Markets Live: Monday, 29th July, 2013

This is the transcript of the Markets Live session ending at 12:00 on 29 Jul 2013. Participants in this session were: Paul Murphy Bryce Elder

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Morning

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Welcome to ML

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I’m back after a short break

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Bryce meanwhile has not been away

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Away the back end of last week in Iceland

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I was there for Lorcan’s wedding

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Lorcan being a long standing friend of AV

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Joseph was there too

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So it was a lovely, tear-inducing ceremony – on the beach.

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A black beach

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And then there was some industrial grade drinking.

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At first I was surprised.

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There only seemed to be a few AV regulars there.

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But then I went round the corner, and ….

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Here’s a close up

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Whoops

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Photo credits to Joseph

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Now, i did bring one of these muppet cakes back to London

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Hauled all the way form southern Iceland

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But i left it in the fridge this morning Emoticon

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So you will just have to imagine it

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But I’m happy to send it on to a lucky reader

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We need a quick competition for that

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How about the closing price of Publicis today?

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In the meantime, here’s the happy couple

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Lorcan and Denise

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Sorry!

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I don’t know what’s gone wrong there

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They are the right way up in my browswer

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But, yes, your views are reiterated. Well done Lorcan, and good luck Denise.

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Okay, are we done with Facebook Live yet?

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Yup

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Because there are a few things happening.

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Best discuss this alleged merger of equals, which is going to be run as a divided company.

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Pubicom

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Pubnicomlicis.

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Two CEOs, to head offices, two listings, holding company tucked away in Holland

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And more than a couple of client conflicts.

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Not in Holland for tax reasons please note.

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It’s in Holland because it’s halfway between France and … er … hang on.

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So ….

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Mr Wren admitted that his team often asked themselves “’is this really possible?” during the talks but Mr Levy said French officials had shown “tremendous support” and the companies hope to close the deal by the end of this year or early 2014.

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Do you ask “is this really possible?”, or “is it really sensible?”

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Because opinions seem to be mixed this morning.

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Well i’d ask “Is it real”

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Well, that’s another fair question.

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France regulators onside, apparently.

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Which can only be because they believe it’s a takeover without premium of an American company.

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Which is sort of is.

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Management expecting deal to close in Q4.

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They’ll be lucky

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If that happens, I’ll be riding on one of the Havas CEO’s flying pigs.

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In terms of hurdles ……..

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In
Europe the ECMR timetable is Phase 1 which can take 25 working days
(without remedies) or a maximum of 35 working days (extended in case of
remedies). Should it be extended to Phase 2 this is up to 125 additional working
days post completion of Phase 1. Although management has indicated that it has
the support of the French government, it is possible that market shares in Europe
may lead to prolonged investigation. In the US we estimate that the combined
entity as nearly 40% market share and therefore may lead to some remedies
being sought. Client concerns and issues which may be raised by media owners
could also delay the process. The Chinese regulator MOFCOM has a potentially
long approval process: Phase 1 is 30 days, Phase 2 is 90 days, then if not passed
it moved to Phase 3, which is 60 days.

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That summary’s via UBS.

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Now, let’s remember Mofcom had to be forcibly bypassed to get the Aegis / Dentsu deal though.

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Course, that was probably because it was Japan. But still.

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Anyone have clarity on Mofcom’s thinking? Anyone? Thought not.

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In terms of the DOJ ………..

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The argument seems to be, “yeah, but we’d still be smaller than Google.”

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($43bn a year in advertising sales, in a $550bn market.)

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But that’s a silly measure really, and not one the DOJ’s likely to concentrate on.

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This is a joke, yeah, classing Google as a direct peer?

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Agency market share is more likely to be the focus.

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Yep

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In which case Omnicom has 17% and Publicis has 10.2% globally.

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Versus 19.7% for WPP.

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(And thanks to TMT sector watcher for these figures.)

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Right now it is unclear currently if the DoJ or FTC will review the merger in the US (let alone the other jurisdictions). However, the DoJ is said to be most likely according to a range of antitrust specialists in Washington. Now remember the DoJ happens to be the very same which effectively blocked AT&T buying T-Mobile. As far as industry classifications are concerned, it would appear the US is where the combined entity has the highest market share which could raise DoJ eyebrows even further. The “newco” would have over 30% market share.

