FT Alphaville » Markets Live transcript 24 Jan 2011

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Markets Live transcript 24 Jan 2011

Posted by Neil Hume on Jan 24 11:03.

Markets Live chat transcript for the chat ending at 12:26 on 24 Jan 2011. Participants in this chat were: Neil Hume, FT bryce.elder

Hola

Markets rabble

it’s 11.03am

and time for an hour or so

of market chit chat

Bryce is at his desk

and raring to go

the right hand side is filling up

so we can begin

11:04AM

and err

a very quiet start

to what should be a busy week

Hm.

FTSE 100 drifting higher

up 15 points at 5,910

mainly due to defensive stocks

which makes a change

Whitbread PLC (WTB:LSE): Last: 1,749, up 29 (+1.69%), High: 1,764, Low: 1,736, Volume: 142.40k

AstraZeneca PLC (AZN:LSE): Last: 3,018, up 54 (+1.82%), High: 3,023, Low: 2,981, Volume: 676.02k

British American TobacCo PLC (BATS:LSE): Last: 2,324, up 41.5 (+1.82%), High: 2,328, Low: 2,294, Volume: 618.06k

Diageo PLC (DGE:LSE): Last: 1,225, up 21 (+1.74%), High: 1,227, Low: 1,206, Volume: 1.58m

off setting those gains are the evil, big big bad banks

boo

hiss

they are all down

Royal Bank of Scotland Group PLC (RBS:LSE): Last: 43.41, down 1.53 (-3.40%), High: 44.45, Low: 43.06, Volume: 46.62m

Barclays PLC (BARC:LSE): Last: 296.95, down 3.95 (-1.31%), High: 302.20, Low: 293.50, Volume: 13.67m

Lloyds Banking Group plc (LLOY:LSE): Last: 65.38, down 1.99 (-2.96%), High: 67.58, Low: 64.01, Volume: 85.92m

So that’s after the “we might break up the banks” speech at the weekend.

yeah

which I didn’t read that way at all

it was more of a

we appreciate this is declicate

and won’t be doing anything as bold as that

but that doesn’t make for a very snappy headline

in fact

I can find nothing in the statement that says break the banks up

ring fence the retail arms, yes

but break up

I watched that Vickers speech. It was so dull that the BBC cut mid-sentence to Brian Cowen speaking Gaelic

So is there any comment? Reaction? Sober analysis?

there is, analysts trying to figure out what the impact of subsidiarisation might be

here’s Investec’s effort

As Sir John himself concluded, the talk “contained more questions than
answers”. We believe the message was better than some had feared – as a
proposal that either RBS or LLOY be broken up does not seem to be on the
cards. We would expect the market to be relieved that the IBC does not appear
as hawkish as had been reported by the press. We continue to see upside for
RBS to 57p and would argue that most outcomes, albeit within a considerable
range, are to the upside.

The Chairman of the Independent Banking Commission, Sir John Vickers, gave a
speech on Saturday outlining the IBC’s preliminary thoughts. As Sir John himself
concluded, the talk “contained more questions than answers “. News agencies
interpreted the message very differently – with some (such as The Sunday
Times) taking the view that the IBC would recommend that banks be broken up.

We interpret Sir John’s comments as suggesting that some form of
subsidiarisation, in which retail divisions are legally segregated from investment
banking, will be the IBC’s most likely proposal. We believe the message was
better than some had feared – as a proposal that either RBS (Buy) or LLOY
(Hold) be broken up does not seem to be on the cards. We also note that as IBC
has no legislative powers it remains very unclear which proposals, if any, will
make it onto the Statute book. The IBC’s interim report is due in April and the final
report in September.

The speech focused on only one half of the IBC’s brief – “structural measures to
promote stability” – with competition issues being left aside. Sir John did give
some pointers about the direction of the IBC’s thinking. The key headline appears
to be that “the IBC is unlikely to favour radical forms of narrow or limited purpose
banking”. We interpret this to mean that the IBC will not recommend the breakup
of any UK bank to create “narrow banks” (liabilities: retail deposits, assets: Govt
bonds) . As Sir John observed, “to ban the funding of ordinary credit by deposits
could have considerable economic cost.”

However, the door was left open to subsidiarisation: “one response could be
somehow to ring-fence the retail banking activities of systemically important
institutions and require them to be capitalised on a stand-alone basis.”

