Markets Live chat transcript for the chat ending at 11:24 on 18 Apr 2011. Participants in this chat were: Neil Hume, FT bryce.elder
NH
Hola rabble
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and welcome to Markets Live
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90 minutes or so of great markets chat
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Bryce is here
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and hey
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the system is working today
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no bugs
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right lots to get through today
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and most of its negative
BE
Good morning everyone.
BE
Happy monday.
NH
Greece to restructure debt
NH
The True Finns winning 19% of the vote in Finland
NH
and threatening the Portugal bailout
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Spain’s yields going wider
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China tightening bank lending rules again
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all of which
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has seen London sell off almost 50 points this morning
NH
we are currently down 47 points at 5,948
BE
As I say, happy Monday.
BE
Right – so where should we begin?
NH
not sure really
NH
the Greek debt restructuring
NH
lots of stories
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denials and stories
11:08AM
NH
trying to piece this together
NH
the IMF believes Greece should restructure
NH
and so do we
NH
- The WSJ are reporting that the IMF Believes Greece Should Consider Debt
Restructuring By 2012. The International Monetary Fund believes Greece’s debt is unsustainable and has told European government and central bank
officials that Athens should consider restructuring by next year, three people familiar with the situation said Saturday.
Restructuring By 2012. The International Monetary Fund believes Greece’s debt is unsustainable and has told European government and central bank
officials that Athens should consider restructuring by next year, three people familiar with the situation said Saturday.
NH
this is from a broker
NH
“The IMF believes the debt situation in Greece is unsustainable,” one of
those people, who has direct knowledge of the matter, told Dow Jones
Newswires. “Senior (IMF) officials have told the parties involved that
restructuring should be considered soon,” including the European Commission
and euro-zone governments.
- IMF spokesman William Murray denied the IMF was recommending a restructuring
of all Greek debt including that held by private holders, but the IMF has
said the fund has considered extending the loan repayment schedule for
Athens, a form of restructuring.
those people, who has direct knowledge of the matter, told Dow Jones
Newswires. “Senior (IMF) officials have told the parties involved that
restructuring should be considered soon,” including the European Commission
and euro-zone governments.
- IMF spokesman William Murray denied the IMF was recommending a restructuring
of all Greek debt including that held by private holders, but the IMF has
said the fund has considered extending the loan repayment schedule for
Athens, a form of restructuring.
NH
so that one was denied
NH
and then the Greek govt denied a report in a local paper
NH
which claimed the PM has discussed this topic
NH
Athens repeated it has no plans to restructure its debt, denying a Greek media report it had already requested talks with its lenders as mounting speculation it would need to cut a deal hit debt markets and the euro.
Greek daily Eleftherotypia said on Monday Greece had told the International Monetary Fund and the European Union earlier this month at a meeting of European Finance ministers that it wanted to restructure its debt.
Discussions on the issue were expected to start in June, the newspaper said, citing a senior IMF official.
Greek daily Eleftherotypia said on Monday Greece had told the International Monetary Fund and the European Union earlier this month at a meeting of European Finance ministers that it wanted to restructure its debt.
Discussions on the issue were expected to start in June, the newspaper said, citing a senior IMF official.
NH
U.S. Treasury Secretary Timothy Geithner had also told Greek Finance Minister George Papaconstantinou a restructuring would be needed, the paper said.
“This is not true. The minister exhausted the issue yesterday,” said the finance ministry official, who declined to be named, referring to repeated denials by Papaconstantinou over the weekend.
Greece was the first euro zone country to need a bailout from EU members and the IMF, and its struggles to pay its debt have dented confidence in other euro zone nations’ public finances, driving bond yields higher across the bloc’s periphery.
“This is not true. The minister exhausted the issue yesterday,” said the finance ministry official, who declined to be named, referring to repeated denials by Papaconstantinou over the weekend.
Greece was the first euro zone country to need a bailout from EU members and the IMF, and its struggles to pay its debt have dented confidence in other euro zone nations’ public finances, driving bond yields higher across the bloc’s periphery.
BE
For, @Deej, can we define what we mean by “restructure” in this context?
NH
pushing out maturities
NH
I guess
NH
some liability management perhaps
NH
I doubt we are talking haircuts yet
BE
Not yet, no.
NH
but these denials
NH
are like the ones we get before a country asks for a bailout
NH
it’s all speculation and nonsense
NH
until the moment is happens
BE
Indeed.
NH
18Apr11 RTRS-GREEK 5-YEAR CREDIT DEFAULT SWAPS RISE TO 1220 BPS, UP 84 BPS ON DAY – MARKIT
NH
i think that says an awful lot
NH
about what the market is expecting
BE
And, for the sake of the transcript
BE
Joseph Cotterill, FT:
Deej – alteration in the principal, coupon, or maturity of a sovereign bond. (Or all three)
Deej – alteration in the principal, coupon, or maturity of a sovereign bond. (Or all three)
BE
Joseph Cotterill, FT:
(Also eg. reducing debt stock by buying back distressed debt)
(Also eg. reducing debt stock by buying back distressed debt)
BE
There you go. And thanks, J.
NH
right
NH
and from Greece we head north
NH
to Finland
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where
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The True Finns
NH
have made a very good showing in the election
NH
now I don’t know a great deal about their politics
NH
is this a Scandi version of UKIP
BE
Well, it’s anti Brussels.
NH
but they don’t like bailouts
BE
And anti-immigration
NH
they dont like giving money to those tax dodging southerns
NH
Here’s a bit of wire company
NH
True Finns win 19% of Finnish vote, raising doubts about whether Finland
will approve Portugese bail-out
- Finnish election outcome poses risk for EU aid deal as Finland’s euro-
skeptic block is poised to form a government after the electorate voted out
the pro-Europe National Coalition. Support for the True Finns, who argue
taxpayers shouldn’t have helped rescue Greece or Ireland, rose almost 15
points to 19%.
will approve Portugese bail-out
- Finnish election outcome poses risk for EU aid deal as Finland’s euro-
skeptic block is poised to form a government after the electorate voted out
the pro-Europe National Coalition. Support for the True Finns, who argue
taxpayers shouldn’t have helped rescue Greece or Ireland, rose almost 15
points to 19%.
NH
The election results could threaten the deal on the eurozone’s future
bailout mechanism and more short term Portuguese aid, as a new government
that involves the True Finns is likely to demand new negotiations over the
package or block it. The outcome highlights the problems government’s in
those countries effectively financing the bailouts have to sell the deals to
their respective electorate. In those countries receiving the bailouts the
EU is blamed for the necessary savings programs to bring finances back on
track and that is equally undermining support for the monetary unions. So it
seems a no-win situation that could strain EMU seriously.
bailout mechanism and more short term Portuguese aid, as a new government
that involves the True Finns is likely to demand new negotiations over the
package or block it. The outcome highlights the problems government’s in
those countries effectively financing the bailouts have to sell the deals to
their respective electorate. In those countries receiving the bailouts the
EU is blamed for the necessary savings programs to bring finances back on
track and that is equally undermining support for the monetary unions. So it
seems a no-win situation that could strain EMU seriously.
NH
actually that was from a broker
NH
I don’t know how much of a threat this is
BE
Good piece from Peter Spiegel last week about the rise of a European Tea Party.
BE
As an actual threat to Eurozone stability ………… dunno.
NH
can we have a snippet
BE
The Eurozone seems to be enough of a threat to itself without nationalists getting involved.
BE
Popular anger at bail-outs, austerity and general economic uncertainty has already toppled leaders on the eurozone’s periphery: first in Ireland, then Portugal and arguably Spain, where José Luis Zapatero has said he will not seek a third term as prime minister.
BE
Now, anger is beginning to infect Europe’s prosperous core, where mainstream parties are losing ground to populist outsiders playing on resentment and frustration triggered by austerity and falling living standards.
BE
That’s all Spiegel. You know the gist.