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you can get side-by-side financials towards the bottom of this presentation

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Well, exactly.

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Just looks like complacency to think this’ll stroll through because no deal has previously been blocked.

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More broadly though, there’s also the question of it being a tad on the ambitious side.

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A reminder of how that management musical chairs works …..

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The senior management structure has been divided between the companies in a
manner in line with the merger of equals. The chairman of Omnicom, Bruce
Crawford, will be the non-executive Chairman for the first year following the
closing of the transaction, after which Publicis’ current Chairperson Elisabeth
Badinter will take the role. Initially, Publicis CEO Maurice Levy and Omnicom
CEO John Wren will be co-CEOs. However, after 30 months Levy will become
the non-executive Chairman and Wren will continue as CEO. This is not
unexpected as Levy is in his seventies and has long been questioned about the
succession plan. The Board will have the co-CEOs and seven non-executive
directors from each company to ensure equal representation.

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(UBS again.)

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14 non-execs eh?

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Can’t have too many noddies.

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And a reminder of the clients who now find themselves in the same office as their nearest rivals ….

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The clients that may be concerned are those such as Pepsi and Coca Cola which
will now be at the same holding company. In autos the same agency now
services Nissan, Volkswagen, Mercedes, GM and Toyota which may lead to
some concerns given the high level of concentration. Other potential conflicts
are Nestle, ATT and Verizon, Visa, Citi and Amex, Unilever and P&G. The
recent move of Pfizer to consolidate into three agencies, WPP, Publicis and
Omnicom, have now essentially moved to two. WPP have won twelve of the last
fourteen pitches at the account.

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(UBS again.)

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Still, some are arguing that everyone wins.

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Barclays uses that exact phrase.

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Even though no one can even suggest why the customers benefit here.

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In our view, everybody is a winner in this deal. Publicis and Omnicom shareholders benefit because of cost synergies that we
expect to be larger than the impact of potential client losses. Interpublic, Havas and WPP shareholders benefit because those agencies are likely to achieve some client wins from the merger disruption. While we do not see significant regulatory risks, combined market share in media buying in certain countries is high, which could lead to some disposals. Overall, this deal does not change our highly positive view on agencies and we continue to believe that the market does not pay enough for their growth profile. We are Overweight Havas, Interpublic, Publicis and WPP while we are Equal Weight Omnicom.

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Impact on Publicis shareholders – They get €1 of dividend and the estimated value of the synergies is €4.75 per share (50% of US$600m after five years, management being “very comfortable” with US$500m; taxed at 29%; valued at 10.1x, in line with Publicis’ current EV/EBITDA; discounted back at 9%). Client losses are to be taken into account, however. To offset the synergies, client losses would need to reach 19% of revenues — which we think is very unlikely. Assuming arbitrarily 5% client losses would reduce the synergy benefits to €3.50 per share and the potential upside to c. 7%.

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Impact on Omnicom shareholders – They get US$2 of dividend and the value of the synergies is US$4.60 per share (same calculation as above). Assuming arbitrarily 5% client losses reduces the estimated synergy benefits to US$3.35 and the potential upside to c. 8%.

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Impact on Havas, Interpublic and WPP – In our view, the combined company is likely to lose some clients as a result of the merger. If anything, the merger provides an opportunity for advertisers to review their agencies in order to get a better deal, and we wouldn’t expect the new Publicis Omnicom Group to win all the reviews. This should benefit Havas, Interpublic and WPP unless they decide to engage in a merger of their own.

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We don’t expect regulatory hurdles …

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Emoticon

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… During the conference call, both Wren and Levy addressed potential regulatory concerns. Levy noted that he had spoken with French officials and believed they were supportive of the deal. Wren framed the merger in defensive terms, citing Google and Facebook as digital competitors who didn’t exist years earlier but had altered the competitive landscape. Separate regulatory approval
will be required in 41 to 46 countries, but we don’t expect any regulatory hurdles for the deal given the still largely fragmented nature of the advertising industry.

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Up to 46 national approvals needed. Let’s see how that works out.

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Should mention quickly taht last year we thought Publicis was interested in InterPublic

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But we (I) got knocked back on that.