Presumably this means

the retail arms

will be forced to hold more capital

on not have as big loan to deposit ratios

not sure how it would worl

Possibly.

here’s bit more

from RBS

The Independent Commission Banking (ICB) is halfway through its review of the competitiveness and financial stability of the UK banking sector. On Saturday, the ICB offered the first insight as to how its thoughts are progressing on how to improve the financial stability of the UK banks in future. Although the speech did not give any indication of the likely end destination of the Commission’s key conclusions, we note that the Commission i) appears sceptical about the diversification benefits of universal banking; ii) is focused on ensuring stronger balance sheet structures for all banks, particularly investment banking and systematically important banks iii) places importance on putting measures in place to adequately safeguard retail (including SME) customers in the event of future bank failures

We remain of the view that the balanced and thoughtful grasp of the key issues exhibited thus far should result in sensible rather than revolutionary new world recommendations – as these would come at significant cost to the UK economy. We do believe that banking industry capital ratios will be higher in future, supported by a stronger regulatory focus on funding and liquidity

In the event that functional subsidarisation were to feature amongst the ICB’s eventual recommendations, we believe these would be likely to be given a lengthy transition period and – where at all possible – implemented in tandem with similar initiatives being carried out internationally. All of the quoted UK banks remain highly exposed to the ICB’s report. We acknowledge that regulatory uncertainty will remain until publication of the interim document in April – which we expect to offer a fairly clear view of the ICB’s likely end recommendations. These will though be open to further consultation afterwards and not finalised until September.

Right, bored with banks

as are, i suspect, the rabble

shall we move onto something more exciting

11:11AM

Explain this

Ocado Group PLC (OCDO:LSE): Last: 242.00, up 15 (+6.61%), High: 244.30, Low: 229.00, Volume: 975.98k

242p!

market cap £1.2bn

Bid, innit. The wires say so.

nooooo

Predator lurking.

I can’t believe that

I won’t believe that

who would pay £1,2bn for a load of vans and a warehouse?

Um ………… Northgate?

I can see synergies there.

As for a supermarket ………….. er ……………

Build versus buy? I’d assume the former’s a fraction of the latter.

(@BrassMonkey – legal reasons??? Such as what??)

Is this where we point out there’s a huge short position?

there is

and interestingly

there has been some change

the amount of long supply has spiked up

and the utilisation – the amount of stock than can be borrowed on loan – is down sharply

evidence I feel that people are finally starting to cover

and that is also

what I have been hearing from hedge fund brokers

whose clients

are really annoyed

when stuff like this flies around

and makes the short sqeeze even worse

OCDO LN is the story that nobody wants to admit. – Ask any mkt person and they dismiss it as short squeeze. – Ask any retail person & they say either Asda or MRW need/want to buy it to stem Tesco’s amazing advance into the online delivery business. – FT highlights stake building, but no names. – Fact is, John Lewis Pension can now sell their 11% stake (180 day lockup period has expired) & the growth of Waitrose Direct means that their holding is a slight contradiction to their operational aims. – The Sell side clearly misunderstands this stock, ’6 sells’ vs ’5 buys’, but Ocado should not be judged in the retail peer group, especially as its supply is so reliant on the majors. With a major, its simply a marvelous bolt on opportunity & with MRW’s network in the Midlands and North, to further grow sales by not opening a shop!

An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.

and before anyone asks

that wasn’t written by Ocadofan

but a City broker

@ROK around 74 days to cover the short in Ocado

(@Brass Monkey – not sure how we could be sitting on something positive Ocado would sue us for. Pls explain your theory)

Ok – that all sort-of makes sense.

I’m still a bit lost as to why the squeeze has gained such momentum though.

galore in this

gathers momentum doesn’t it

and if the results disappoint

then this thing comes all the way back

complete with speculation of a big John Lewis share placing

I can see the market reports now

a month of spec in February

(@Brass Monkey. I see what you are driving at now. and no. We don’t have anything like that)

(@Brass Monkey: to be clear, there are no reasons to suspect that.)