NH
right OK
NH
backed to Finland
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and we don’t know is TF
NH
will be made part of the government
NH
and Nomura expects
NH
the Portugal bailout to get through the parliament
NH
It is not yet clear by any means that True Finns will be part of the next government, either as an insider or supporting from the outside (as in the Netherlands and in Denmark). Clearly difficult and protracted coalition negotiations lie ahead before the new government can be formed.
NH
We think the election outcome makes the Finnish stance on EU/IMF financial packages potentially influential, as the Finnish parliament (unlike other eurozone legislatures) is likely to vote on any package for Portugal. It is possible that the next government to emerge in Finland will be more EU-sceptical and may demand more concessions from its EU partners in order to accept any potential aid packages for Portugal. In the end, we expect pragmatism to prevail, but this is all adding to the general muddle, which was left after last month’s less than decisive European Council meeting and will likely lead to protracted uncertainty over peripheral prospects in the broad.
NH
The far right True Finns outperformed expectations in yesterday’s general election, winning 19% of the vote (compared with 15% in most opinion polls and just 4% in 2007′s election) and securing 39 seats (out of 200) to become the third-largest party in the next parliament.
NH
True Finns campaigned in part on a veto of Portugal’s IMF/EU financial package post-election. True Finns has already softened its tone slightly, making it clear that it expects to be invited into negotiations to form the next government – which we think it is likely to be.
That said, the next government will likely be led by the conservative and pro-EU National Coalition Party (NCP) – 44 seats – with outgoing finance minister, Jyrki Katainan to become prime minister (the NCP was the junior coalition partner in the outgoing government).
The main opposition Social Democrats came second with 42 seats. The Social Democrats, which will also be invited into coalition talks, have stated that they want to see bailout packages toughened up. The former ruling Centre Party (which is the party of the outgoing Prime Minister) sank to just 35 seats.
NH
there you go
NH
and here’s a bit more
NH
from RBS
NH
which focuses on Spain
NH
now we were all starting to think Spain was OK
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and its bond yields had decoupled from the other PIIGS
NH
but people are not so sure
NH
With Greece, Ireland and Portugal having already requested assistance packages, Spain has become the focal point in the Euro area debt crisis. Over recent weeks, it had looked insulated from rising periphery concerns. However, on the back of market concerns over an imminent Greek debt restructuring late last week, Spanish yields rose, indicating that the country is not yet ring-fenced from the periphery.
NH
RBS Rates Strategy see a near-term restructuring in Greece as unlikely, although remain negative on Spain for other reasons. Meanwhile, there continues to be a sharp divergence in the policy response of the ECB and the Fed to the rising commodity prices. While the ECB sees higher commodity prices as inflationary, the Fed views it as a tax on consumers. As a result the ECB has embarked on a policy tightening phase whilst the Fed will keep policy rates low for long. Recent soft data may also undermine the USD, with RBS US Economics having steadily lowered their Q1 real GDP estimate from a high of around 4% in early February to around 2%.
NH
Looks like Europe could be driving markets for the next couple of months
NH
RTRS-GERMAN GOVT SPOKESMAN SAYS HAS NOTHING TO ADD TO GREEK FINMIN’S DENIAL ABOUT GREEK DEBT RESTRUCTURING
11:20 18Apr11 RTRS-GERMAN GOVT SPOKESMAN, ASKED ABOUT FINLAND VOTE, SAYS EXPECTS EU AGREEMENTS WILL BE HONORED IRRESPECTIVE OF ELECTORAL RESULT
11:20 18Apr11 RTRS-GERMAN GOVT SPOKESMAN, ASKED ABOUT FINLAND VOTE, SAYS EXPECTS EU AGREEMENTS WILL BE HONORED IRRESPECTIVE OF ELECTORAL RESULT
NH
Bryce anything from you?
NH
or should we move on to some stock stuff?
BE
Nah -there’s not much else needing said on the sovereign risk today.
NH
actually one thing on China
NH
China central bank hiked bank reserve requirements by 50bp
- The PBOC moved to a record 20.5% for the largest banks. The announcement
Sunday by the PBoC, its tenth increase in reserve requirements since early
last year, was not a surprise, and comes as the central bank is tigthening
policy on several fronts in an effort to contain inflation, after March CPI
rose to +5.4% y/y, a 32-month high. The PBoC also raised its 1-year lending
rate by 25 bps to 6.31% earlier this month, its fourth increase since
October. With economic growth reported remaining robust at +9.7% y/y in Q1
GDP, the central bank is expected to continue tightening monetary policy, as
well as tolerating ongoing appreciation in the CNY versus USD as another
tool for resisting inflation pressure from imported commodities.
- The PBOC moved to a record 20.5% for the largest banks. The announcement
Sunday by the PBoC, its tenth increase in reserve requirements since early
last year, was not a surprise, and comes as the central bank is tigthening
policy on several fronts in an effort to contain inflation, after March CPI
rose to +5.4% y/y, a 32-month high. The PBoC also raised its 1-year lending
rate by 25 bps to 6.31% earlier this month, its fourth increase since
October. With economic growth reported remaining robust at +9.7% y/y in Q1
GDP, the central bank is expected to continue tightening monetary policy, as
well as tolerating ongoing appreciation in the CNY versus USD as another
tool for resisting inflation pressure from imported commodities.
NH
that completes the hat-trick of bad news
NH
Greece, Finland and China
NH
a great start to the week
BE
And, if the rabble can think of any connection between Greece, Finland and China other than today’s bearers of bad news, feel free to share.
BE
In the meantime, how about some M&A?
11:23AM
NH
Of course
NH
poor Smith & Nephew
NH
J&J has found something else to spend its massive cash pile on
Smith And Nephew Plc (SN.:LSE): Last: 672.50, down 24 (-3.45%), High: 676.00, Low: 660.00, Volume: 5.53m
BE
Yup – as rumoured on Friday.
BE
J&J has turned its sights towards Synthes.
BE
Potential $20bn bid.
NH
the world leader in trauma
BE
And spinal reconstruction, though no-one’s interested in that any more apparently.
NH
there was a good explainer of what they do on Deal Journal
NH
apologies to the squeamish
BE
Brace yourself. Perhaps literally.
NH
In short, they make power tools to crack open your bones during surgery, and they make implants such as artificial spinal disks, as well as plates, rods and screws to stitch together broken bones. Gulp. Or, if you prefer, Synthes does “Bone Work from Head to Toe,” in the words of a Synthes online brochure.
The company’s roots date to 1946, when the company Mathys AG was founded in Switzerland. In the 1950s, according to the company’s website, Swiss surgeons began to advocate for the use of surgery and implants to mend fractures, rather than rely on existing popular treatments such as plaster casts and traction.
NH
The current Synthes was created in 1999, when a company called Stratec Medical, publicly listed in Switzerland, merged with the U.S. company Synthes to create Synthes-Stratec Inc. The combined company also bought another European firm in 2004 and formed what is now known as Synthes Inc.
Synthes had revenue of 3.29 billion Swiss francs (about $3.68 billion) for 2010, an 8.6% increase from the prior year, according to CapitalIQ. The company’s 2010 net income was 811 Swiss francs, according to CapitalIQ. The lion’s share of the company’s revenue and profits are generated in North America.
NH
anyway
NH
it’s a growing market
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and Synthes is number one
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and for J&J it would be a good if expensive acquisition
NH
certainly more attractive than S&N
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fewer anti-trust issues
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and a big shareholder than can deliver the business
NH
UK sharesholders would probably hold for too a higher price
NH
if J&J ever did bid
BE
Yeah – let’s bear in mind there do remain a few hurdles for this deal to clear.
