had a little wobble there

Not sure exactly why

Anyhoo, here’s Nick Bubb’s current thinking

Sector View: The General Retail sector was a surprisingly good performer for the bulk of last year, but so far this year it is the worst performing sector in the market, down 10% relative. As we note above, the gloomy weather may not have helped investor’s mood, but the key issue is that the market has begun to discount a much tougher time post-Election for the consumer. Clearly, the extraordinary fiscal and monetary stimulus has to be unwound eventually, via higher taxes and higher interest rates and lower public sector employment.

The debate is simply over whether this has been priced in too soon, too quickly. The fact is that short-term trading news has been good and that valuations are very low, so there is a risk of private equity/bid interest. Our feeling, ahead of the results season, is that the risk/reward ratio is quite good for the General Retail sector and we feel moderately positive at current levels. On a longer tern view, we prefer the Food Retailers, given their obvious defensive merits, but the sector has been range-bound so far this year. It may take time for the sector to outperform again, but our main feeling is that relative valuations are too bunched, i.e. we expect Morrison’s and Tesco to move to a bigger premium to Sainsbury.

And, for a more negative take, there’s a big note out of Execution Noble this morning

Our latest survey results show that UK consumers may be building for
a nasty negative shock. The gap between consumer confidence and
perceptions of current financial situation has widened, and
historically this has meant realignment is needed. With mortgage
costs now up year-on-year and a noticeable step down in the number
of respondents expecting tax rises, consumers could be in for a
negative shock over the next few months. In addition to downward
pressures on discretionary income we now see upward pressures on
input costs for retailers, but there is only so much inflation that the
consumer can take. We note that whilst the sector may look optically
cheap on cashflow yields and earnings multiples, we see potential
downside to consensus forecasts and as such maintain our
Underweight stance on the UK general retail sector.

crikey

that’s a bit bleak

It is. Here’s some more.

A negative shock around the corner?
Consumer confidence improved this month by 3 points, the largest gain since
November, but consumers’ perceptions of their current financial situation has
deteriorated for the second month in a row. Whilst the improvement in confidence
would not seem to be a bad thing it is the widening gap between the two
measures that worries us as this signals that realignment may be necessary. With
consumers’ discretionary income set to come under pressure as steps are taken to
curb the budget deficit, and with the mortgage boost fading, we think that
consumers could be setting themselves up for a nasty shock.

Further negative news on mortgage costs
For the first time since November 2008 mortgage costs rose in February, up 3.7%
yoy to c.£571. Whilst costs are still lower on a 3-month rolling average basis, the
incremental benefit is clearly diminishing. As such the boost to discretionary
income that we have seen support retail spend through 2009 will not be a feature
of 2010, and we struggle to find any stimulus on a similar scale. Furthermore we
have seen a noticeable rise in the number of mortgage-holders with fixed rates this
month, up to 44% from 39%. Whilst this is not a problem in itself, consumers are
still expecting to be able to remortgage at very low levels; it seems to us that
mortgage rates are more likely to move up than down so again, expectations may
have to be realigned in at some point in the future.
Consumers less bearish on tax rises
The third key finding from this month’s survey is that consumers have become
more relaxed about the potential for tax rises over the next 12 months. In February
42% said they were expecting their income tax or National Insurance to rise, which
is a noticeable drop from 53% in December and an average of approximately 50%
between August and November last year. Again we are seeing evidence that an
expectations gap may be opening, setting consumers up for a negative shock.
Further downside to come – maintain Underweight
Investors have asked us whether the weakness in retail stocks represents a good
buying opportunity. Having downgraded our LFL sales forecasts last month, and
with PBT estimates 8% and 12% below consensus for 2010/11 and 2011/12
respectively, we see further downside to earnings. And whilst cashflow yields may
look attractive we would note that distributable cashflow is at a high point in
2010e and set to fall in 2011e, putting yields under pressure. We maintain our
preference for retailers with international exposure or self-help, such as DSGi,
Kingfisher and Tesco and would continue to sell those with the most profit
downside such as Home Retail and Kesa.

time for share prices I think

let’s see what’s moving

Sure

Marks and Spencer Group PLC (MKS:LSE): Last: 335.00, up 4.2 (+1.27%), High: 336.00, Low: 330.60, Volume: 3.75m

Next Plc (NXT:LSE): Last: 1,865, up 9 (+0.48%), High: 1,874, Low: 1,850, Volume: 214.63k

Debenhams Plc (DEB:LSE): Last: 61.55, up 0.25 (+0.41%), High: 61.60, Low: 61.10, Volume: 1.39m

Kesa Electricals plc (KESA:LSE): Last: 112.10, down 1.2 (-1.06%), High: 113.70, Low: 111.00, Volume: 1.40m

DSG International Plc (DSGI:LSE): Last: 29.81, up 0.2 (+0.68%), High: 29.85, Low: 29.28, Volume: 5.31m

They were all a bit weak yesterday on the dollar trade, of course.

of course

they suffered from a strong dollar

having to import all that stuff

right

it is all turning a bit Exchange & Mart on the right

while they debate what a second Corolla is worth

let’s stay with the retailers

and look at the latest from the world of fat bloke finance

Aha. Good idea.