are we done with the Webvan

still trading at 242p

Ocado Group PLC (OCDO:LSE): Last: 242.50, up 15.5 (+6.83%), High: 244.30, Low: 229.00, Volume: 979.15k

market cap £1.2bn

I repeat

£1.2bn

madness

11:20AM

Moving

some discussion on the right about De La Rue

and the latest bid from France

Oberthur have offered 935p a share and that has been kicked back

now

in answer to Andrew’s question about the Indian business

it’s clear to me

that the Indian business is far from lost

and also

I reckon this week’s trading statement from the company will show that they are still picking up business in the rest of the world

De La Rue Plc (DLAR:LSE): Last: 814.50, down 5 (-0.61%), High: 876.00, Low: 798.50, Volume: 1.08m

Tim Cobbold, Chief Executive of De La Rue, said:

“My first few weeks at De La Rue have confirmed my view that De La Rue is a high quality business with substantial potential in growing markets. There are, of course, opportunities for improvement, building on changes already made, but shareholders should be in no doubt of my absolute commitment to realise De La Rue’s full potential and deliver significant value.”

which goes along way to explaining today’s price action

ahead of the bid

and the weekend press rumours

DLAR trades as high as 876p

bid comes out

and they are down on the day

De La Rue Plc (DLAR:LSE): Last: 814.50, down 5 (-0.61%), High: 876.00, Low: 798.50, Volume: 1.08m

that’s says a number of things

first, the French are struggling to put a knock out bid on the table

even with Bain Capital chipping in EUR400m

and they need a recommendation

because Bain won’t back a deal without one

so I think the chances of a bid are increasingly slim

given the amount of time left before the bidding deadline

Oberthur probably have one more bump left

but the three big shareholders in this

don’t want to sell out below £10

Yes – I think all that’s fair.

The chances of this going much further look to be receding.

(LYO – whare are they now. Come on tell us all)

nothing in today’s statement to make me change my mind

they won’t get a recommendation

because the French can’t pay enough

now we just need to figure out where DLAR trade

without a bid

I guess Friday’s trading statement will help with that

Top three in De La are ……

accounting for about 25% of the stock.

might be higher

could be 30%

anyway I guess

Oberthur will regard this as a useful excercise in gauging market reaction

but if they haven’t figured things out yet

they never will

11:28AM

Ocado now trades at 244.5p

as the bid email

gets picked up

by the trading/news robots

(@NJS – I don’t think centra banks like dealing with private/leveraged companies with PE backers)

(@Fatdaz, they won’t. they see dlar as a unique company. if they sell it there’s nowhhere to recycle the cash. they view this as a company that will be around in 30 years and has had one smallish problem at a plant in the UK)

(@Fatdaz. also all the big shareholders love the new CEO and believe he will deliver. Cobbald is the poster boy for UK long onlys)

11:30AM

Right – so we seem to be having some system issues today.

So, if you’re in, please don’t refresh.

And if you’re reading the transcript having failed to get in — sorry.

Those of you here will have to comment twice as much to compensate I’m afraid.

yes

sorry about that

we have mailed assanka

Cracking little software shop who built FT Alphaville

to see what the issue is

11:32AM

Right

we have some breaking news

the terms of EFSF

Ireland bailout bond

and here it is

***EFSF € 5YR – TIMING/BASIC TERMS***

(@Fatdaz. new management. they listen to Cobbald)

Issuer………….EFSF (EFSF – Aaa/AAA/AAA)
Size……………EUR benchmark (max €5bn)
Type……………RegS Eurobond, off €27bn Guaranteed DIP
Coupon………….Fixed, Ann ACT/ACT, short first
Maturity………..18-Jul-2016
Settle………….01-Feb-2011
Guidance………..TBD
Leads…………..CITI/HSBC/SG CIB (Dur.Mgr/B&D: HSBC)
Law/Listing/Denom..English/Lux/€1k
Timing………….Expect tomorrow’s business (formal
bookbuilding, official guidance & pricing)

(@FAtdaz. and they are still picking up lots of decent business we hear. it’s just that central banks don’t let them reveal it.)

Tears for Tier 1 Emoticon

11:34AM

Back to the equity market

where now

Serco?

Serco Group PLC (SRP:LSE): Last: 559.00, up 1 (+0.18%), High: 562.50, Low: 555.00, Volume: 354.64k

they were the bidder for SRA International

not BAE as we thought

although they could be lurking in the wings

in fact might be seens as a white knight for the company

Ok – so we may need to explain what SRA International is.

spy firm?