NH
fair point
NH
such as this
NH
from Olivetree Securities
NH
There would be significant overlaps in both Trauma and Spinal markets – certainly requiring in-depth analysis by anti-trust regulators. This will certainly require remedies to allow the transaction to be approved. Synergies would be excellent, but the focus here should be on solving the anti-trust hurdles. Synthes controls nearly 50% (47% at last count) of the Global Trauma market – adding any group to this would cause problems. JNJ control some 8% of the Global market – indicating that NewCo would control >50%, tough on all measures (including HHI). In Spinal markets, NewCo would control some c30% (JNJ 18% / SYST 12%), which would makes it a strong number two player behind Medtronic. It is worth noting that despite the headline overlaps in Trauma and Spinal, there are less broad-based overlaps that would have come with an acquisition of a business like Smith & Nephew.
BE
Yup. And there’s also the controlling stake that’s in the hands of this Doctor Moreau person.
NH
Synthes is controlled by Hansjörg Wyss, the Synthes chairman. The 70-something Wyss is the second-richest person in Switzerland, and the 154th-richest person in the world, according to Forbes.
NH
he owns 48% apparently
NH
getting on a bit
NH
previously he has said no to a sale
NH
but perhaps things have changed
BE
Best note I’ve seen this morning’s from JP Morgan
NH
go ahead
BE
Which points out that J&J may as well buy something
BE
Anything, in fact
BE
Because it’s better than sitting on cash.
BE
So, while it looks a bit expensive, that’s not really the point.
NH
it’s growth
NH
and it might return more
NH
than cash on desposit
BE
Speculation over what J&J could buy has led the financial press to report in recent
months on several potential transactions. The latest round of speculation involves
Synthes (SYST.VX), the dominant player in the $5.5B trauma market (47% share)
and the #3 player in the $8.8B spine market (10% share; J&J is #2 at 12%). J&J
wouldn’t be buying it for the spine business — the overlap would be substantial –
but Synthes’ franchise in trauma is undeniable and has for years been worthy of
strategic interest.
months on several potential transactions. The latest round of speculation involves
Synthes (SYST.VX), the dominant player in the $5.5B trauma market (47% share)
and the #3 player in the $8.8B spine market (10% share; J&J is #2 at 12%). J&J
wouldn’t be buying it for the spine business — the overlap would be substantial –
but Synthes’ franchise in trauma is undeniable and has for years been worthy of
strategic interest.
BE
Financially, an acquisition of Synthes makes sense for J&J in our view. At the
reported purchase price of $20B, we estimate a Synthes acquisition would be 3-
4% accretive to J&J’s 2012 GAAP EPS and 6.0-6.5% accretive to 2012 Cash
EPS. This is pre-synergies and the initial inventory step-up, as well as the sales dyssynergies
from merging overlapping franchises in spine and trauma. In spine, these
would likely be substantial, and it’s worth noting that every notable merger of spine
franchises over the last 15 years has resulted in significant sales disruption. But the
appeal for J&J is trauma, where Synthes dominates.
reported purchase price of $20B, we estimate a Synthes acquisition would be 3-
4% accretive to J&J’s 2012 GAAP EPS and 6.0-6.5% accretive to 2012 Cash
EPS. This is pre-synergies and the initial inventory step-up, as well as the sales dyssynergies
from merging overlapping franchises in spine and trauma. In spine, these
would likely be substantial, and it’s worth noting that every notable merger of spine
franchises over the last 15 years has resulted in significant sales disruption. But the
appeal for J&J is trauma, where Synthes dominates.
BE
The concern, of course, is that Synthes’ end markets today are not what they
were 3-4 years ago. Spine is no longer growing low double-digits, but low singledigits.
Pricing is no longer neutral to modestly positive, but negative to the tune of
4-5%. As a market, trauma has held up much better, but volume growth in trauma
should continue to be low single digits and the sustainability of positive mix and
price has been and should be called into question, particularly in our evolving
healthcare environment. Such concerns over the health of both the spine and trauma
markets have resulted in significant multiple compression for Synthes, mirroring
what we’ve seen in other parts of the orthopedic space.
were 3-4 years ago. Spine is no longer growing low double-digits, but low singledigits.
Pricing is no longer neutral to modestly positive, but negative to the tune of
4-5%. As a market, trauma has held up much better, but volume growth in trauma
should continue to be low single digits and the sustainability of positive mix and
price has been and should be called into question, particularly in our evolving
healthcare environment. Such concerns over the health of both the spine and trauma
markets have resulted in significant multiple compression for Synthes, mirroring
what we’ve seen in other parts of the orthopedic space.
BE
The question for J&J then is Why Now? If the spine market has structurally slowed
amidst significant pricing pressure and fundamentals in trauma may not be sustainable,
why buy Synthes? If you’re J&J, why increase your exposure to these markets in what
would be the biggest deal in the company’s history?
amidst significant pricing pressure and fundamentals in trauma may not be sustainable,
why buy Synthes? If you’re J&J, why increase your exposure to these markets in what
would be the biggest deal in the company’s history?
BE
The answer, in short, is financial. As we noted earlier, J&J is sitting on $27B in
cash, the vast majority of which resides overseas. That cash is today earning less than
1.0% interest and J&J, with its AAA rating, can tap the debt markets faster and
cheaper than some European sovereigns. As a result, it could be argued almost any
deal that J&J does outside the US for an established franchise with reasonable
margins is going to be accretive. Synthes, as we outlined earlier, could be
substantially accretive to the tune of 3-4% to 2012E GAAP EPS and 6.0-6.5% to
Cash EPS. Beyond 2012, we estimate the accretion increases to 4-5% GAAP and
6.5-7.0% Cash EPS (see Table 1).
cash, the vast majority of which resides overseas. That cash is today earning less than
1.0% interest and J&J, with its AAA rating, can tap the debt markets faster and
cheaper than some European sovereigns. As a result, it could be argued almost any
deal that J&J does outside the US for an established franchise with reasonable
margins is going to be accretive. Synthes, as we outlined earlier, could be
substantially accretive to the tune of 3-4% to 2012E GAAP EPS and 6.0-6.5% to
Cash EPS. Beyond 2012, we estimate the accretion increases to 4-5% GAAP and
6.5-7.0% Cash EPS (see Table 1).
NH
and here’s a bit from Merrill
NH
Article cites US$ 20bn potential offer – cCHF164 per share
The WSJ report states that JNJ may offer c.US$20bn. Assuming this is an EV
value, and adjusting Synthes’ net cash at 31 Dec 2010 of US$ 1.8bn, this would
imply an equity consideration of US$ 21.8bn or c. CHF 163.9 per share (at
CHFUSD 1.1204) – a 25.5% premium to the 14 April 2011 closing price. The offer
would be c.CHF150 if the US$ 20bn is an equity consideration figure. A CHF
163.9 per share offer would imply a 2011 EV/EBITDA of 12.3x (2012: 11.6x) and
P/E of 21.1x (2012: 20.0x) on our estimates. This implies a material premium to
the current valuation of Synthes’ peers. The global orthopaedic peer group trades
on 2011E EV/EBITDA of 9.1x and EU medtech on 10.7x.
The WSJ report states that JNJ may offer c.US$20bn. Assuming this is an EV
value, and adjusting Synthes’ net cash at 31 Dec 2010 of US$ 1.8bn, this would
imply an equity consideration of US$ 21.8bn or c. CHF 163.9 per share (at
CHFUSD 1.1204) – a 25.5% premium to the 14 April 2011 closing price. The offer
would be c.CHF150 if the US$ 20bn is an equity consideration figure. A CHF
163.9 per share offer would imply a 2011 EV/EBITDA of 12.3x (2012: 11.6x) and
P/E of 21.1x (2012: 20.0x) on our estimates. This implies a material premium to
the current valuation of Synthes’ peers. The global orthopaedic peer group trades
on 2011E EV/EBITDA of 9.1x and EU medtech on 10.7x.
NH
Potential deal should pass regulatory scrutiny
On our analysis an acquisition of Synthes by JNJ should pass regulatory scrutiny.
