Markets Live transcript 23 Jun 2011

Posted by supporton Jun 23 11:03.

Markets Live chat transcript for the chat ending at 11:40 on 23 Jun 2011. Participants in this chat were: bryce.elder Neil Hume, FT

BE

Good morning, folks.
BE

And welcome to another Markets Live
BE

Today, starring ……
BE

No-one.
BE

No repeat visit from Paul Murphy.
Former FT Alphaville editor and founder of the site. Now in charge of something called FT Tilt.
BE

No Neil, who’s trapped in a meeting.
BE

No Tracy, who’s off speaking to the lawyers.
BE

No Joseph, who’s MIA.
BE

So …. you’ve got me.
BE

Um …..
BE

What about that market, eh?
BE

(@Mrs martin: no. No it wasn’t. Are you new to this?)
BE

May as well have a quick whip around the scoreboard while we wait for someone to turn up.
BE

FTSE down nearly 50 points at 5723
BE

Miners and banks the drag.
Vedanta Resources PLC (VED:LSE): Last: 1,904, down 63 (-3.20%), High: 1,949, Low: 1,900, Volume: 514.44k
Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 713.50, down 19 (-2.59%), High: 730.00, Low: 713.00, Volume: 489.39k
Kazakhmys PLC (KAZ:LSE): Last: 1,274, down 26 (-2.00%), High: 1,290, Low: 1,267, Volume: 500.00k
Xstrata PLC (XTA:LSE): Last: 1,267, down 22.5 (-1.74%), High: 1,281, Low: 1,263, Volume: 2.67m
BE

(@Mrs martin: this is what’s known in the trade as “mind yer eye.” An important grey market indicator, even if it’s fallen out of favour recently.)
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 37.44, down 1.21 (-3.13%), High: 38.60, Low: 37.24, Volume: 30.28m
Lloyds Banking Group plc (LLOY:LSE): Last: 45.75, down 1.25 (-2.66%), High: 46.90, Low: 44.85, Volume: 46.97m
BE

Well, you get the idea.
BE

Ok – Neil’s back.
BE

Just logging on.
BE

So normal service will be resumed shortly.
11:11AM
NH

Hello Rabble
NH

very sorry I am late
NH

got stuck on the tube
NH

what have I missed?
BE

Nothing.
BE

Me filling desperately, like a Wimbledon commentator while it’s raining.
BE

Done the FTSE and that’s about it, really.
BE

What do you fancy kicking off with?
NH

what about
NH

OCADO
An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.
Ocado Group PLC (OCDO:LSE): Last: 183.00, down 12.2 (-6.25%), High: 192.10, Low: 182.50, Volume: 760.45k
BE

Oh dear.
NH

yes
NH

back near the float price
NH

and the reason is
NH

results next week
NH

and JPMorgan downgrade today
NH

for reasons I can’t quite understand
NH

the target price is still bullish
NH

everything seems to be going OK
NH

but they downgrade
BE

Floated at 180p of course.
NH

3p away
NH

clogs to clogs
BE

Give us a look at this note then.
BE

See if we can make sense of it.
NH

Ocado will report its half year results before the market opens on the 27th of June, followed by an analyst meeting in London at 9.30am. Having already updated the market on trading for the vast majority of the period at the AGM on 11 May, we expect the market to be well informed as to the likely outcome of next week’s release and the results themselves to largely be a ‘non-event’. We therefore remain focused on any further trading update, outlook for the remainder of the year, progress in increasingly capacity at CFC1 and any potential impact from the ‘relaunch’ of Waitrose.com.
NH

Increasing target price but downgrading our recommendation – We update our forecasts to reflect the slower than expected trading in Q2, and lower our Nov-11E and Nov 12E EBITDA forecasts by 10% and 13% to £36m and £60m respectively. As a result of these forecast changes, rolling over our price target to Nov-12 and marking to market our multiples, we are increasing our Target Price to 217.8 pence, but downgrading our rating to Neutral from Overweight due to a lack of upside to current levels (9% upside).
NH

so target price up
NH

rating down
NH

go figure
BE

217.8p?
BE

That’s granular.
NH

it is
NH

perhaps this is the reason
NH

for the negativity
NH

WAITROSE
NH

We expect capacity constraints and negative sentiment around Waitrose’s ability to compete within the London area (inside M25), to hold back the shares until the opening of CFC2 at the end of 2012. The capacity constraints have been well flagged by management and we believe are largely understood by the market. However, we believe it is the volatility on a quarterly basis that is created by this which may prevent new money investors at this stage.
BE