Well. Sort of. It’s an IT contractor for US federal government.

So, yes.

But it also does air traffic control systems and things like that.

right

and Serco

bid and walked away

as the SRA price ran away on bid rumours reported here and elsewhere

Indeed. That looks to be how it happened.

SRA shares up 27% since the start of the year.

wow

quite a move

On no news whatsoever.

So, for the sake of completeness, we should have a look at the Serco statement from this morning.

Serco Group plc (Serco), the leading international service company, notes the recent speculation regarding a possible acquisition by Serco.

Serco confirms that it is not in any discussions regarding any major transaction at this time.

note

at this time

which means

they were in talks

but it all went pear shaped

now the key question for me

is why say anything at all

it’s not as if they had to

certainly it’s welcome

but it occurs to me they might have been trying to say

don’t panic, we still think the UK market is growing

and aren’t going to blow $2bn on something expensive in the US

anyway

some comment

first up Charles Stanley

Our view: Serco’s statement that it is not in any discussions regarding material transactions follows on from the story in The Sunday Telegraph that it had pulled out of talks to acquire US based SRA International for $2bn following rumours of a higher offer from BAE systems. If Serco is looking at additional overseas acquisitions we view this as an admission that its core UK businesses are slowing. Contracts from both the Central Government and Local Authorities following the Spending Review are proving slower to materialise than anticipated and margins are also potentially under threat. We maintain our reduce recommendation.

and now

Shore Capital

SERCO^ – Acquisition Speculation, BUY, 558p. Reports in the press yesterday (Sunday Telegraph) suggested that Serco was set to mount a cUS$2.0bn bid for US security specialist service provider SRA International. The suggestion was that talks had been ongoing re a bid for some weeks. Serco issued a statement yesterday stating that no talks are taking place at present re a major acquisition. We believe that it is likely that Serco is looking for further acquisitive/corporate development at present – as always the focus being on growing the company’s skill base. It is also likely that overseas development is to he fore, given the environment in the UK public sector (though we accept this should bring organic opportunities in due course). We believe that Serco has a strong track record in finding transactions and integrating businesses into the group. Serco’s balance sheet is strong at present with recourse net debt estimated at end December 2010 of c£240m; this is set to fall to a net cash position over the next two years – thus financially inefficient, to our minds. However, we believe that Serco management has options for strategic development in delivering shareholder value. Whilst we expect further acquisitive activity in due course, we also expect cash returns to shareholders to continue to rise. BUY.

OK – thanks.

And UBS has a very detailed look at the mechanics of this one.

SRA would be a substantial deal for Serco (SI International, the last major deal
it did in 2008 was c.$420m) and the $2b quoted would indicate a c.12x forward
EBITDA multiple. SRA is focused on the US government (42% DoD, Justice,
Homeland Security; 17% health, 33% Civil and 8% Intelligence/Space). On a
proforma basis, it would add c.£1b (or 25%) to Serco group revenues and further
increase the non-UK weighting from c.30-35% to c.50%. SRA also reports an
EBIT margin of c. 7-8% (vs Serco 2010e margin of 6.0%). SRA is controlled
(via voting structure) by its chairman and founder Ernst Volgenau with a 24%
stake who would clearly need to support the deal. Article also suggests BAE
could be interested. Other risks to Serco could be further increasing exposure to
the US DoD at a time when budgets are under pressure.

Finally we note a DOD announcement at the weekend that Serco has been
awarded an $850m contract for IT installation and certification for Space and
Naval Warfare over 3 years. At a headline basis this would appear to be very
large (4% on group organic revenue growth), but we await further details from
the company.

A deal of some kind is likely for Serco this year (we flagged it as the most likely
acquirer in the sector in our recent sector note) and US federal defence is a
stated area of interest. Using cash might just be possible (Serco on 0.2x debt:
2011e EBITDA) but would push gearing ratio above 2.5x (perhaps
uncomfortable), although the FT today suggests a £500m rights issue was
considered.

an expensive purchase

against an uncertain backdrop

now wonder they backed away

Is BAE braver?

it’s bigger

And they could sell it as a strategic deal easier than Serco.

might be synergies

Might be.