We est. that in 2010, Synthes’ global market share of the US$ 5.4bn trauma
device market was 50.3% but JNJ DePuy unit’s was only 3-4%, for a combined
share of c54%. On our analysis, Synthes’ share of the US$ 8.5bn global spinal
device market was 11% in 2010 and JNJ DePuy’s was c12-14%, for a combined
share of 22-25%. We note that market leader Medtronic has c40% share. In our
view JNJ could comfortably fund an acquisition of Synthes, with US$11bn in net
cash at YE2010, of which c50% was held outside the US.
On our analysis an acquisition of Synthes by JNJ should pass regulatory scrutiny.
We est. that in 2010, Synthes’ global market share of the US$ 5.4bn trauma
device market was 50.3% but JNJ DePuy unit’s was only 3-4%, for a combined
share of c54%. On our analysis, Synthes’ share of the US$ 8.5bn global spinal
device market was 11% in 2010 and JNJ DePuy’s was c12-14%, for a combined
share of 22-25%. We note that market leader Medtronic has c40% share. In our
view JNJ could comfortably fund an acquisition of Synthes, with US$11bn in net
cash at YE2010, of which c50% was held outside the US.
NH
Valuation
Synthes trades at 17.1x 2012E adjusted EPS (15 April 2011), a 2% discount to
the wider European medtech sector following its 6.2% share price increase on 15
April 2011, when bid speculation were initially reported (Bloomberg). Prior to April
15th, Synthes traded at an 8% discount to the sector which we believe is
warranted for the business on a standalone basis to reflect the material
deterioration in the spine market’s underlying fundamentals in recent years,
limited scope to expand the company’s sector-leading margins and lower than
sector earnings growth (7.6% 2010-13E EPS CAGR vs a sector average 14%).
We have a standalone price objective of CHF126.
Synthes trades at 17.1x 2012E adjusted EPS (15 April 2011), a 2% discount to
the wider European medtech sector following its 6.2% share price increase on 15
April 2011, when bid speculation were initially reported (Bloomberg). Prior to April
15th, Synthes traded at an 8% discount to the sector which we believe is
warranted for the business on a standalone basis to reflect the material
deterioration in the spine market’s underlying fundamentals in recent years,
limited scope to expand the company’s sector-leading margins and lower than
sector earnings growth (7.6% 2010-13E EPS CAGR vs a sector average 14%).
We have a standalone price objective of CHF126.
NH
so it looks like S&N will remain independent
NH
unless the new CEO
NH
fancies cooking up a complex reverse takeover with Biomet
NH
which I’m sure he doesn’t
Smith And Nephew Plc (SN.:LSE): Last: 670.50, down 26 (-3.73%), High: 676.00, Low: 660.00, Volume: 5.64m
BE
Though I’m sure even now there will be brokers circling the S&N office with those plans already dusted down.
BE
Oh – and just a postscript
BE
Again courtesy of JPM
BE
Apparently, over the past ten years ..
BE
J&J generated $104B in free cash flow, spent $30B on acquisitions and returned more than $76B to investors in buybacks ($37B) and dividends ($39B). Today, J&J generates more than $14B a year in free cash flow and $8-9B after dividends.
BE
Say what you like, that’s impressive.
NH
it is
NH
in house M&A team to boot
NH
they never go hostile
NH
always take their time
NH
and rarely listen to rainmakers
NH
BE
Fearsome company, J&J.
11:34AM
NH
Right
NH
just something from Kleinanwire that made me laugh
NH
Vince Cable wants to explore the idea of merging Northern Rock with hundreds of Lloyds Banking Group branches in an effort to boost competition in high street banking, I have learned.
NH
http://blogs.news.sky.com/kleinman/Post:78e914f1-9e9e-4534-8008-7b272d538972
NH
so that would be called
NH
CrockHBOS
BE
HBork
NH
actually all the banks are a bit weak this morning
NH
prolly on these restructuring fears
Barclays PLC (BARC:LSE): Last: 293.75, down 7.9 (-2.62%), High: 300.25, Low: 293.50, Volume: 11.05m
Lloyds Banking Group plc (LLOY:LSE): Last: 59.06, down 1.05 (-1.75%), High: 60.00, Low: 58.88, Volume: 30.39m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 41.83, down 0.84 (-1.97%), High: 42.91, Low: 41.81, Volume: 17.78m
11:35AM
NH
Moving on
NH
what are the other big fallers?
BE
CowderyCo?
Resolution Ltd (RSL:LSE): Last: 298.00, down 11.4 (-3.68%), High: 308.00, Low: 296.50, Volume: 2.05m
NH
that’s a nasty little fall
NH
what’s caused it
BE
UBS turns negative
BE
Or, rather, neutral.
NH
BE
With a very large cut to earnings.
BE
30% off EPS.
NH
ouch
NH
expect a call from the Reso 
NH
telling us why it’s wrong
BE
Well, it’s not our argument. It’s James Pearce’s.
NH
the old Caz guy
NH
he’s pitched up at UBS?
BE
Think so.
BE
And the argument is, in short, that Resolution’s no longer an aquisition machine so shouldn’t be valued as such.
BE
While the stuff it’s bought is toiling.
BE
Here’s the summary.
BE
Resolution has clearly signalled that its focus is now on making the most of its
existing businesses rather than further M&A. Reduced M&A risk has already
driven the stock’s 31% outperformance so far in 2011. The change means
Resolution is becoming a “normal” life company and our analysis is changing too.
existing businesses rather than further M&A. Reduced M&A risk has already
driven the stock’s 31% outperformance so far in 2011. The change means
Resolution is becoming a “normal” life company and our analysis is changing too.
BE
A murky operating picture in 2010
Resolution’s operational performance is obscured by its three recent acquisitions.
However, FP’s UK life operating performance is not improving at the expected
rate, and Axa UK’s performance deteriorated significantly in Q410. Given that the
new CEO doesn’t start until July we see little scope for a rapid turnaround.
Resolution’s operational performance is obscured by its three recent acquisitions.
However, FP’s UK life operating performance is not improving at the expected
rate, and Axa UK’s performance deteriorated significantly in Q410. Given that the
new CEO doesn’t start until July we see little scope for a rapid turnaround.
BE
The significantly worse than expected base level of MCEV profit has driven 15-
25% reductions in our EPS forecasts. IFRS EPS reductions of 27-39% are equally
eye-catching but reflect a new, more comparable, definition of operating profit.
25% reductions in our EPS forecasts. IFRS EPS reductions of 27-39% are equally
eye-catching but reflect a new, more comparable, definition of operating profit.
BE
One more par on the valuation.
BE
The stock looks cheap on yield (6.2% v sector 4.7%) and price/EV (65% v sector
88%). However it looks decidedly expensive on IFRS PER (15x v sector 11x) and
on MCEV PER (13x v sector 7x). We compute that, subject to FSA approval, the
company could pay a 109p special dividend and remain in the middle of its 25-
30% target gearing range, but even then the PER’s would be in line with or higher
than peers. Given the weak operational performance, mixed valuation picture and
strong recent share price performance, we downgrade from BUY to NEUTRAL.
88%). However it looks decidedly expensive on IFRS PER (15x v sector 11x) and
on MCEV PER (13x v sector 7x). We compute that, subject to FSA approval, the
company could pay a 109p special dividend and remain in the middle of its 25-
30% target gearing range, but even then the PER’s would be in line with or higher
than peers. Given the weak operational performance, mixed valuation picture and
strong recent share price performance, we downgrade from BUY to NEUTRAL.