And the target now offers 19.0163% upside.
BE

So can we expect a Cazenove upgrade later?
BE

I’ve a feeling not.
NH

puzzled by it
NH

and to think
NH

those shares were placed at what 260p?
BE

Something like that, yeah.
NH

anyway
NH

let’s move on from Ocado
NH

it’s an unhealthy obession
NH

although they have just delivered the cakes
NH

for today’s afternoon tea
NH

and have a look at Sainsbury
J Sainsbury PLC (SBRY:LSE): Last: 327.50, up 1.6 (+0.49%), High: 332.20, Low: 323.00, Volume: 3.74m
NH

Qatar bid rumours back again
NH

when I mentioned it in the office this morning
NH

one of the editors shot back with this
NH

encore une fois
BE

We’re an educated mob, ain’t we.
NH

it’s a song
NH

ain’t it?
NH

some rave number
BE

Sash.
BE

Not a classic of the genre.
NH

EmoticonEmoticon
BE

1996. Quite shouty. His follow-up to the equally terrible “It’s My Life”
BE

[/trainspotter]
BE

Anyway – we putting any credibility on this retreaded tale?
NH

nothing
NH

other than the note
NH

BMAlpha just put up
NH

and the fact that one
NH

spread bet house
NH

says it won’t write any business on SBRY
NH

and that’s it
BE

(Folks, don’t try to out-trainspot me: http://www.youtube.com/watch?v=y0C8E5QwEDA )
NH

(as it happens on my recent football course was the man who wrote Baby D’s ‘Let me be your fantasy’
NH

(rave on)
BE

Yeah – these tales do tend to turn up whenever Sainsbury’s around its current levels.
NH

it’s there for a reason
NH

ie weak balance sheet
NH

pay divi from reserves
NH

TESCO
NH

should launch a massive price war
NH

and crush them
J Sainsbury PLC (SBRY:LSE): Last: 327.70, up 1.8 (+0.55%), High: 332.20, Low: 323.00, Volume: 3.77m
TESCO Plc (TSCO:LSE): Last: 398.30, down 0.5 (-0.13%), High: 399.95, Low: 394.30, Volume: 4.13m
NH

I’d like to see Justin King try and spin his way out of that one
11:25AM
NH

Right
NH

someone was asking about Misys
Strange software outfit, seemingly controlled by US investor ValueAct Capital.
NH

we were slightly out with the bidder
NH

I thought it was Fiserv
NH

but I was wrong
NH

and our M&A reporter
NH

Anoushia was right
NH

it’s FIS
BE

A name that’s been mentioned for months.
BE

Fidelity National Information Services, to give it its full title.
NH

FIS notes the announcement made by Misys on 21 June 2011 and confirms that it has made a preliminary approach regarding a possible cash offer for Misys.
NH

interesting statement
NH

they didn’t have to say the approach was in cash
NH

but they did
NH

now I have looked at their balance sheet
NH

and FIS will need to borrow to fund this
NH

possibly a bridging loan
NH

then debt issue
NH

which is why
NH

I believe Misys called the approach preliminary
NH

but still gave them access to the books
NH

but this is solid bidder
NH

so I am not surprised the price has ticked higher
BE

Yeah – UBS has run the numbers on this one.
BE

We have used FIS in our peer group SOTP-analysis for Misys Banking for
some time. In 2010 it had sales of $5,204m and EBITDA of $1,628m (31%), with
$1,891m of sales (at 44% EBITDA margin) in Financial Solutions in N America
and $834m (25% EBITDA margin) in International Solutions (both core banking
and payment solutions). Payment Solutions in N America make up the balance of
sales and profits. Int’l is made up of 45% EMEA; 38% LatAm and 17% Asia.
BE

FIS has a core-banking footprint today, but is limited in TCM
BE

In Financial Solutions, FIS offers a number of core-banking solutions in retail and
wholesale such as Profile (60 customers) and ACBS (112). It has some channel
mgt and risk mgt tools too, but on paper we would regard an acquisition of
TCM/Sophis as creating cross-selling opportunities, while some consolidation of
the roadmap between BankFusion and Profile/ACBS would be likely.
BE

FIS is no stranger to acquisitions, acquiring US core-banking Metavante in 2009
for $4.2bn – 2.5x EV/Sales and 7.6x EV/EBITDA. FIS had $4.6bn of net debt at
31 Mar. 11. We calculate using 2012 cons. data for FIS and our Misys forecasts
that if FIS acquired Misys at 400p, 450p and 500p at a 4% cost-of-finance and
assuming no synergies it would be 8%, 7% and 6% accretive respectively.
NH