BAE Systems PLC (BA.:LSE): Last: 354.80, up 5.2 (+1.49%), High: 355.60, Low: 350.00, Volume: 2.20m

Though it’d be goodbye buybacks.

indeed

11:44AM

a couple of stories to catch up on

one is Soco

Soco International PLC (SIA:LSE): Last: 370.10, up 0.1 (+0.03%), High: 372.50, Low: 369.10, Volume: 79.45k

Deal Reporter says SIA has held talks with Chinese oil and gas groups. SIA spoke to PetroChina, CNOOC and Sinochem. However, the Chinese parties felt SIA’s asking price was too high. SIA did not initiate the talks, which are understood to have focused on the group’s Vietnam assets.

and the other

involves Fosters

and SABMiller

SABMiller PLC (SAB:LSE): Last: 2,103, up 0.5 (+0.02%), High: 2,118, Low: 2,102, Volume: 551.01k

The SMH writes that with the FGL board tipped to give official approval on February 15 for the split of its wine and beer operations, SAB has overcome a key obstacle in a potential takeover bid for the group. SAB is understood to have spent the past few months working with lawyers to address legal and commercial issues relating to its joint venture with CCA that have prevented it making a lone bid for FGL. Those obstacles are now understood to have been overcome, leaving SAB with the option to bid for FGL.

any idea what CCA is?

Dunno.

Ah – Coca-Cola Amatil

CCA is the largest non-alcoholic beverage company in the Asia-Pacific region and one of the world’s leading Coca-Cola bottlers, with operations in six countries.

do they have a bottling deal with them

where does that fit in

Aussie JV

CCA imports, markets and distributes Miller in Oz.

right

got it

http://www.sabmiller.com/index.asp?pageid=149&newsid=449

doesn’t actually say in the piece

how it is sorted

still

and the only other piece of 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.

we have today

Cable & Wireless Worldwide PLC (CW.:LSE): Last: 72.00, up 2.1 (+3.00%), High: 72.40, Low: 69.65, Volume: 2.85m

Oh yeah. Bid rumour?

yeah

someone stalking apparently

no price mentioned

or name

just a whisper

has been talking about it

Well, we can trot out the usual names I guess.

AT&T were rumoured back in September.

hmm

did that makes sense

after this company generates no cash

is a mish mash of companies

Energis, Thus etc

(Bohemia. No. i think only in Firefox)

Well, the AT&T rumours arrived after a big profit warning, somewhat conveniently.

And all the analysts said that AT&T was only interested in picking up business from multinationals

I guess the directors would sell out quickly – they all have big fat options packages

True. But So &W, with is meh UK customer base and no wireless exposure, looks a tricky sell.

yep

it does

not sure you’d buy it

just to get a few big MNC’s contracts

still

never say never

11:51AM

Right

let’s move on to Chicken Man

who did make a bid for Northern Foods late on Friday

and it was recommended

by the board of NFDS

Northern Foods PLC (NFDS:LSE): Last: 73.25, up 10.25 (+16.27%), High: 73.75, Low: 72.50, Volume: 84.74m

73p a share I think

although that will fall once NFDS pays a divi

Game, set and match to Chicken Man then?

Well, it’s a big ask for Greencore now

They’re going to struggle to finance anything at this level.

indeed

the promise of 40p of synergies

in the deal is just that

a promise

Chicken Man is offering hard cash

and for Greencore to have any hope of winning they day

they need to find a large dollop of the folding stuff ASAP

Northern Foods PLC (NFDS:LSE): Last: 73.25, up 10.25 (+16.27%), High: 73.75, Low: 72.50, Volume: 84.79m

Well, they can’t really do a stock deal. Greencore’s only capped at €250m or so.

So, once again, it looks all over.

it does

they need a cash kicker

actually what’s interesting here

is that debt

is clearly available

for private buyers

Yeah – there was a lot of cynicism that Mr Chicken could pull this together.

Yet – financing agreed, pension fund chiefs pacified ….

Impressive.

indeed

right some comment

I have something from Shore Cap

and Bryce

have you got anything from Charlie Mills at Credit Suisse

who called this one spot on

GREENCORE HINTS OF IMPROVED OFFER: Despite losing support of the NFDS board, Greencore this morning have put out a statement giving a strong hint they will return to the table with an improved offer possibly with a cash kicker stating that they recognise the importance Northern Foods board attached to the certainty of cash value in their decision to change their recommendation. Boparan’s bid resets the takeover timetable giving Greencore 28 days to submit any revised bid to NFDS shareholders.