NH
thanks for that
11:40AM
NH
Ok then
NH
Zippy mentioned
Reckitt Benckiser Group PLC (RB.:LSE): Last: 3,217, up 17 (+0.53%), High: 3,224, Low: 3,190, Volume: 880.78k
NH
I forgot to mention this on Friday
NH
but there was a very bold call out of Liberum
NH
which said Mr Cilit Bang
NH
decided to resign
NH
after the board told he
NH
not to buy or merge with someone big
NH
take a look
NH
it’s quite interesting
NH
Although we can only speculate about the reasons for the departure
of CEO Barth Becht (of whose parting words from Thursday’s 4pm
call we shall remember the “I built this company” quote), we believe
his resignation was triggered by a major strategic disagreement
between Mr. Becht and the Board, with the former (as per our read)
potentially pushing for a transformative merger (CL) and or an
outright sale (PG? UNA? J&J?) and the latter wanting independence
(remember HSY?).
of CEO Barth Becht (of whose parting words from Thursday’s 4pm
call we shall remember the “I built this company” quote), we believe
his resignation was triggered by a major strategic disagreement
between Mr. Becht and the Board, with the former (as per our read)
potentially pushing for a transformative merger (CL) and or an
outright sale (PG? UNA? J&J?) and the latter wanting independence
(remember HSY?).
BE
That sets the argument up rather nicely for the Q1s on Wednesday.
NH
As explained in several notes, we believe the
company’s HPC and OTC businesses have entered a phase of lower
growth combined with downside risk to margins; those counting on
the new Suboxone film to save the save the day forget its lower
margin profile. We keep SELL stance and see better value elsewhere
(ULVR).
company’s HPC and OTC businesses have entered a phase of lower
growth combined with downside risk to margins; those counting on
the new Suboxone film to save the save the day forget its lower
margin profile. We keep SELL stance and see better value elsewhere
(ULVR).
BE
So Bart wanted to merge with Colgate?
BE
And the board didn’t?
NH
yup
NH
the company has been struggling for a couple of years
NH
always finding a rabbit to pull out of the hat
NH
Bart said no more
NH
let’s merge
NH
and the board said no
BE
It’s fair to argue that Bart had delivered everything he could.
BE
And the company’s facing quite a range of risks all of a sudden.
BE
I guess the threat is that it turns into Unilever five years ago.
BE
I can understand the logic here.
BE
Though I can’t understand why the board would want to block such a strategy.
BE
Self interest?
BE
Surely not.
NH
pass
11:44AM
NH
let’s move on to the day’s big big winner
NH
the stupidly named
Bwin.party Digital Entertainment Plc (BPTY:LSE): Last: 175.80, up 44.8 (+34.20%), High: 215.00, Low: 141.60, Volume: 43.20m
NH
which has gone 
NH
following Friday’s late news
NH
from the DoJ
NH
that
NH
it was charging
NH
charging the 3 largest US poker sites (PokerStars, Full
Tilt and Cereus), and seizing and closing their websites.
Tilt and Cereus), and seizing and closing their websites.
BE
Okay – this is positive.
BE
Undoubtedly.
NH
On April 15 the DoJ unsealed indictments charging 11
defendants with charges including bank fraud, money
laundering and illegal gambling offences. The most
serious charges carry possible jail terms of 30 years.
PokerStars and Full Tilt have reacted immediately to
suspend real money play from US players.
defendants with charges including bank fraud, money
laundering and illegal gambling offences. The most
serious charges carry possible jail terms of 30 years.
PokerStars and Full Tilt have reacted immediately to
suspend real money play from US players.
BE
Is it 34% on BWin positive?
BE
There’s a lot of uncertainties here.
NH
there was a big short position after Germany
NH
perhaps that explains it
NH
i agree with you it does seem an over the top reaction
NH
but this online gamers are the very definition of volatility
BE
True.
NH
So the main positive here
NH
is that the big US sites lose liquidity
NH
because they can’t match European and US players
BE
Yes – we’re back to the old sharks and fishes arguments.
BE
You need a sufficient number of rubbish players to take money from.
BE
So online poker’s a liquidity argument.
BE
However, we don’t know where will the people currently playing on dot-com Pokerstars and Full Tilt migrate, if at all.
NH
like stock markets
NH
so
NH
that helps Bwin
NH
and there’s also a chance that Poker Stars and Full Tilt lose licenses in France
NH
and Spain
NH
sorry
NH
that should be Italy
NH
that would be a big positive
NH
plenty of comment around on this one today
BE
Yeah. Though on a broader perspective
NH
go on
BE
I still don’t know what this means for US regulation.
BE
Is it a positive or negative?
NH
hm not sure
NH
it brings legislation one step closer
BE
Are we moving towards legalisation or more aggressive prohibition?
NH
but what sort of regulation
NH
German regulation would be my guess
NH
tax the business to death
BE
Well, indeed. And make it land licences. Protect the Nevada vote.
NH
yep
BE
Anyway, some comment please.
NH
Here’s David Jennings at Davy
NH
who I think is one of the best people following the sector
NH
Development has far-reaching consequences for European
listed gaming operators.
listed gaming operators.
NH
Firstly, some of the player liquidity advantage that US sites
have enjoyed has now gone. This means that poker, which has
been in structural decline for European sites will instead likely
grow in 2011 and 2012.
have enjoyed has now gone. This means that poker, which has
been in structural decline for European sites will instead likely
grow in 2011 and 2012.
NH
• Secondly, it may make French and Italian regulators reassess
whether Pokerstars and Full Tilt should have been granted
licenses there. A shut down of these operations would be
hugely beneficial to bwin.party.
whether Pokerstars and Full Tilt should have been granted
licenses there. A shut down of these operations would be
hugely beneficial to bwin.party.
NH
• Thirdly, it will likely make it very difficult for Pokerstars and
Full Tilt to win licenses in European markets yet to regulate.
Full Tilt to win licenses in European markets yet to regulate.
NH
Fourthly, irate US poker players may now ratchet up pressure
on US politicians to regulate online poker at either state or
federal level.
on US politicians to regulate online poker at either state or
federal level.
NH
Fifthly, should they do so, it now appears very unlikely that
Stars or Tilt would ever get licensed there. This would imply
that bwin.party could enjoy a greater US market share in the
future.
Stars or Tilt would ever get licensed there. This would imply
that bwin.party could enjoy a greater US market share in the
future.
NH
and here’s some good background
NH
When the US government passed the unlawful internet gambling
enforcement act (UIGEA) in 2006, all of the listed online gaming
companies that had been operating there (PartyGaming, bwin,
Sportingbet and 888) exited the market. They did so on the back of legal
advice that to continue offering services to US customers would be in
breach of US federal law. Post their exit from the US market, a number
of privately owned offshore operators chose to continue to offer online
poker services into the US, the biggest being Pokerstars (Isle of Man
based) and Full Tilt Poker (Dublin based).
enforcement act (UIGEA) in 2006, all of the listed online gaming
companies that had been operating there (PartyGaming, bwin,
Sportingbet and 888) exited the market. They did so on the back of legal
advice that to continue offering services to US customers would be in
breach of US federal law. Post their exit from the US market, a number
of privately owned offshore operators chose to continue to offer online
poker services into the US, the biggest being Pokerstars (Isle of Man
based) and Full Tilt Poker (Dublin based).
NH
That decision effectively meant that since 2006, there has been an
uneven playing field in the global online poker market with US facing
sites enjoying several big competitive advantages over non-US facing
sites. The biggest such advantage has been greater player liquidity; online
poker players like to play on a site where they can get to play on the
table they want, at the buy-in they want, without having to wait a long
time for the table to fill. By being able to pool US players with non-US
players, the customer experience at Tilt and Stars has generally been far
more attractive for European-based players than at the likes of
PartyPoker and other non-US facing sites.
uneven playing field in the global online poker market with US facing
sites enjoying several big competitive advantages over non-US facing
sites. The biggest such advantage has been greater player liquidity; online
poker players like to play on a site where they can get to play on the
table they want, at the buy-in they want, without having to wait a long
time for the table to fill. By being able to pool US players with non-US
players, the customer experience at Tilt and Stars has generally been far
more attractive for European-based players than at the likes of
PartyPoker and other non-US facing sites.
NH
This in turn has meant that
these sites could offer multi-table tournaments with the highest prize
funds. The second key advantage has simply been one of scale; the
financial fire-power the US facing sites have had to market their
businesses in Europe and elsewhere has been immense with the funds
being generated in the US allowing Tilt and Stars to substantially grow
their non-US businesses.