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There weren’t any talks. Maybe

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…………… Emoticon

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Oh, and some wags are suggesting this looks rather like Alcatel-Lucent this morning …….

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As in …….

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Merely same geographies, and some similar grab-handing press shots, I’d say.

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One more slice of grey and we can move on.

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David Reynolds at Jefferies provided the best summary I’ve read this morning, so here it is.

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Quick pen picture. The combined entity represents a proforma market capitalisation of c.US$35bn, the two companies broadly 50/50 in scale, though Omnicom delivered FY12 revenues of US$14.2bn versus US$8.8bn at Publicis. The valuation difference here driven by the higher margin characteristics of the Publicis business and its greater digital component together with the higher-growth profile evident in Publicis’s businesses. The businesses have a broadly similar geographic revenue mix. Publicis has been the more aggressive acquirer of assets in recent years, indeed the three digital acquisitions of Digitas, Razorfish and Rosetta constitute a subtle difference, perhaps a digital lead at Publicis, a little way ahead of Omnicom.

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Structured to deliver a ‘merger of equals’. The merger is expected to be tax-free to the shareholders of both companies. The transaction has been structured so that the
shareholders of Publicis Groupe and Omnicom, after special dividends, will each hold approximately 50% of the equity. Publicis shareholders will receive one new share for each Publicis share they own, together with a special dividend of €1.00 per share. Omnicom shareholders will receive 0.813 new share for each Omnicom share, together with a special dividend of US$2.00 per share. In addition, Omnicom shareholders will receive up to two regular quarterly dividends of US$0.40 per share.

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But can it ever be so? Omnicom’s CEO, John Wren, will lead the new company ultimately, it will be listed on the NYSE and Euronext Paris under the symbol OMC; is this a US takeover? But, the equality of the financial terms, despite the revenue scale differences between the two, suggests a great deal for Publicis and an adept deal structure to side step a merger premium that perhaps one may think would be warranted.

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Operational efficiencies. The press release outlined possible savings of c.US$500m driven by future scalability and internal synergies.

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But hurdles aplenty. The advertising agency industry has been consolidating steadily for the last three decades, the most recent global deal being the acquisition of Aegis by Japanese agency group Dentsu. That said, the scale of the consolidation engendered by Publicis Omnicom is significant; both companies are concentrated in the United States and together would constitute something like 40% of the US advertising market, more than twice the US revenues of WPP. The anti-trust issues crystallised by the deal can then not be easily dismissed. With Levy succession planning clearly a major driving force behind the rationale, political issues are also likely to emerge in France where there is little reminiscent of Thatcher’s free market philosophy.

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A closing thought. This is clearly a bold and audacious deal. That said, it will require decisive and imaginative work with conflicted clients. As a succession solution, superb, but it will also be interesting to see how Sorrell responds – it potentially creates lots of opportunities for the WPP brand stable as, however enlightened advertisers may have become across decades of M&A, it remains counter-intuitive to have one’s creative marketing and advertising plans under the same roof as key competitors.

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WPP PLC (WPP:LSE): Last: 1,195, up 20 (+1.70%), High: 1,231, Low: 1,191, Volume: 2.92mBlock
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There. Done.

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11:25AMBlock
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Should we do this Elan deal

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Probably leave it alone for now

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How abotu moving on to Barclays?

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Fresh buying op this morning

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I say hesitating

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Cos they are going to be forced it a rights issue, no?

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(@YoGabba: both wildly unlikely and unnecessary. Sorrell’s not a clown.)

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Or maybe restrict to a cash box?

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……. well, or cocos.

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We don’t know yet.

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Thought cocos had gone out of fashion?

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Not for them, or for the sources that talk to Bloomberg.

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The bank favors issuing cheaper CoCos instead of new stock,
according to two people with knowledge of the talks who asked
not to be identified because no decision has been reached.

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Now, none of this is a surprise really.

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Rumours of a cash call (noted here in passing, I think) were around all of last week.

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And …. well ……

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That’s the reason why.

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Course, Barclays has reportedly agreed to suspend the 3% stressed deadline to the end of 2014.

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Which I guess makes them something other than a distressed seller.

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Quick bit of Deutsche Bank to summarise what’s needed …..