GREENCORE NEED A CASH KICKER: A revised bid would need to add a cash kicker to the existing merger terms. They could also adjust the merger terms to provide NFDS’ shareholders a higher proportion of equity in Essenta and raise cost synergy targets which this morning they reiterated a high degree of confidence of achieving.

Greencore also make the point that Boparan’s bid does not guarantee to pay a final dividend to NFDS shareholders as they had which was to be announced in March/paid in August) and expected to be 3p per share. Effectively meaning the bid Greencore is competing with is 70p (not 73p). We would just say that if Greencore can get close to Boparan, we think the industrial logic is much more compelling with 4-5x synergies…Greencore are down but not out. Watch this space.

And here’s Charlie Mills, who as you say has been excellent all through this story.

The 73p agreed cash offer from Ranjit Boparan looks a compelling bid to
us. We struggle to see how Greencore can beat such an offer. We have
moved our price target to the cash offer.

First up we believe Northern’s management have done well to secure such a
price. We had in mind something nearer 65p, but perhaps this was the price
of an agreement?

The offer represents a multiple of 7.9x 2010/11E EBITDA (including the
pension deficit). By way of a benchmark there has been a flurry of private
equity deals in the UK food space over the last decade paying 6-9x EBITDA.
We would expect Northern to be at the lower end given its predominately
own label revenues, so the price looks pretty reasonable.

Greencore may not have given up, but would struggle to finance an
alternative we suggest. It is worth remembering the initial response to the
merger was to mark Northern shares up from 45p to 55p, implying, we
believe, that the market only ever bought into the idea that £15m of the
£40m savings would be delivered (a view we rather agreed with). If the
market doesn’t believe the savings, we struggle to see what Greencore can
do – any offer it might make would need to be substantially in paper

hmm

good point on the synergies

if the market believe it

the price would have been at a level

Chicken Man

could not have matched

and let’s face it

two food companies

delivering what they promise on synergies

very unlikely

12:01PM

guess the ticker time

what’s the new name for BAY:LSE

Well, it’s British-Airways-Iberia-American-Airlines

BAIAA

International Consolidated Airlines Group SA (IAG:LSE): Last: 285.40, up 285.4 (), High: 289.00, Low: 284.00, Volume: 5.82m

yes

although

that doesn’t work on Reuters

285p

is that up or down

up I think

should have closed on a pro-forma basis at 280p on Friday

and Merrill

reckons they will be above 300p soon

Based on the close share prices of BA and Iberia, we estimate the IAG valuation
implies a FY 12/11E PE multiple of 16.8x falling to 10x for FY12/12E. We see a
potential valuation range between 315p and 350p (€3.8 and €4.2) per share,
suggesting upside potential. This includes an FY12/11E EV/IC multiple range
between 0.32x and 0.34x. At the low end of the range, this would imply FY12/11E
and FY12/12E PE multiples of 19.4x (includes only limited synergies) and 11.5x
respectively. At the high end of the range, this would imply FY12/11E and
FY12/12E PE multiples of 21.4x and 12.7x respectively.

Merrill’s always been keen on BA though.

No change there.

true

talking of BA

what do you make of this rumour

or idea even

that they should buy EasyJet

Easyjet PLC (EZJ:LSE): Last: 381.50, down 0.5 (-0.13%), High: 390.10, Low: 378.70, Volume: 1.20m

so they can have a lost cost offering

Hm.

A “lost cost” offering indeed.

sorry

It sheds money for nine months a year.

slip

but not a bad one

I reckon

it’s a non started

for one

BAY would pay in paper

and Stelios

can you imagine him

agreeing to taking a load of BA paper

never in a million years

No. Fair point.

he wants dividends

and when did BA

last pay a divi

answers on a postcard please

actually

I stole those points

from a good note from Charles Stanley

Our View: We do not see Easyjet as a potential takeover target for IAG or anyone else. With oil prices edging into dangerous territory, no airline is going to hazard the £2.1bn of cash that it would take.
§ Sunday Times business editor Dominic O’Connell used his column yesterday to highlight Easyjet’s poor share price performance and operational difficulties (“a few too many problems recently”)…

§ …and concludes that it might become a takeover target for the new International Airlines Group.