Blacks Leisure

Ashley blocked the fund raising

and has turned round this moring and said

I want to bid

we don’t how much he wants to pay

but the price hasn’t exactly run away

Blacks Leisure Group PLC (BSLA:LSE): Last: 59.00, up 7.75 (+15.12%), High: 59.50, Low: 58.00, Volume: 564.69k

Hm. Are investors applying the Ashley Discount to this tale?

yes

and that’s wise

does he really want it

or is this just a ploy

Hm. It’s difficult to know.

A deal would make some commercial logic.

I find it difficult to believe Ashley actually wants Blacks

it’s way too upmarket

now if he was looking to buy Cordings

well that would be completely different

I could understand that

What is your obsession with Cordings?

Phil Spencer

the face of Cordings

Of course.

Should we move to some comment on Blacks?

yes

but one other point

Blacks is gonna try and do its cash call again

but this time

with a 50% acceptance level

they obviously don’t want to become part of Mikes empire

Right

I have some comment from

JP Morgan Cazenove

the new merger, integrated JP Morgan Cazenove

that all happened on Monday

Following the announcement last week that it was in discussions with
Sports Direct in an attempt to seek its support for the proposed
fundraising for the company, Blacks Leisure has this morning
announced that these discussions were unfruitful as Sports Direct is
considering making a takeover offer for the company and that as a
consequence it no longer intends to pursue the Firm Placing and
Placing and Open Offer in its previous form.

Management does intend pursuing an alternative fundraising for
Blacks, but rather than requiring a 75% vote, the new fundraising will
now require only a majority vote, thus obviating the need for Sports
Direct’s approval. Sports Direct has a 28.5% stake in Blacks Leisure,
which it re-acquired early last week.

This morning’s news does not come as a significant surprise. There is a
long history between the two companies. Sports Direct successfully
opposed the proposed sale of the company’s boardwear arm in 2007
and the business continued to act as a drag on profits helping to push
Blacks into its current distressed situation. Sports Direct also made a
takeover bid for Blacks Leisure a year ago and was subsequently
reported by the Blacks management team to the FSA for allegedly
making a takeover approach without disclosing that it had lost control
of a 29 per cent stake in the company (this stake was re-acquired last
week).

Blacks’ shares are currently trading on an EV/EBITDA of 11.3x, but
any spot metrics are in our view irrelevant given the company’s loss
making status. The proposed funding was crucial for the company in
terms of helping it to recover and any delay is clearly bad news. In this
context we believe an offer from Sports Direct would be attractive to
shareholders, although much depends on the price eventually offered

And here’s Peter Smedley at Charles Stanley,

who makes an interesting point about the Blacks management holding options with change of control provisions being locked at 100p

We are confident that Mike Ashley remains attracted by
Blacks’ dominant position in a structurally attractive market with an underlying
robust financial model supported by high sustainable gross margins, which are a
function of low branded supplier power and large proportion of own label in the
overall product mix. In our view, the timing of the announcement reflects a
realisation, on Mike Ashley’s part, that Blacks’ achilles hell – its onerous store leases –
has now been addressed, and so Blacks is well placed to return to good profitability,
albeit much work is left to be done to effect a turnaround.

We note in Blacks’
recently announced turnaround incentive plans for senior managers, that the ‘change
of control provision calls for a 100p share price for managers’ options to be
crystallised in full. At 100p, we understand that CEO Neil Gillis would make c. £1.5m,
so given the ratcheting effect that takes place at a price below 100p, we can imagine
his strong motivation of existing management to get an offer as close to 100p as
possible.

Well

I can tell you there is no way in the world Ashley

would offer anything that gave Gillis

£1.5m

not a chance

Indeed. Smedley does add the health warning ….

we flag that events may still not play out as indicated by this announcement.

Which is a masterpiece in understatement.

11:54AM

Where now?

small cap corner

Sure

And I think Kurdistan is calling once more.

yes the siren call

Is there any more on this Gulf Keystone fundraising story?

not much

they have raised $15m apparently

should be announced tomorrow

10% discount to last nights price

(RNS alert!)

is the latest guess

apparently they did not want to run down the equity PIPE fully

so have deciced to issue some equity

now there are two ways of looking at this

one is that it’s positive they don’t want to do a big fund raising at this level

because it would be dilutive

and they will wait until there is more good news

and do it from a position of strength

and then

there is another view

Well, I think we all know what the other view is.