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The Barclays gap to a 3% stressed leverage ratio in the test was 17%, implying
a £233bn excess of assets or £7bn equity deficit at FY12. The deadline for
compliance with the unexpected stressed CT1 ratio was not specified. We
expect deadline and required actions to be driven by the regulator’s view of the
credibility of plans lodged by Barclays in mid July to achieve compliance.

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The WSJ and FT articles say that issuance of equity (FT references a potential
£4bn rights issue), convertible bond and/or balance sheet reduction are under
consideration. Though the valuation consequences of these is not dire the
challenge with capital issuance is providing confidence that what’s done is
sufficient, given the surprise nature of the test, long deadline granted to
Nationwide, tougher leverage ratio definition under comment from the BCBS,
US FBO proposals, CRDIV insig. financial holdings proposals etc. Barclays
intend to provide more detail of its interpretation of the final CRDIV text and
legacy asset run-down with results on 30 July. Both are more important now.

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Our base case has been that Barclays rationalizes balance sheet rather than
issues equity. If a £7bn equity shortfall under the leverage ratio is the real and
only capital requirement and this were solved by equity issuance, our FY14 and
FY15 forward P/E multiples would increase by 1 P/E point to 8x and 7x. 1Q13
pro-forma B3 capital ratio goes from 8.4% to 9.8%. Equally, however, if £7bn is
what’s required before balance sheet restructuring, we forecast retained
earnings in 2013 and 2014 of £7bn, inclusive of 2.5% and 3.0% dividend yields
this year and next. Clarity on what regulators will ultimately require and how
near term plans actually satisfy these is the biggest near term issue. What role
do cocos, for example play when tests appear focused on CT1? Are ringfence
and SPE resolution rules sufficiently clear to plan longer term PLAC issuance
now? As things stand, we see Barclays’ P/E as more than discounting these
significant uncertainties and retain a Buy recommendation and 380p TP.

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The gist from the sellside is that Barclays would be well advised to avoid a rights issue if at all possible.

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that’s rather bold in the circs

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And would it be overly suspicious to suggest that the idea of equity’s been put out there even though it’s a worst-case option that’s unlikely to be pursued?

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Not saying a share issue won’t happen. Only that there would be a relief rally if it doesn’t.

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Here’s Merrill.

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Reports suggest a combination of equity, hybrid and
balance sheet reduction will be used by Barclays to boost its Basel 3 leverage ratio.
As we discussed in 3 things that matter for the 2Q13 Barclays results we see a new
capital path as key to Barclays re-rating potential. If Barclays were to avoid a rights
issue, at these valuations, we see any enhanced capital plan as a positive catalyst
for the shares. We reiterate Buy.

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In The final stages of change could speed re-rating we argued that with global
requirements for leverage increasing, regardless of any UK timetable, Barclays may
still choose to accelerate its capital plan to boost its leverage ratios. We have
already reflected the new 3% Stressed Basel 3 CET1 leverage ratio in our forecasts
by factoring in a 12% balance sheet reduction. This sees Barclays at 3% by 2014e
and just shy of a 4.5% AT1 leverage ratio by 2015 (see Chart 1). Whilst this reduced
our 2014/15 EPS estimates by 12%, we think those EU banks that move early to get
ahead of the regulatory shift may be rewarded more fully by the market.

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To hit a 3% ratio by 2014 we estimate that Barclays needs to find £4bn of capital
equivalent. Barclays could potentially pursue one or a combination of strategies.
Our preference would see Barclays (1) issuing 5% or £2bn of new equity in an ABB
and (2) issuing £2bn new “going concern” AT1. Assuming a flat balance sheet on
2012, this could lift its B3 AT1 leverage ratio to 3.9% by end 2013. To move towards
5% by 2015 Barclays could look to (3) restructure existing CCNs, increasing their
trigger to qualify as AT1 and (4) announce plans to “optimise” it notional balance
sheet, which could credibly reduce assets by 5% without loss of revenues, we think.

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(@yogabba: shush for a minute. Read more, type less.)