What it has meant for European operators is that poker effectively
became a product that was in structural decline. The pace of that decline
is illustrated in the table below which shows how poker revenues have
developed since the end of 2006
these sites could offer multi-table tournaments with the highest prize
funds. The second key advantage has simply been one of scale; the
financial fire-power the US facing sites have had to market their
businesses in Europe and elsewhere has been immense with the funds
being generated in the US allowing Tilt and Stars to substantially grow
their non-US businesses.
What it has meant for European operators is that poker effectively
became a product that was in structural decline. The pace of that decline
is illustrated in the table below which shows how poker revenues have
developed since the end of 2006
NH
that is a nice list of the positives
BE
(I remember when the mere sniff of a Partygaming discussion would set the ROTR off like the comment box on a Littlejohn column …. No more, it seems.)
NH
(not sure what interests them now)
BE
Ok – one last bit of comment and we’ll move on.
BE
Here’s Investec.
BE
Operational impact. We see three key operational benefits for Bwin.Party and
other European poker operators. First, the immediate response of high-value
players, affiliates and processors is likely to be to seek safer sites. Bwin.Party
should therefore receive an immediate market share boost. Second. the loss of
US liquidity removes a significant competitive issue, leveling the playing field.
Finally, the extent to which PokerStars will need to trim its European marketing
remains to be seen, though the loss of US cash flow is bound to be a blow.
However, we would caveat that, in the short-term, we do not know the financial
position of PokerStars and European liquidity is likely to be significantly – if not
mortally, wounded by the loss of US business, European competition could
actually increase before it stabilises.
other European poker operators. First, the immediate response of high-value
players, affiliates and processors is likely to be to seek safer sites. Bwin.Party
should therefore receive an immediate market share boost. Second. the loss of
US liquidity removes a significant competitive issue, leveling the playing field.
Finally, the extent to which PokerStars will need to trim its European marketing
remains to be seen, though the loss of US cash flow is bound to be a blow.
However, we would caveat that, in the short-term, we do not know the financial
position of PokerStars and European liquidity is likely to be significantly – if not
mortally, wounded by the loss of US business, European competition could
actually increase before it stabilises.
NH
thanks for that
BE
Regulatory look-through. We see the regulatory look-through as mixed. There
is a clear bull argument that the US has seen a big hurdle to online regulation
removed, and Party can point to its DoJ settlement as a proxy for probity.
However, we would make four points. First, with the link between online gambling
and crime reinforced in the minds of politicians, we would argue ‘liberal’ regulation
has become less likely, both in the US and elsewhere (we find the idea that this is
part of some sort of regulatory master-plan hard to believe). Second, this move
demonstrates governments can enforce, and much of Bwin.Party’s revenue
remains ‘grey’ (in and out of the EU). Finally, if the move drives newly regulating
markets to look more closely at probity (it will be interesting to see what, if
anything, ARJEL and AAMS does), then this is likely to produce more problems
for the ‘.com’ model.
is a clear bull argument that the US has seen a big hurdle to online regulation
removed, and Party can point to its DoJ settlement as a proxy for probity.
However, we would make four points. First, with the link between online gambling
and crime reinforced in the minds of politicians, we would argue ‘liberal’ regulation
has become less likely, both in the US and elsewhere (we find the idea that this is
part of some sort of regulatory master-plan hard to believe). Second, this move
demonstrates governments can enforce, and much of Bwin.Party’s revenue
remains ‘grey’ (in and out of the EU). Finally, if the move drives newly regulating
markets to look more closely at probity (it will be interesting to see what, if
anything, ARJEL and AAMS does), then this is likely to produce more problems
for the ‘.com’ model.
NH
and one more comment
NH
from Morgan Stanley
NH
Pokerscout estimates that poker
traffic has dropped c.20% for PokerStars and c.40% for
Full Tilt since last weekend, while the leading European
sites are seeing some gains (Party Poker +6%, iPoker
+10%). We believe this trend is likely to continue, with a
‘flight to quality’ as customers are likely to be nervous
leaving money on deposit with an operator that is being
charged by the DoJ, with the risk of website closure and
funds being seized.
traffic has dropped c.20% for PokerStars and c.40% for
Full Tilt since last weekend, while the leading European
sites are seeing some gains (Party Poker +6%, iPoker
+10%). We believe this trend is likely to continue, with a
‘flight to quality’ as customers are likely to be nervous
leaving money on deposit with an operator that is being
charged by the DoJ, with the risk of website closure and
funds being seized.
NH
well
NH
if i gambled on line
BE
(@BeigePerson: Bwin is Partypoker. You’re going from HBOS to Lloyds, I’m afraid.)
NH
which I don’t
BE
(cough)
NH
I wouldn’t be leaving cash on deposit
NH
with Poker Stars
BE
Fair point.
11:56AM
NH
Time for Small Cap corner
NH
I think
BE
Well, we can start at the obvious place
BE
Which is the Ninky well
BE
And its lack of oil.
NH
no no
NH
this counts a success for Desire Petroleum
NH
they actually found oil this time
NH
they did
NH
unfortunately
NH
not enough to fill an egg cup
NH
but they did find oil
Desire Petroleum Plc (DES:LSE): Last: 17.50, down 22.5 (-56.25%), High: 21.00, Low: 12.00, Volume: 31.36m
NH
anyway
NH
this is really the end of the road
NH
there’s no cash left
NH
or there won’t be once the rig is demobilised
NH
the only hope is a lowball offer
NH
from Rockhopper for the seismic
NH
but what would they pay?
NH
5p?
NH
10P
BE
(@BeigePerson: Sky Poker after midnight was, for a while, a good place to catch the smallest, drunkest fish in the pond. Not sure how it is these days though.)
NH
10p according to this broker
NH
Cash in the bank for DES is £10-£15m (lets be generous and say £15m) – this equates to 4.38p/share.
They have no more drilling in prospect, and do not have enough funds to drill a further well.
RKH drilling schedule over the next 3 months will focus on the Sea Lion field – this is adjacent to DES’s field but is not linked. DES do not have any interest in this further RKH drilling schedule.
However DES do still own licenses and also Seismic which must have value. Charlie apportions £10-20m for these tangible assets as well as further drilling upside. Again using a top end valuation of £20m would equate to 5.8p/share
NH
For the FY2010 DES Administrative costs were circa £850k. Already down from the year before – assuming a constant burn rate for the next 3 months DES could lose 200k in administrative costs before they get any opportunity to drill again. or 0.5p share.
A simple summation means that INCLUDING FURTHER OPPORTUNITY COST. DES should be 9.68p. On a fundamental value that figure drops to 3.88p…
For DES to survive they need to find further assets to Drill and also cash to do fund the drilling… This means a fund raise.. I cant see them being able to get cash in at a price above our already optimistic 10p/share.
Current SP is 16.75p. – on 10p fund raise that is 40% downside to current value
NH
there you go
NH
plenty more downside
NH
and here’s the sector watcher
NH
Whilst it’s not quite game over for DES just yet, it’s not far off it. The Ninky exploration well has failed to find hydrocarbons in the two zones it was targeting, aside from oil shows over a 1-metre section. Whilst trying to put a brave face on it, and saying that the sands may thicken further downdip, this is unequivocally bad news for DES. The group now has £22m of remaining cash (6p/share), the majority of which will be used up with its share of rig demobilisation costs and completing/interpreting an ongoing 3D seismic programme.
NH
Whilst the group says it will now review all financing options, I would imagine that a straightforward equity raise would prove difficult (and hugely dilutive), given the group’s disappointing exploration record, and a general waning of interest by equity markets towards the Falklands in general. I also can’t see industry queuing up to buy the company, or indeed to farm into the group’s Falklands acreage. The exception to this may well be RKH, given that it already has 7.5% of the licence, and that it has previously said there is an outside chance that the Sea Lion discovery extends into the acreage. However I’d guess that any potential farm-in deal that RKH might get involved in would certainly be on better terms for it than DES, given its far stronger financial/strategic position. In terrms of the impact of today’s well result on RKH, this should be limited – a successful well would have been worth only around 15-20p/share, and we certainly weren’t carrying a penny for it in the first place. I’d be an outright seller of DES, even if the shares fall sharply today.