However, we’re already getting so much stick over at muppetinvestor.com this morning

That I think we should draw a veil over this one for now.

yes

right

11:57AM

Right a few other things to follow up on

remember that L’Oreal story

from a few weeks ago?

Yeah, vaguely.

It comes around habitually.

Nestle buying the stake off the family.

yes the Battencourt family

now

there is some debate as to whether tha can happen

until someone dies

and also

Liliane Bettencourt, specifically.

http://en.wikipedia.org/wiki/Liliane_Bettencourt

whether this really fits Nestle’s acquisition critera

For example

here’s Olivetree on the rumours

The Daily Telegraph is this morning running a small story in the “Market Report” section saying that Nestle has been informally talking to Liliane Bettencourt about acquiring her stake in L’Oreal. Some quick background on this story below. Nestle has Alcon sale proceeds coming soon, so we would expect to see continued speculation of this nature, but we see nothing to make us think a move is imminent. L’Oreal shares are still expensive, meaning a full acquisition would not fulfil Nestle’s acquisition criteria. We think the status quo at L’Oreal will be maintained for the foreseeable future.

Nestle has a strictly defined “Acquisition Criteria”, some of which L’Oreal meets but others where it clearly does not. These are (1) To create #1 or strong #2 market player (2) Focused approach on value added growth categories (3) Strong brands in leadership positions (4) High certainty of successful integration (5) Organic Growth, Cash Flow & Earnings Enhancing (6) Generate quantifiable value. An acquisition of L’Oreal clearly meets the first two hurdles but the more mathematical tests are questionable.

Nestle shares currently trade on 17.1x consensus 2010 PE, and 10.74x 2010 consensus EV/EBITDA. This compares to L’Oreal shares on 20.6x and 13x respectively. It is clear that L’Oreal shares still trade at a maeningful premium to Nestle’s own, L’Oreal stock is expensive. This seems to be at odds with the clear stated goals of Nestle M&A as it leads to such a transaction being immediately earnings dilutive.

Hm. So it’s the same old same old?

Yes

but L’Oreal were up around 3% earlier

True

But this all reminds me of the Diageo / LVMH deal … one party wants to do the deal, the other doesn’t. Something will give sometime, but who knows when.

yes

not happening any time soon

says the reverse midas indicator

12:02PM

Okay

it’s past midday

It is. We’re just getting some interesting off-air chat about Man United at the moment.

Might make a post later I suspect.

yes

some ideas on the financing

here’s what we are hearing

so £500m of debt

£500m of equity from some sugar daddy

McManus and Magnier being mentioned

and they have some form here

also talk of a 25% issue to fans

apparently

Jim O’Neill

and Paul Marshall of Marshall Wace

would put in some cash

but again

no deal without the Glazer’s

and we hear

the holders of the PIKS are in no mood to sell out

and would you

getting a 16% coupon

12:06PM

Just looking at the banks

Standard Chartered PLC (STAN:LSE): Last: 1,582, up 56 (+3.67%), High: 1,584, Low: 1,522, Volume: 2.96m

moving higher ahead of the results

Any comment on that?

yes

a little preview

BUY Standard Chartered thorugh the figures tomorrow. Note Andrew was spot on with his issues on HSBC’s Core Tier 1. Stock fell in sympathy with HSBC figures and PRU cash raise to fund rights issue yesterday. We expect STAN figures tomorrow to be much stronger, note:

2 Key -ves from HSBC were

1. Core Tier 1 effects under Basel 3 – leading to worries over dividend growth. (No increase on q1 2010 from Q1 2009). We see CT1 as much more resilient for STAN LN as mix of businesses means hit will be far less. See Andrews note

2. Net Interest Margin (NIM) was weaker than the market expected. Looking at the figures it is from a reduction in Risk Weighted Assets – predominantly in FRANCE and Swiss Private Banking. STAN is not active in these areas, thus NIM should be better.

3. PRU fund raise is a legitimate source of funding worry. However note this is not going to happen in the short term. Rights will not start to trade until the EGM has been seen in May, and will conclude in early June.

STAN fall unwarranted – Pick up.

(not sure Chopper but Fox Davies has been doing it)

meanwhile

Lloyds

and RBS higher

Lloyds Banking Group PLC (LLOY:LSE): Last: 51.85, up 1.59 (+3.16%), High: 51.99, Low: 49.59, Volume: 72.46m

Royal Bank of Scotland Group PLC (RBS:LSE): Last: 37.93, up 1.24 (+3.38%), High: 38.00, Low: 36.12, Volume: 34.53m

Yeah

XWAP mentions a goldman push yesterday, which was unavoidably yesterday.