(Hidden – i think it’s on call options not CFD’s but it doesn’t make much sense)
NH

a lot of net debt there
NH

for a $9bn company
NH

so that’s the risk here
NH

FINANCING
NH

but that’s why I imagine Deutsche Bank have been brought in
NH

on the FIS side
NH

and for the rationale
NH

if FIS want to enter the cap markets business
NH

then a Misys buy makes sense
NH

and it gives them an international presence
BE

Expensive way to gain it, but there are no other options I guess.
NH

quite
NH

and what’s happened to Temenos
NH

on the back of this?
BE

Lower, I believe.
BE

Though can’t autoquote.
NH

yes
NH

almost 6%
NH

I think someone has downgraded
BE

Actually, getting quoted nearly 14% lower in Switzerland.
NH

wow
NH

competition fears?
BE

Here’s Credit Acricole’s downgrade.
NH

excellent
BE

While we still like the company’s execution in what is a structural
growth space, medium to longer term, we struggle to see how
Temenos can deliver on its 2011 objectives in light of darkening
macro clouds and renewed stress in the banking sector. Yes, the
stock is down 30% year to date, but with it trading at 19x our new
2012E earnings estimate and 2011E guidance at risk, we think we
are far from having seen the bottom.
BE

So – market rather than competition.
BE

While we still like the company’s execution in what is a structural
growth space, medium to longer term, we struggle to see how
Temenos can deliver on its 2011 objectives in light of darkening
macro clouds and renewed stress in the banking sector. Yes, the
stock is down 30% year to date, but with it trading at 19x our new
2012E earnings estimate and 2011E guidance at risk, we think we
are far from having seen the bottom.
NH

one can see why Misys wants to sell
BE

Yeah – and may have to get it done quick if their market’s genuinely deteriorating.
BE

Though I guess banking’s where they’re already a bit underweight customers.
NH

staying in the tech space
NH

another bid target
Micro Focus International PLC (MCRO:LSE): Last: 335.90, down 18.1 (-5.11%), High: 347.50, Low: 334.70, Volume: 878.44k
BE

Rubbish results.
NH

yes
NH

they have written off 2011
NH

need to do an awful lot in 2012 to keep revenues flat
NH

the chairman has been pretty honest on that
NH

There are a number of challenges ahead for the Group to address the issues that have been identified. In order to achieve a similar level of revenue in the year to 30 April 2012 we will need to grow like for like licence fee revenue against a backdrop of a 15.2% decline this year, in order to offset the anticipated decline in maintenance fee revenue and maintain consultancy fee revenue at the same level. Consultancy has been a loss making revenue stream during 2011 and our aim is to avoid taking on those type of projects in future which may lead to a reduction in the consultancy revenue stream. In the near term, it is therefore likely that overall sales will decline. In this context, we are taking the necessary steps to protect our margins through a clear focus on profitability throughout the Group.
NH

whatever PE were looking to pay
NH

we can assume its probably less now
BE

Yup. It underlines that the company’s still deep in the woods.
BE

It remains a turnaround story that’s yet to be turned around.
NH

perfect for PE
NH

at the right price of course
BE

Exactly.
NH

any comment
BE

RBS sums it all up quite well.
BE

Today’s statement from Micro Focus all feels like hard work; numbers are at the
low end of expectations, the outlook points to limited momentum and there is no
progress on the bid talks. The shares are likely to drift while the uncertainty
continues.
BE

Full-year results today look indifferent with revenues of $436m (vs guidance of $432m-442m)
and adjusted EBITDA of $158.7m vs guidance for $159m-167m. Our numbers expense
capitalised R&D. On that basis adjusted EBITDA was $149.5m vs our $152mF. These
numbers reflect -6% organic growth. Meanwhile, cash numbers look good with strong working
capital and accrued income trends and lower-than-expected cash tax. Overall, net debt came
in at $14.9m, ahead of $33mF despite $42m of buybacks
BE

The outlook statement points to a challenging near-term outlook, with the company indicating
that licences need to return to growth (after -15% growth in FY11) in order to offset an
anticipated decline in maintenance revenues. Forecasts already assume little in the way of
growth, so there may not be dramatic forecast changes. However, there is clearly limited
short-term momentum.
BE

Aside from trading, it is disappointing that there is no update on the bid process, other than to
say it is ongoing. The lack of conclusion implies a difficult sale process, which we believe has
negative implications for pricing. Furthermore, management appears to be softening investors
up to an independent future, with references to the “board considering all options to deliver
shareholder value”.
BE

On unchanged numbers, the shares trade on a Dec 2011 EV/ nopat of just 11.4x, which looks
undemanding and supports a medium-term buy stance. However, we acknowledge that given
weak trading outlook and lack of bid conclusion, the shares are likely to drift while the uncertainty continues. In terms of downside support, it is worth noting that the company
bought shares back before the bid talks at 323p.
NH

thanks for that
NH

shall we just leave the equity market for a moment
NH

and look at the Great British Krona
11:40AM
NH

and oh dear
NH

below $1.60
NH

below the 200 MA
NH

and a euro things buys 0.8899p
BE

QE fears, I guess.
NH

yep
NH

or the QE trade
NH

short sterling
NH

long gilts
NH

Now
NH

a lot of people dont believe we will get QE2
NH

but that sort of misses the point
NH

the market is pricing in the possibility
NH

and that’s what matters
NH

for it to happen
NH

things would need to get seriously bad from here
NH

have a look at this
NH

it’s from Richard Barwell at RBS
NH

who is a former BOE man
NH

In recent weeks attention has once again turned to the question of whether the Bank of England will restart asset purchases, prompted by weak activity data, dove-ish comments by one member of the MPC and today’s set of MPC Minutes.We have called for QE2 before and have been proved wrong. So although QE2 is warranted now in the opinion of the author, we do not believe that the majority of Committee members will be prepared to commit to more asset purchases until February 2012 at the earliest, if at all.