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And, just for the full house, JP Morgan’s numbers ……

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We think that Barclays can
meet its leverage ratio requirements through retained earnings and asset
deleveraging, but a capital raise (combination of equity + CCNs) will allow
the group to accelerate this and create a contingent buffer on top of the
minimum. We analyse 3 scenarios for capital raising i) £2bn equity + £2bn
Tier 1 CCN, ii) £4bn Tier 1 CCN, iii) £4bn Equity. We conclude that the
EPS dilution is in the range of -3% to -8.5% in the 3 scenarios, which does
not alter the fundamental valuation attractions of the stock.

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Post a £4bn capital raise in our
analysis which results in the highest dilution, the shares are valued at 6.7x
2015E P/E and 0.75x P/TNAV ‘15E for RoNAV of 11.9%. Alternatively,
the implied cost of equity for Barclays remains high at 16% 2015E which
we believe should decline with a reduction in leverage post capital raise.

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Barclays PLC (BARC:LSE): Last: 310.85, down 9.3 (-2.90%), High: 319.75, Low: 307.10, Volume: 27.60mBlock
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So Barc off the bottom

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As I say, if a share issue turns out to be the nuclear option, and they don’t have to press that button, then a rally might be in order. That seems to be the idea.

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Thanks for all that

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11:38AMBlock
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So done the main merger and the main cash call

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What next?

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results?

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All the fund managers weak again I see

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Aberdeen Asset Management PLC (ADN:LSE): Last: 396.00, down 11.8 (-2.89%), High: 406.50, Low: 395.00, Volume: 2.15mBlock
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Rather poor numbers.

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£3.4bn walked out of the door.

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Oh dear

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this is because everyone is writing off EM

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?

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Well, it’s £2.5bn on a net level, which Aberdeen says is largely on the lower margin stuff.

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(Suggesting that if you pay more for your fund, you’re less likely to pull your money out. Not sure what to read into that.)

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Headlines weak across the board, actually, though you can consider the June quarter to be exceptional.

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Japan’s not going to do that every month. Surely.

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Here’s Peter Lenardos at RBC to summarise.

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Flow analysis: Aberdeen indicates that outflows are related to market volatility in June (with £2.5B of the net outflows occurring in June) and further action it has taken to manage capacity in its global emerging market equity funds. This was partially offset by flows into Asia Pacific equity strategies, including Japanese equities where Aberdeen continues to see interest. Aberdeen continues to focus its distribution effort on markets with the largest asset pools, particularly USA and Europe. Aberdeen reported that net outflows were “lower margin” and thus the positive business mix change continues to occur.

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Outlook: Aberdeen indicates that global markets remain susceptible to volatility but the company continues to “trade in line” with its expectations and Aberdeen remains “confident” that it “can continue the organic growth of the Group’s revenue and profit.”

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Valuation: Aberdeen trades at 9.3x CY13E EBITDA (sector: 9.5x) and at 12.9x CY13E EPS (sector: 15.2x). In Q4/FY13 (Q3 of CY13), we forecast 0.0% in net flows and 2.5% in investment performance. In the current quarter, the MSCI World Index has increased 5.8% while the MSCI Emerging Markets index has increased 2.3%. Aberdeen trades at a discount to the sector despite the fact that Aberdeen continues to have an above-average growth profile.

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Conclusion: Flows and investment performance are disappointing and below our expectations. The only good news from today’s statement is that despite the flow and investment performance figures, because of business mix changes and market performance so far in the current quarter, there should be no material changes to our forecasts, and we continue to forecast strong year-on-year growth, with the dividend increasing 30% (to 15.0p) and adjusted diluted EPS increasing 34% to around 30p. We continue to believe that commencing in FY14 the company will initiate a share buyback programme.

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And Canaccord.

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We expect the quarter’s margin accretion to offset net outflows to an extent. Overall
not a bad set of numbers given the peak to trough market fall in May/June was 17%
with some recovery towards the end of June. Overall performance in the funds
remained benchmark beating for June. Funds lost 5% in the quarter (around
£10.3bn). The markets have gained 2.5% since the June Q3 closing.

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We expect the earnings numbers to be maintained. Consensus had previously
stabilised at 30.5p adjusted EPS for this year and 34.4p for next. We remain below
consensus at 28.1p for this year and 30.1p for next. Emerging markets remain
volatile with consensus EPS growth of 7-8% vs. the 20-year average of 15%.
Aberdeen’s Asia outlook conference last week hosted by Hugh Young did highlight a
general slowing down of EM economies. However, we believe EM should continue to
attract inflows over the longer term and, with good performance, Aberdeen should
experience superior flows compared to the sector. We retain our BUY rating.