On Lloyds that is.

However, here’s UBS saying similar things this morning

Profitable in 2010
The guidance by Lloyds makes the conclusion that the company will be profitable
in 2010 easier to reach, in our view. We believe that higher net interest income will
broadly offset impairment with costs and non-interest2.85 income broadly equal,
leaving an overall business as usual profit (pre restructuring costs) broadly in line
with the targeted fair value unwind (£2.5bn).

(Choppper all I can say it I talkled with a number of people who were approached about a GKP cash call yesterday. they were positive on it. )

Fair value unwind a contra to impairment
The fair value unwind represents losses arising in the HBOS book which have
already been recognised by Lloyds. For this reason, to avoid double counting, it is
right to consider the net of fair value adjustments and impairment as the economic
cost to shareholders of the legacy HBOS problems.

Margin guidance looks conservative
The scale of the margin reversal and improvement in H2 2009 was a significantly
better out-turn than guided to by the company at the interims. With the Q4 out-turn
only marginally short of the 2010 target and with new business margins at much
higher levels than historic and with c.20% of the back book to reprice in 2010, we
think the risk of a substantial overshoot relative to the revised target is high.

Valuation
Our forecasts remain well ahead of consensus which we think will be migrating
towards a profit/break-even on the back of these figures. On our estimates, we
believe the stock is trading on less than 6x, falling to around 4x 2012 with trough
tangible NAV having already plateaued at 60p. We are buyers with an 80p PT.

are you done with that?

Yeah. And on RBS, I guess there’s a bit of a readthrough from the Admiral numbers, which look boring but okay.

on the insurance side

which has been a bit difficult for RBS

and HSBC

compensation culture

and all that

Yup – there’s a huge Bernstein note rattling around today talking about whiplash.

I won’t post, as it’s a bit esoteric, but an entertaining read nevertheless.

Right – are we all done now?

one more thing

for fans of the housebuilding sector

Persimmon

results out

and a positive reaction

Persimmon PLC (PSN:LSE): Last: 423.40, up 22.8 (+5.69%), High: 424.70, Low: 399.50, Volume: 2.26m

and here’s a bit of comment

Solid results, £75m provision release
The key highlight in the Persimmon FY09 results was the provision release. The group released £75m of provisions, a small writeback after £710m of writedowns in 2008 but still equal to 25p per share, taking NAV to 540p. Volumes fell 12% and prices were 7% lower. Underlying PBT came in at £7m, in line with consensus and better than our forecast of a £4m loss. H2 PBT was £24m, with H2 EBIT margins of 6% signalling a return to profitability. The landbank equates to 6.7 years supply at current output levels.

Positive outlook
Forward sales are up 29% and prices have held firm since the start of the year. Sales rates per site per week are 20% up in 2010. The group continues to use part exchange and shared equity schemes to push sales through. The group is currently operating on 370 sites compared to 420 last year, but will bring a further 90 sites on-stream in H1. FY margins are expected to exceed the 6% recorded in H209.

Excellent cash generation
Persimmon is one of the few housebuilders to seriously generate cash during the downturn. Net debt of £268m is down from £1.2bn at peak and down over £300m during 2009. The group may, in our view, return to M&A during 2010 if the post-election outlook remains visible. It has a superb track record in acquiring and cutting costs.

Upgrade to Buy
At £4, the shares are trading on a 26% discount to NAV. This is one of the highest discounts in the sector – yet Persimmon is one of the best operators, and is the only housebuilder not to issue equity. As the shares are well below our 520p TP, we upgrade to Buy.

so writting land values back up

For now.

Right

are we done?

Yeah, I think we are.

crikey

the market is flying now

FTSE 100 up 41 points at 5,447

ROTR have failed us

Man Utd still not announced their results

and a small rally in sterling

$1.4974

Yup – that’s a small rally.

it is

time for lunch

we are taking Joseph out

for an initiation

but before that

I need to check if out guest editor

is appearing tomorrow

(Lorcan – you have not been zapped)

Yea

the guest editor is coming in tomorrow

Can we say who yet?

nope

that will be revealed later

And it’s a serious heavyweight, right?

oh yes

should be fun

Ok – let’s close this. Thanks for the comments.

yes

see you tomorrow

I had some RAW on Brewin Dolphin

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.

and some new box ticking the FSA are making them do

and the cost of re-papering everything

but that can wait until tomorrow

cya

This entry was posted by Neil Hume on Tuesday, March 2nd, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 2 Mar 2010

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