NH

While we remain of the view that the lion’s share of the surge in inflation is transitory, we have learned the hard way that the reality of high short-term inflation and the risk of second round effects that could follow have proved and will likely continue to prove a major hurdle to further asset purchases. These risks will likely reach their zenith in the run up to the November policy meeting.
NH

he keys to unlocking more QE are (i.) a significant and persistent fall in commodity prices which take the heat out of near-term inflation and help take the risks of second round effects off the table, and more importantly (ii.) significant weakness in activity and wages which together would suggest materially lower domestically generated inflation (DGI) in the medium term.We suspect that a negative Q3 GDP print, corroborated by dire survey data, is a necessary condition for the Committee to be convinced that more QE is required in November. A possible sufficient condition is a persistent global shock to which the UK economy is heavily exposed – most likely a financial crisis, perhaps triggered by a disorderly resolution of the European periphery crisis – which would both depress commodity prices and UK DGI.

NH

there we go
NH

a dire Q3 GDP print needed
NH

that said
NH

there was a very good piece
NH

from Chris Giles in the paper today
NH

on why we shouldn’t all stop worrying about QE2
NH

here was certainly a strong reaction to Wednesday’s minutes in gilt, sterling and interest rate futures markets. Investor excitement was fanned by two clearly dovish tilts in the minutes.
First, Ben Broadbent, the new external member, is less keen on raising rates than Andrew Sentance, the member he replaced. Mr Broadbent joined the consensus on the committee by voting to keep rates at 0.5 per cent at the June meeting. In contrast, Mr Sentance backed a 0.5 percentage points rise in May.
NH

For monetary policy to be loosened, a majority of at least five MPC members would have to vote for QE2 at a time when the minutes acknowledge that inflation is likely to rise above 5 per cent in the months ahead.
Since it is judged likely to rise, the MPC will need pretty clear evidence of disaster to be able to demonstrate that inflation will soon be below rather than above target.
Other powerfully hawkish statements appeared in the minutes for the first time. The committee acknowledged that surveys of spare capacity in the economy show that it is all but eliminated. This suggests the room for rapid economic growth is limited and might help explain why inflation has been so stubbornly high.
NH

“Survey measures of capacity utilisation had suggested that some spare capacity remained in the service sector, although less than a year ago, while capacity utilisation in the manufacturing sector appeared at around normal rates,” the minutes said.
The MPC also identified a conundrum in the UK economy: the labour market appears strong but the figures for gross domestic product are weak. This leads to the possibility that “an upward revision [of output data], with commensurate changes to estimated productivity growth, would resolve some of that puzzle in the published data”.
NH

anyway
NH

nice piece
NH

worth a read
NH

this is going to be a good debate
BE

It is.
11:46AM
BE

What won’t be a good debate ….
BE

Is this idea that we’ll all get a lump of Lloyds and RBS through the letterbox.
BE

Which is, to use the technical term, bobbins.
BE

Right?
NH

well that was my first reaction
NH

populist nonsense from Clegg
NH

a desperate attempt
NH

to boost his popularity
BE

That was my first reaction too.
BE

In fact, my only reaction.
NH

(Ptolemy – a day ago in fact. keep up)
BE

Is there any merit to this piece of pandering to the electoral rabble?
NH

well
NH

something has to be done with these holdings
NH

and drop feeding them into the market isn’t it
NH

nor is some massive convertible issue
NH

or trying to slot the lot to SWFs
NH

there’s too much of it
NH

I think it’s the best effort yet
NH

the guy behind it
NH

is a former GLG guy
NH

Michael O’Connor
NH

he works for something called
NH

Portman Capital
NH

and there background is in the convertible market
NH

and as I understand it the plan has four parts
NH

(i) a £5bn convertible bond, (ii) a £10bn institutional placement, (iii) a distribution to the public of 95% of the remaining shares and (iv) a final sale of the residual holding. In terms of how the public distribution works, effectively each person receives an undated warrant potentially struck at the government entry price.
NH