§ That’s extremely unlikely, for the following reasons:
o IAG is designed to facilitate all-share transactions, whereas Stelios would surely want cash.
o Stelios is also keen on dividends; but IAG does not pay a dividend and is not likely to give any undertaking on the matter.
o There are no revenue synergies to be had from adding a point-to-point low-cost carrier to the BA/Iberia/OneWorld network.

Easyjet PLC (EZJ:LSE): Last: 380.00, down 2 (-0.52%), High: 390.10, Low: 378.70, Volume: 1.22m

not an overwhelming reaction from the market

That last point is where I got stuck. What does Easyjet add to the BA model?

Some rubbish slots from Luton.

Not sure I get the logic.

easyjet is cheap

and sure to get cheaper

but even then I don’t see it

Stelios is a massive poison pill

I guess that bloke who runs the Indian low cost airline

could take a shot

if he has the cash

Stelios is indeed a massive ….. poison pill.

(could everyone who had trouble logging on, mail me with a screen shot pls. neil.hume@ft.com. I can then send on to assanka. thanks.)

Right. So that’s enough of BA.

Sorry, didn’t mean to say BA.

Meant to say International Considated Airline, Zeppelin and Spats Enterprises PLC or whatever it’s called now.

Anyway, let’s move on.

12:11PM

small cap corner

Sure. What do you have?

I had a few emails from excited GKP’ers over the weekend

The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 171.25, up 2.75 (+1.63%), High: 176.00, Low: 170.00, Volume: 1.69m

because of this

According to the Kurdistan Regional Govt (KRG) website, oil exports from the region may re-commence next month, following a meeting between the Kurdish Prime Minister and his Iraqi counterpart. If this proves to be the case, it should be seen as a positive for Heritage Oil (HOIL LN), Gulf Keystone (GKP LN), Shamaran (SNM CN) and DNO (DNO NO).

Shamaran

not heard of that one before

This story was around all last week, wasn’t it?

yep

but as I say

got a few emails alerting me to the news

Ah.

still

they doesn’t mean anyone will get paid does it?

Nope.

There’s still a fair way to go before we get to the point of actual cashflow.

(ROK – do you have a link to that?

quite

moving on

the sector watcher has been taking a look at Nighthawk

and there big oil in place upgrade

Nighthawk Energy Plc (HAWK:LSE): Last: 11.00, up 1 (+10.00%), High: 11.50, Low: 10.25, Volume: 11.16m

Nighthawk Energy – HAWK LN
HAWK announces an increase in its Oil In Place (OIP) estimates on its 50%-owned Jolly Ranch acreage in Colorado. A study by Schlumberger has shown OIP/acre to be materially higher than previously estimated at 35,000 barrels/acre compared to 5,900 barrels/acre previously. However it is worth highlighting that the study concentrated on only 3,200 gross acres, compared to the previous study in 2009 that encompassed 246,000 acres. Gaffney Cline will now undertake a reserves/resources study. I wouldn’t get too excited about today’s news – the CEO describes it as “encouraging” which is about as far as I’d go. The group still has a lot to do to prove that Jolly Ranch can produce oil at commercial rates.

and he’s also been having a look at Circle Oil

Circle Oil PLC (COP:LSE): Last: 37.90, up 0.9 (+2.43%), High: 38.75, Low: 37.25, Volume: 3.81m

Circle Oil – COP LN
The group announces that the fourth of a five-well drilling campaign has been successful, with the KSR-10 well testing 5.5 mmcfd of gas (900 boe/day). COP has 75% of the Sebou Permit which contains the well, which is the third success out of four. The final well in the programme, KSR-11, will now be drilled. According to its website, COP targets prospects in Morocco which are typically low-risk although small – the previous six-well campaign in 2009 generated around 20 bcf of gas (3.3m boe). The group also has assets in Egypt, Tunisia, Oman and Namibia. Today’s news looks like a small positive.