BE
Ok – ta.
BE
And, moving from micro to major
BE
@MacRus wants some comment on the Sunday story about a BP break-up.
NH
well what can we say
NH
the shareholders weren’t named
NH
and Morgan Stanley
NH
has been pushing this break up idea for months
NH
since just after Macondo
NH
makes lots of sense to me
NH
but do CEO’s ever
NH
vote for smaller businesses
NH
hang on
NH
let’s see if we have the note
NH
I reckon it came out
NH
back in Novement
BE
Give me a moment.
NH
(*November – sorry my typing finger was injured in a cycling accident at the weekend)
BE
………. no.
BE
Sorry – no sign.
NH
I may have it
NH
hang on
BE
Here, instead, is some rather dull comment from MF Global on the sunday story.
BE
What’s happened: Weekend press reported that some of BP’s biggest investors are calling for BP to extend its $30bn
asset disposal programme to around $60bn to help transform it into a smaller, more dynamic company. BP has
already sold around $24bn of assets. The company later played these calls down.
asset disposal programme to around $60bn to help transform it into a smaller, more dynamic company. BP has
already sold around $24bn of assets. The company later played these calls down.
BE
Our take: As long as BP is able to realise more value for its assets outside the group than inside the group it’s difficult
to question the logic. The ‘value of integration’ is increasingly something all of the integrateds are being asked to
account for. Whether Svanberg/Dudley are the right team to turn BP into a smaller, more dynamic company remains
to be seen. The prospect of a Russian oil company potentially becoming the largest single shareholder in BP may also
become more of an issue as time goes on. With the anniversary of Macondo on Wednesday this is likely to be another
week of heightened media attention for BP.
to question the logic. The ‘value of integration’ is increasingly something all of the integrateds are being asked to
account for. Whether Svanberg/Dudley are the right team to turn BP into a smaller, more dynamic company remains
to be seen. The prospect of a Russian oil company potentially becoming the largest single shareholder in BP may also
become more of an issue as time goes on. With the anniversary of Macondo on Wednesday this is likely to be another
week of heightened media attention for BP.
BE
None of which you can disagree with.
NH
(TK – no I can use a head stick in an emergency)
BE
Any sign of that note then?
NH
hang on
BE
We should really consider these things before coming on air ….
NH
while
NH
it was a reader question
BE
Yes. Fair point.
NH
can;t find it
NH
OK
NH
what else in the oil world
NH
I see Heritage are down
Heritage Oil Plc (HOIL:LSE): Last: 257.10, down 12.9 (-4.78%), High: 266.20, Low: 255.90, Volume: 1.28m
NH
overreaction?
NH
to the Tullow lawsuit
BE
Uncertainty, innit.
NH
(RAJ – no. Yellow card)
NH
is it
BE
Markets don’t like uncertainty. David Buik taught me that.
BE
So, UBS is worried enough to cut Hoil from its “buy” list.
BE
We are cutting Heritage to Neutral on news that Tullow has filed a claim with the
High Court of Justice in England seeking $313m for alleged ‘breach of contract’.
This adds a further layer of uncertainty to Heritage’s story on both timing and
outcome and with potential sources of exploration upside limited to late 2011, we
believe the overhang of the various moving parts outweighs an opportunity to gain
exposure to this. See page 2 for various upside/downside on dispute outcomes.
High Court of Justice in England seeking $313m for alleged ‘breach of contract’.
This adds a further layer of uncertainty to Heritage’s story on both timing and
outcome and with potential sources of exploration upside limited to late 2011, we
believe the overhang of the various moving parts outweighs an opportunity to gain
exposure to this. See page 2 for various upside/downside on dispute outcomes.
NH
hm
BE
Tullow is suing Heritage for its refusal to reimburse Tullow for the $313m
payment it made to the Ugandan government as security against the disputed tax
amount currently demanded by the Ugandan government of Heritage (part of
which is held in escrow). Heritage is now looking for the release of the amount
held in escrow ($283m) in its dispute against the Ugandan government.
payment it made to the Ugandan government as security against the disputed tax
amount currently demanded by the Ugandan government of Heritage (part of
which is held in escrow). Heritage is now looking for the release of the amount
held in escrow ($283m) in its dispute against the Ugandan government.
NH
and what about the update
NH
from their massive Gas field
NH
what did HGAS say about that?
BE
Well, they’ve got a rig.
BE
And they might find some more gas.
NH
yipee
BE
But can they sell the gas?
BE
Dunno.
NH
good question
NH
does anyone want it?
BE
I’m sure someone would want it if it were somewhere convenient, like the North Sea.
BE
Unfortunately, it’s not.
BE
Here’s UBS again.
BE
Heritage has contracted a rig to drill in the Kurdistan region of Iraq, which will
begin drilling in July with results expected in late 2011/early 2012. The well will
test Cretaceous layers (which is where Heritage previously tested oil), and deeper
Jurassic, where Heritage made its 9Tcf gas find. We see 63% upside if Heritage
can monetise this gas, but note that an outcome is dependent on appraisal drilling.
begin drilling in July with results expected in late 2011/early 2012. The well will
test Cretaceous layers (which is where Heritage previously tested oil), and deeper
Jurassic, where Heritage made its 9Tcf gas find. We see 63% upside if Heritage
can monetise this gas, but note that an outcome is dependent on appraisal drilling.
NH
gas gas gas all around
NH
and not a buyer to be found
NH
tragic
NH
really
NH
Turkey remains the best hope
NH
but what are the odds of them buying Kurdish gas
NH
as MacRus notes?
NH
anyway
NH
here’s another resource related story
Crosby Asset Management Inc (CSB:LSE): Last: 5.07, up 1.87 (+58.44%), High: 5.50, Low: , Volume: 7.59m
BE
Is there? What’s that.
BE
Trouser presses?
NH
Crosby Asset Management Inc., the natural resources focused investment company, was notified on 15 April 2011 by ARA Capital Limited (“ARA”), a company beneficially owned by Mr Arkadiy Abramovich, that it has acquired 95,200,000 ordinary shares of US$0.01 (“Ordinary Shares”) in Crosby and now holds 26% of the Company’s issued share capital, as the Company’s largest shareholder.
ARA’s strategic investment is designed to further advance the process of identifying suitable acquisition opportunities for Crosby in order to allow the Company to fulfil its previously announced investing strategy of acquiring holdings in the natural resources sector.
NH
That’s Roman’s 20-year old son
BE
Ah. The one who was going to buy DNO.
NH
is he?
NH
really
BE
And Copenhagen FC, if I remember right.
NH
he fancies Kurdish oil?
BE
According to an interview he gave in January, I think.
NH
what a toy for a young man to have
NH
a shell company
BE
Better than a watch or a bottle of whisky, certainly.
NH
BE
Though it goes without saying that this is a total punt into the dark.
NH
I wonder how much cash it has
NH
punters are going to love this one
NH
right
NH
a few more small caps
NH
the situation in Burkina Faso
NH
has got worse over the weekend
NH
and that’s bad news
NH
for lots of Co’s
NH
West African plays very soft as the news flow from Burkina Faso continued to deteriorate over the weekend, with news that the ruling party soldiers were now becoming involved in the protests but on the side of the students who have been protesting against food prices and other inflation related concerns. The soldiers are protesting against pay conditions and have so gone on strike but are also starting to loot civilian and army targets. This has seen the likes of Ampella, Resolute, Noble Minerals , and Perseus sell off in Australia overnight. Focus also on Cluff Gold (CLF LN) down 12% over the past three days, Gryphon Minerals (GRY AU) and Orezone Gold (ORE CN).