If the shares are above the strike price, when they sell they receive the premium, and the government receives the balance, paying down the government’s borrowing. The plan envisions the public distribution happening when the shares are trading at a 15% premium to the strike price. We would note that this is untested in the UK, and that the UK doesn’t have the same ‘equity’ culture as the US. Furthermore this plan is also dependent on the shares being worth considerably more than current market prices, note we have 2012E SoP based target prices of 42p and 55p for RBS and Lloyds respectively, both below the potential strike prices in the plan. In terms of the government’s participation in the upside, this would potentially be via taxation of profits realised by individuals sales.
NH

that was from the banks team at Credit Suisse
NH

see
NH

it’s not as dumb as it looks
NH

the govt gets it money back
NH

the taxpayer might get a windfall
NH

and Lloyds and RBS get a normalish share register
BE

Fair enough. I’m a bit lost as to how the distribution would happen though.
BE

And they wouldn’t have a normal-ish share register.
NH

well, the logistics are an issue
NH

but we have something called the internet now
BE

They’d have 50 million people owning a few hundred quid each.
NH

this won’t be like the Tell Sid flotations
NH

where it was all paper work
NH

that said
NH

this country is hopeless at big IT projects
NH

well at least getting them delivered on time and cost
BE

Hm. Hadn’t thought about it as a good old-fashioned privatisation scheme.
NH

and the big draw back of course
NH

is the price
NH

Lloyds and RBS need to be higher
NH

well above the current levels
NH

Credit Suisse reckons the average in price
NH

including financing costs
NH

will be 50.2p and 73.6p for RBS and Lloyds
NH

by next year
NH

(@FATDAZ – you joke but it could be used)
NH

want to see some more of the Credit Suisse note
NH

it’s pretty good
BE

Yeah – it is.
NH

1. Focus has been shifting to RBS from Lloyds – Over the past few months we think that the market’s attention has been moving to RBS given the under performance of Lloyds Banking Group. RBS is seen as further down the path of restructuring, where as Lloyds is seen as just beginning that journey. We believe that should market conditions permit, in the base case, the government would look to start the exit process with RBS in Q1 2012. In terms of the government’s average entry price, we note that there is debate about whether to include the financing costs or fees paid to the government – the original entry prices were 50.2p and 73.6p for RBS and Lloyds respectively, including financing costs these will be c.54.7p and c.80p by next year based on our estimates. If we exclude the financing costs and deduct fees paid, which is how we think the government would most likely present the prices we get c.45p and c.63.2p respectively, both well above current prices.
NH

3. Implications for the government’s balance sheet – under this plan as the public sell their shares the government would be reducing financing requirement, but clearly if the government chose this exit path they would not be in control of the pace of disposal. We note that when the building societies were demutualised in the UK c.35% of windfalls were realised by sales in the first 6 months. Further, whilst the government would most likely be financing the stock for longer, it would benefit less from any upside in the share price. We would note however that for the shares there could be positive index implications as the free float is increased earlier than it may have been otherwise.
NH

Overall we think that this is an interesting proposal, but that there are significant difficulties in execution – not least that it is dependent on significant upside in RBS and Lloyds where we have Neutral ratings and 42p and 55p target prices respectively, and mass ownership of a warrant type instrument when the UK has a more limited equity culture than in some regions such as the US. Further it takes the exit timing away from the government and reduces the Treasury’s potential upside from a sale. We will also have to see what impact the regulatory debate and ICB’s final report have on the ability to execute such a plan.
NH

(Come on then Daz lets have your workings)
NH

shall we move on
NH

a few more things to talk about
NH

the LSE
NH

Sportingbet
NH

Dixons
BE

Sure.
11:57AM
BE

Starting with LSE I guess.
London Stock Exchange Group PLC (LSE:LSE): Last: 958.00, up 0.5 (+0.05%), High: 969.00, Low: 949.00, Volume: 257.07k
BE

Which is a surprise.
BE

I was expecting them to go worse.
NH

me too
BE

On what looks like an act of sheer desperation.
NH

indeed it does
NH

the TMX merger
NH

was looking dead in the water
NH

but the prospect of a special dividend
NH

might win the day
NH

in fact this just popped up on Dow Jones
NH

nfluential proxy advisory firm Institutional Shareholders Services Inc. recommended that TMX Group Inc. shareholders approve the deal with London Stock Exchange Group PLC, putting pressure on rival Maple Group Acquisition Corp. less than a week before a key shareholder vote on TMX’s future.ISS is the largest proxy advisory firm and its recommendation is expected to hold sway over many TMX investors, some of whom are undecided about which offer they like better and had been waiting for the ISS report.