Major Lazer

we do have something on Churchill

following Friday’s news

that the government in Indonesia

is going to ban exports of some coal

Churchill Mining Plc (CHL:LSE): Last: 118.00, up 12.5 (+11.85%), High: 121.00, Low: 110.00, Volume: 823.11k

and here is the note

from Northland Capital

Churchill management this morning confirmed to us reports in the Indian
Economic Times (ET) that it is negotiating with ‘several’ Indian power
companies with the intention of finding a buyer for EKCP. In an email to ET CEO
Paul Mazak confirmed plans to sell and negotiations with Indian companies.
These are said to include large private companies and a couple of stateowned
enterprises. Whilst not conclusive at this stage, this is potentially
significant positive newsflow. The development also seems to promote an
outright sale as opposed to a JV partnership as the likely option. We believe a
sale would value the assets at a narrower discount to the project NPV. The
current market valuation accords less 10% of the $1.8bn NPV suggested by the
feasibility study, suggesting significant scope for upside.

On Friday Churchill shares reacted negatively (-11%) to news reports
quoting Indonesian Government officials on potential plans to ban exports
of coal with an energy value of less than 5,600 kilocalories per kilogram
from 2014. The mooted move would be directed at achieving higher
export prices and support the supply needs of state electricity provider PT
Perusahaan Listrik Negara (PLN). Despite, the understandable share
response to the news, we believe this may be an overreaction.

This is not the first time such a move has been mooted for both strategic
and economic reasons in Indonesia. If this were to be passed, it would
invariably have implications for the EKCP project. However, whilst we do
not dismiss this out of hand, such a move would seem to be contrary to the
requirements of existing power station infrastructure in Indonesia for higher
calorific value coal. Churchill is already working closely with PLN and still
expects to meet all of its domestic supply obligations.
In the worst case scenario (i.e. increasing the calorific value), coal drying
technology exists and PLN is evaluating the potential for EKCP coal to be
used in its coal drying technology (which gives Churchill an early lead if the
move does pass).

In addition, the proposed move is only being talked about and we would
anticipate serious lobbying by the mining majors. Churchill has a highpowered
Indonesian advisory board that should help it navigate the
regulatory landscape.

there you go

and finally in this segment of the show

a small cap

that isn’t really a small cap

European Goldfields Ltd (EGU:LSE): Last: 948.70, up 2.2 (+0.23%), High: 946.00, Low: 942.50, Volume: 9.55k

worth £1.7bn

Oh yes. We suggested it was looking a bit toppy, for a company with no production.

the same as Centamin, which is actually producing

Liberum

claim the permitt is imminent

European Goldfields – Permits “imminent” – At the end of last week we met with Martyn Konig, Executive
Chairman of European Goldfields and Steve Sharpe, Senior VP Business Development. With financing now
lined up for its pre-construction Greek and Romanian projects and Greek permits “imminent”, 2011 looks set to
be a watershed for the company as it embarks on its way to estimated production of over c.700koz pa by 2014.
BUY

If it is able to eventually match Olympias’ present 3.6Moz of reserves, based on
traded producer comps of US$444/oz of EV/reserve, we estimate this could imply
EGU’s EV at US$5.6bn or £19.43/shr.

£19.43p a share!!!!

700koz pa by 2014!!!

ambitious stuff

Yeah, well. It takes two opinions to make a market.

A sanely pragmatic one and an insanely optimistic one.

(@Rok: isn’t that just Broughy stating facts? Not sure that gets us anywhere.)

£19.43

still

the Liberum mining team are highly rated

who are we to argue with that

Bryce

any more small caps from you?

No, don’t think so.

We should probably wind up soon.

yeah

Given the lack of ROTR activity.

I have a lunch in St James

Anywhere nice?

with one of the ROTL

well

it was supposed to be the RAC

but apparently I have been blackballed

so its

The Avenue

Oh. Never mind.

Order defensively.

yeah I know

still

close to the Tube

Green Park that is

True. That’s something.

no fish

no there on a monday

Ok – before we say something that’ll have you blackballed from the Avenue as well …..

I had better scoot

Yup – thanks for all your comments today, ROTR.

The few of you who made it in

(ID – not revealing our contacts on this one. sorry)

yes

hopefully

we will have things fixed tommorrow

thanks Rable

(TK – thanks and I am prepared. There’s a Pret up the road)

see ya all tomorrow

Bye.

(ID – not odd at all. we don’t tell people the names of contacts we have private conversions. and nor I doubt do you)

(ID yellow card for that)

bye and we all now know which gold stocks is most popular among london’s hedge fund community

This entry was posted by Neil Hume on Monday, January 24th, 2011 at 11:03 and is filed under Uncategorised. Edit this entry.

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Markets Live transcript 24 Jan 2011

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