Encore Oil Plc (EO.:LSE): Last: 115.00, down 0.75 (-0.65%), High: 118.50, Low: 114.25, Volume: 1.05m
NH
have announced their break up plans
NH
and here’s Arbuthnot on that
NH
At the interim results in March, EnCore stated that it may spin out its exploration assets. Today, the company announced the formation of XEO Exploration as part of this strategy. XEO will be listed on AIM and there will be an associated fundraising (the value of which was not stated) to provide the capital for future drilling commitments.
We feel that this is a very good strategy as it provides investors with two opportunity sets. For those who prefer the risks and potential rewards from exploration, go for XEO; for the risk adverse, stick with EnCore. Historically EnCore has funded its operations via asset sales. We feel that this strategy lends itself to increasing the likelihood that the new version of EnCore can more easily pursue asset sales in future.
NH
In terms of our valuation, we held 157p per share for the discovered asset and 54p per share for exploration. We will review our numbers in light of today’s news, but our initial view is that this is a positive result for the company.
NH
Bryce anything else?
BE
Yeah – couple of things
BE
In retail corner
BE
Dixons has been playing down the chances of following Woolies into the history books.
BE
Were out seeing Barcap on Friday, apparently.
BE
Who said this
BE
Given the significant move in Dixons’ equity over the past two weeks,
Barclays Capital hosted management (John Browett – CEO, Nicholas Cadbury
- CFO and David Lloyd Seed – Head of IR) for an investor lunch on 15
April. As expected, questions and concerns from investors were focused on
different angles of the capital structure, with a key focus on the
company’s relationship with suppliers and credit insurers and its ability
to fund its financial obligations in 2012 and beyond.
Barclays Capital hosted management (John Browett – CEO, Nicholas Cadbury
- CFO and David Lloyd Seed – Head of IR) for an investor lunch on 15
April. As expected, questions and concerns from investors were focused on
different angles of the capital structure, with a key focus on the
company’s relationship with suppliers and credit insurers and its ability
to fund its financial obligations in 2012 and beyond.
BE
We believe that
issues like austerity measures, declining consumer confidence, higher
inflation and ongoing negative sentiment on UK retail are likely to
continue to weigh on Dixons’ stock; that said, we think that management
presented a very clear and detailed picture of the options they have to
i) extract further savings (both from costs but also working capital),
ii) ability to scale down their capex needs significantly (without
impairing the operations), and iii) reduce their store space. Although
Dixons is likely to continue to face significant headwinds in the
short/medium term, we feel that management is doing the right things to
adapt the business and steer it towards a more flexible model from an
operating cost perspective and from right-sizing the business.
issues like austerity measures, declining consumer confidence, higher
inflation and ongoing negative sentiment on UK retail are likely to
continue to weigh on Dixons’ stock; that said, we think that management
presented a very clear and detailed picture of the options they have to
i) extract further savings (both from costs but also working capital),
ii) ability to scale down their capex needs significantly (without
impairing the operations), and iii) reduce their store space. Although
Dixons is likely to continue to face significant headwinds in the
short/medium term, we feel that management is doing the right things to
adapt the business and steer it towards a more flexible model from an
operating cost perspective and from right-sizing the business.
BE
Whilst
visibility on the recovery of the UK consumer remains very bleak, we came
out even more comfortable with Dixons’ liquidity position, which could be
further enhanced by another �100mn flexibility in capex (per year), �60mn
proceeds from sale of Swedish warehouse and �10-40mn additional savings
in working capital. Whilst the company CAN draw on its RCF to pay down
the notes, we continue to think that drawings will be controlled and that
Dixon’s will have no issues renewing its RCF ahead of the maturity of the
2012 notes.
visibility on the recovery of the UK consumer remains very bleak, we came
out even more comfortable with Dixons’ liquidity position, which could be
further enhanced by another �100mn flexibility in capex (per year), �60mn
proceeds from sale of Swedish warehouse and �10-40mn additional savings
in working capital. Whilst the company CAN draw on its RCF to pay down
the notes, we continue to think that drawings will be controlled and that
Dixon’s will have no issues renewing its RCF ahead of the maturity of the
2012 notes.
Dixons Retail PLC (DXNS:LSE): Last: 13.60, down 0.27 (-1.95%), High: 14.21, Low: 13.33, Volume: 7.26m
BE
And, heading up the market …
BE
Merrill’s pushing Kingfisher
BE
We are upgrading Kingfisher from Neutral to Buy. We like Kingfisher’s
international exposure, asset backing, self-help levers and sensible strategy to
drive top-and bottom line growth going forward. All these attributes, combined
with our UK Economist’s more benign view on the UK consumer in H2, mean we
believe the shares have scope to outperform the sector. Valuation, at c.11x
cal.11E P/E, c.20% below its historic average, is also attractive enough to justify a
Buy, in our view. Our PO, based on a DCF, moves to 310p, as we have increased
our estimates by 1-3%.
international exposure, asset backing, self-help levers and sensible strategy to
drive top-and bottom line growth going forward. All these attributes, combined
with our UK Economist’s more benign view on the UK consumer in H2, mean we
believe the shares have scope to outperform the sector. Valuation, at c.11x
cal.11E P/E, c.20% below its historic average, is also attractive enough to justify a
Buy, in our view. Our PO, based on a DCF, moves to 310p, as we have increased
our estimates by 1-3%.
BE
UK consumer not doomed; better outlook in H2
In the UK, high inflation, fiscal tightening and rising public sector unemployment
have put pressure on consumer confidence and disposable incomes; our UK
economist expects sizeable falls in real consumer spending in the first half of the
year. However, there seems to be some light at the end of the tunnel, implying
potential for some moderate improvement in H2: public sector job cuts in 2011
could be less than 2010, fiscal tightening is not worse, the housing market is more
stable and the expected degree of monetary policy tightening over the next few
quarters should have only a moderate impact on households’ debt service costs.
In the UK, high inflation, fiscal tightening and rising public sector unemployment
have put pressure on consumer confidence and disposable incomes; our UK
economist expects sizeable falls in real consumer spending in the first half of the
year. However, there seems to be some light at the end of the tunnel, implying
potential for some moderate improvement in H2: public sector job cuts in 2011
could be less than 2010, fiscal tightening is not worse, the housing market is more
stable and the expected degree of monetary policy tightening over the next few
quarters should have only a moderate impact on households’ debt service costs.
BE
Self-help levers still present, margins have scope to go up
We think one major driver of earnings growth will remain direct sourcing.
Management has set up a new target of having 50% of ranges in common across
the different geographies, the majority of which will be own brands and sourced
direct. We estimate about of a third of profit gains between FY11 and FY14 will
come from growing direct sourcing 20-25% pa to c.25% of COGS, while we think
there is scope to reach 40-45% in time. Admittedly the group’s 15% EPS growth
target pa also requires market share gains, LFL growth and space expansion in
existing/new markets, which are more uncertain in difficult economic times but, in
our view, Kingfisher’s current valuation more than discounts these challenges.
We think one major driver of earnings growth will remain direct sourcing.
Management has set up a new target of having 50% of ranges in common across
the different geographies, the majority of which will be own brands and sourced
direct. We estimate about of a third of profit gains between FY11 and FY14 will
come from growing direct sourcing 20-25% pa to c.25% of COGS, while we think
there is scope to reach 40-45% in time. Admittedly the group’s 15% EPS growth
target pa also requires market share gains, LFL growth and space expansion in
existing/new markets, which are more uncertain in difficult economic times but, in
our view, Kingfisher’s current valuation more than discounts these challenges.
BE
B&Q own-brand stuff’s largely rubbish, though that’s an aside that probably doesn’t affect the investment case.)
BE
Ok – that’ll do for the brief stopover in retail corner
BE
Should we wrap up now?
NH
not much else to say
NH
most of the Rabble are away
NH
or don’t care
NH
or are working really hard
NH
on lots of deals
NH
lots to chew over today
NH
cya rabble