NH

I do have one question
NH

where’s the cash for this special divi coming from?
BE

Good question.
BE

Debt?
NH

must be
NH

I wonder though
NH

if someone will bid for the LSE
NH

before shareholders vote on the merger
NH

is that why the price is so firm?
NH

Nasdaq is looking
NH

talking to Dubai and Qatar
NH

it’s almost now or never for them
BE

Vote’s June 30, so the clock’s ticking.
NH

it is
NH

OK some comment
NH

here’s Numis
NH

While the special dividend may be appreciated by shareholders, the value creation
is at best limited to the preferable tax status of debt over equity. With the vote due
on the 30th June, we expect LSE shareholders to back the deal. The lack of detail in
the Maple offer and the bid premium in the LSE coupled with TMX management
backing increases the probability of TMX shareholders backing the deal. If there is
an alternative bidder for the LSE we would expect them to make an offer before
shareholders approve the TMX deal. The longer we go without an offer the less
likely it is to materialise. Should the TMX deal go through, even if only half of the
revenue synergies can be achieved the LSE is a Buy. Should the deal fail or go
through and the unrealistic revenue synergies are not achieved and no bid emerges
for the LSE it is a Sell.
NH

(Ta FatDaz)
BE

Cheers. And here’s UBS.
BE

LSE sweetened their offer for TMX by proposing of a special dividend of 84.1p for
both LSE and TMX shareholders and to rebase the ongoing dividend of the
combined company at 33.6p per share (vs 26.8p per share) in March 2011 and
maintain a progressive dividend policy.
BE

Maple responded overnight by raising its offer to C$50/share from C$48/share and
increasing the cash proportion to 80% (from 70%). Assuming that Maple is paying
a 20% control premium for the shares this puts the total offer at C$48 vs C$45
(80%x50+20%x(1-20%)x50=48).
BE

Both LSE and TMX votes are due to on 30 June. A majority of LSE shareholders
is required to approve the deal, while two thirds of TMX shareholders are required.
Given that LSE shares are trading with a c12% takeover premium, we estimate that
the LSE offer is c. C$39, 19% less than the Maple offer, and C$1 worth of cost
synergies. At this stage we therefore think that it is more likely that TMX will
reject the LSE offer and LSE could become the target of a friendly approach from
Nasdaq, as we have discussed previously.
BE

Our 1,000p PT is DCF based. We estimate that Nasdaq could justify a takeover in
excess of 1050p. As indicated in out note ‘LSE at a cross-road’ 16 May 2011,
assuming conservative synergies, this would result in 10% earnings accretion.
NH

Nasdaq takeover
NH

mentioned again
NH

interesting
BE

Perhaps that’s what’s supporting LSE
NH

must be
NH

it can’t be this deal
BE

Yup. It’s certainly nothing the company’s doing itself.
NH

creating a world leader in resource listings
NH

hardly something to get excited about
NH

this business should have been sold years ago
NH

but for some reason
NH

Dame Clara
NH

clung on to its independence
BE

FAMILY SILVER
NH

not her’s though
NH

it’s shareholders
BE

PROUD BRITISH INSTITUTION
BE

MA’AM.
NH

not it’s not
NH

it’s second division
NH

software company
BE

Yup – this idea that stock exchanges are national assets just because they tend to have national identities is total bunk.
BE

But that’s an irrelevant point, really.
BE

Where now?
NH

before we go to Dixons
NH

and Sportingbet
NH

just a comment on the banks
12:07PM
Barclays PLC (BARC:LSE): Last: 247.55, down 4.75 (-1.88%), High: 252.00, Low: 245.80, Volume: 15.85m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 37.46, down 1.19 (-3.08%), High: 38.60, Low: 37.24, Volume: 35.36m
Lloyds Banking Group plc (LLOY:LSE): Last: 45.73, down 1.27 (-2.70%), High: 46.90, Low: 44.85, Volume: 55.23m
NH

the reason they are down
NH

has nothing to do with Clegg’s give away
NH

it’s this HSBC note, right?
BE

Yeah – from Peter Toeman, who we like a lot over here.
NH

veteran
BE

Saying banks will have to raise core T1 against whatever’s left outside the retail ringfence to 13-15%
BE

And shareholders will have to bear that cost
BE

Because it’s investment banking, where if they try to pass a cost on to a customer that customer will go elsewhere.
NH

ouch
NH

that will crib returns at Barcap
BE

Somewhere between 15% and 25% off EPS
BE

If it all comes to pass
NH

ouch
BE

And that doesn’t include the cost of rebuilding Core T1
NH

can we have a quick snippet
NH

please
BE

Will repeat the summary, along with a few edited highlights.
NH

good idea
BE

So far the equity and credit markets have treated the ICB
ring-fencing proposal with remarkable equanimity. Maybe
that is because it is not seen as a credible proposal, or maybe
it is because the initial reaction to the report was a positive
one. We are not so sanguine. It is clear that the proposals
have significant political support. And our analysis suggests
the cost of the ring-fence will be both significant and,
understandably given likely timescales, not in forecasts.
BE