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Sector having a lurch lower in tandem.

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Schroders PLC (SDR:LSE): Last: 2,441, down 53 (-2.13%), High: 2,518, Low: 2,427, Volume: 138.68kBlock
Man Group PLC (EMG:LSE): Last: 81.10, down 2.55 (-3.05%), High: 83.55, Low: 79.50, Volume: 10.23mBlock
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Divi cut coming in Man this week, most likely, of course.

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Can’t argue it’s not in the price already. Yielding ~15% or something absurd, in theory.

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INdeed

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H1 on Friday.

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H113 MSe AuM $51.4bn (Cons $51.7bn), Net sales $(5.5)bn
(Cons $(6)bn), PBT $76m (Cons $90m), EPS 2.7c (Cons 3.4c),
DPS 1.3c. We note that consnensus PBT includes different
treatments of the debt repayment costs of $28m the company
has guided to. As such we believe consensus PBT on a like for
like basis is closer to our $76m than the figures above suggest.

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That’s what Morgan Stanley expects.

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11:46AMBlock
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Im still catching up

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Take three days off and im lost

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Oh, should note, the rabble was moaning last week about no AV summer drinks.

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And in that summer holiday are looming, we should probably sort something out.

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Er, ok

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When’s good?

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Back end of August?

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Yeah, back end of August would be sensible. That gives us long enough not to worry about it.

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We were planning to take August off — from ML.

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But AV still running of course

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Just to give us a break from you, rabble, and vice versa.

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Schools back drinks sounds sensible

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Let me come up with a date, which we wil psot tomorrow

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post even

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Good plan.

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@outlaw: yup. Emergency sessions as and when required.

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11:51AMBlock
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So we should mention Elan, even though I’ve not been following this.

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Looks done, most likely.

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Perrigo proposing $16.50

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As in $6.25 and 0.07636 of newco.

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So Elan shareholders get 29% of the newco.

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I’d never heard of Perrigo before this, I have to admit.

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Snap

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Seems they are interested in the tax effciencies of Ireland as well as this MS drug that Elan has

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Tysabri

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It currently does a weird selection of stuff. Generics, but also baby formula and nutritional supplements.

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Shares already trade at a rather punchy 20x 2014.

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Detusche can tell us why it makes sense.

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The proposed offer is a significant premium to our $12/share NPV of Elan’s
assets i.e. Tysabri plus cash, reflecting strategic value attributed Elan’s to low
tax infrastructure and the potential for Perrigo to lower its current and future
tax obligations. Importantly, the deal is a 27% premium to the last offer from
Royalty Pharma (excluding value for the CVR) and a 21% premium to our
valuation of Royalty’s last offer ($13/share cash plus our $0.6/share NPV of the
CVR). While investors may debate the value of the Perrigo offer, given that
greater than 60% is in equity, we note that this equity would have to be
overvalued by greater than 28% for the value of the deal to be less attractive than the last
offer from Royalty Pharma.

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Offer seems likely to be accepted in our view
A significant proportion of the proposed offer reflects strategic value attributed
to the ability of Perrigo to lower future tax obligations. As third party observers,
it is difficult to assess whether the value of the tax benefits is worth more to
another company and therefore whether a competing bid will emerge.
However, given that a formal sales process has been conducted and that
Elan’s Board has accepted the offer this seems highly unlikely to us. We also
note that there is meaningful overlap between the blue chip shareholder bases
of the respective companies, improving the chances that the deal is accepted.

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The terms look plenty rich enough when set against the Royalty offer

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(@TheLeggie: what are the actual, real-life advantages of putting your muppetstocks in an ISA? I’ve never had that explained to me.)

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(@TheLeggie: hahahahahahahaahahahaha! ha! hahahahahahaah! hahaha!)

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Bryce!

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Okay, are we done? I think I’ve run out of steam.

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Sure

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We didn’t mention any macro stuff

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And we are supposed to be getting ECB minutes at some stage in the future

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Here’s the relevant interview

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But we’re done for today

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Thanks for joining us

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Will come up with a date for post-sumemr drinks tomorrow

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Seeya

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