There are two critical factors at play here. The first is that
the activities that lie outside the ring-fence will be explicitly
unsupported by the UK sovereign. That suggests credit
ratings should converge towards the ‘stand-alone’ ratings; a
decline of two-to-five notches if applied today. And that, in
turn, should lead to higher funding costs.
BE

The second factor is that the activities outside the ring-fence
will, almost by definition, be less diversified and weaker
credit propositions than the whole bank is today. Normally
that would suggest ‘stand-alone’ ratings will themselves also
fall. But our expectation is that banks will run with higher
core Tier 1 ratios (we estimate 13-15%) to mitigate the
impact. We do not buy into the Modigliani-Miller theory (for
banks), so this higher capital will be a real economic cost.
BE

And, heading into the note itself ….
BE

The UK banking sector is in trouble. Of course
some might argue (including ourselves) that there
is nothing new in that; after all for virtually the
entirety of the past 15 years all we can remember
is the sector bouncing from one trauma to the next
(and that has been reflected in serial
underperformance).
BE

But whereas most of the historical problems were
ultimately resolvable or simply short-term
sentiment impacts (internet bubble anyone?), the
new difficulty facing the banking sector is far more
permanent as it is structural in nature – and that
difficulty is the ICB Retail ring-fencing proposal.
NH

the usual place for that I think
BE

And as we go on to show in this note, the
potential economic profit cost to RBS, Barclays
and Lloyds alone is substantial; we estimate it
could run to £10bn pre tax. And that is before we
allow for any risk to corporate deposit outflows
(with a knock-on requirement to further
deleverage), incremental administration costs or
the broader impact of an almost inevitable
slowing of UK GDP.
BE

Yeah – well worth reading. And I don’t say that much about bank research.
NH

with good reason
NH

ok let’s move on
12:13PM
NH

Seen this?
NH

By Gaurav Panchal June 23 (Bloomberg) — Divesting Penguin, FT Group couldgenerate additional GBP1.7b-GBP2b of pretax proceeds to redeployin education, Bernstein’s Claudio Aspesi says.Bernstein expects Penguin to sell for GBP1b-GBP1.2b, FT Group GBP700m-GBP900mReiterates outperform, PT 1,275p
NH

sell the FT!!!!
NH

mind you are £900m
NH

I think the’d be tempted
BE

Hm. £700-900m
BE

Best not speculate what multiple that’d put us on.
NH

no
NH

deffo not
NH

although
NH

I keep hearing this story
NH

and it makes me nervous
NH

because Bloomie would be an obvious buyer
BE

(I’ve just done the maths per subscriber on a £900m takeout, and amused myself quite a lot.)
BE

(You’re a very valuable bunch, rabble. Apparently.)
BE

Bloomberg is, of course, setting up a big office at the opposite side of Soutwark Bridge.
NH

it is
NH

very big
BE

Always curious why they need that much space.
BE

Oh … we need to stop this. It’s giving me the jitters.
12:17PM
NH

small cap corner time
Chariot Oil and Gas Ltd (CHAR:LSE): Last: 150.00, down 25.5 (-14.53%), High: 176.75, Low: 150.00, Volume: 2.05m
NH

making calls
NH

but no one has a clue
NH

we have been waiting for a farm out deal
NH

for their prospect off the coast of Nambia
NH

which supposedly has billions of barrels of oil
NH

I have fired off a load of emails
NH

and made calls
NH

but no one has anything
NH

isn’t Bobby Morse
NH

at Buchanan the PR?
BE

Yeah – think he is.
NH

the only thing I can think of is the
NH

Farm out
NH

while we wait on that
NH

a bit of comment
NH

on another punters favourite
Chaarat Gold Hldg Ltd (CGH:LSE): Last: 30.75, no change, High: 32.40, Low: 30.15, Volume: 181.77k
NH

via Collins Stewart
NH

Calls for nationalization misinterpreted: Chaarat released a press statement clarifying a statement by the Kyrgyzstan Minister of Natural Resources, which was reported as a call for nationalization of all mineral deposits in Kyrgyzstan. The company stated that the comments were likely to be lost in translation and are not aware of any intention by the Kyrgyz government to nationalize its mining industry. Kyrgyzstan is a country familiar to us from our previous dealings. Calls for nationalization in the country are not new, however they were never seriously considered by the Kyrgyz government, as there is no technical expertise in the country to operate mines, in what is a very infrastructure challenged environment. We share the view of Chaarat that nationalization is not on the agenda in Kyrgyzstan
NH

Kyrgyzstan a tough place for miners: Kyrgyzstan is a country with weak government, significant tribal divisions, lack of rule of law and poor license tenure and in our view is one of the most difficult mining jurisdictions globally. Centerra Gold’s Kumtor has been the only large scale mine that has been successfully commissioned and operated and they have had major issues dealing with the government with the tax and fiscal agreement negotiated and renegotiated several times. Jeeroy and Andash projects have been in development ready state for years, but are still to be developed. The big problem working in Kyrgyzstan is dealing with many different and often opposing vested interests, which the government has limited control over. In our view the company of Charaat’s size will face many delays and struggles in trying to bring their projects in the country into production.
12:20PM
BE

Still on smalls
BE

Should mention Ladbrokes taking a prod at Sportingbet
Sportingbet PLC (SBT:LSE): Last: 48.50, up 6 (+14.12%), High: 53.00, Low: 42.00, Volume: 13.10m
Ladbrokes PLC (LAD:LSE): Last: 147.20, up 0.7 (+0.48%), High: 147.40, Low: 145.06, Volume: 568.66k
NH

the idea earlier this week
NH

was that SBT
NH

should merge with Betfair
NH

but we all agreed that was nonsense
BE

This looks much more sensible.
NH

it does
NH

Ladbrokes gets into new markets
BE

And helps fix Ladbrokes’ online side
NH

indeed
NH

and unlike 888 holdings
NH

there’s not majority shareholders
NH

to deal with
NH

as for price
NH

here’s EVo Securities
NH

on what they might pay for the business
NH

Sportingbet has confirmed press speculation that Ladbrokes (LAD.L, Buy, TP 175p) has made a ‘highly preliminary approach’ to acquire the company.In any takeover situation there are two questions that need to be addressed; (1) is the acquisition consistent with strategy and (2) what is the price? We think the mooted deal (1) firmly fits with Ladbrokes’ desire to expand its international online opportunities and (2) a bid value of 80-90p/share is a suitable valuation for both sides.

 

NH

Our view: sound strategic sense for LadbrokesWe think that a deal makes sound strategic sense for Ladbrokes as it would instantaneously establish a market-leading position in more than 10 global territories, including the key Australian, Spanish and Greek markets.

Ladbrokes is highly UK-centric and does not have the brands to penetrate internationally. Sportingbet, via its eponymous brand and Spanish-facing ‘miapuesta’ marque, has considerable brand value and a leading trading/risk management team that would both complement Ladbrokes’ trading division and drive cost synergies.

NH

alue: 80-90p/share for SportingbetAs always, the key to a good deal on both sides is valuation. Ladbrokes needs to decide what value to put on Sportingbet’s existing operations that are c33% ‘white’ (fully regulated) on pro-forma post-Centrebet completion earnings.

In our Sportingbet note of 10 days ago (‘Hop’, 13 June 2011, see attached) we raised our target price on Sportingbet from 70p to 75p based on a higher proportion of regulated earnings and increased earnings from the Centrebet deal.

Given we are still some way from full Spanish and Greek regulation (>6 months and >12 months respectively) and that the Centrebet acquisition (£119m deal) is not expected to complete until November 2011, we regard our 75p target price as a valid valuation for ‘current’ Sportingbet.

NH

We therefore think Ladbrokes should be thinking along these lines (press speculation was focused on a 70p/share value) with a takeover premium of c10-20% in order to secure shareholder approval, thus implying a bid value of 80-90p/share, representing a >90% premium to yesterday’s close.We also think that 80-90p represents a suitable value based on good potential synergies that we estimate could amount to >£30m on an annualised basis.

At 85p/share, Sportingbet would be valued at calendarised FY13E P/E of 9.0x (first full-year of Centrebet). We think this is a sensible valuation for taking control of the group, although forecasts remain changeable depending on European regulatory change and synergies from the Centrebet acquisition.

Although shareholders may miss longer-term upside from the growth and development of the key Spanish, Australian and Greek markets, as well as the ongoing cash inflow and/or potential sale proceeds of Turkey, regulatory issues are not insignificant and shareholders may be willing to accept the certainty of a short-term takeover.

It is worth noting that certainty of a deal is low. Ladbrokes has been active in potential M&A since CEO, Richard Glynn, joined the group 12 months ago, including protracted talks with 888 Holdings that came to nothing.

 

NH

sorry
NH

this goes on a bit
NH

CounterbiddersThe most natural counterbidders would include similar companies to Ladbrokes that are looking for (1) cost synergies, (2) geographic expansion, (3) international brand opportunities and (4) a market leading sports trading/risk management team.

This would therefore include William Hill (WMH.L, Buy, TP 285p), Unibet (UNIB.SS, Sell, TP Skr 100) and Bwin.Party (BPTY.L, Neutral, TP 210p). Elsewhere, we cannot exclude interest from private operators such as Betclic.

Ladbrokes is the most obvious buyer, in our opinion, although the attractiveness of Sportingbet to a number of operators should support the premium to our target price that we would look for.

 

NH

RecommendationsAlthough any approach is stated to be ‘highly preliminary’, we think an acquisition of Sportingbet by Ladbrokes makes strong strategic sense for the latter and we would support a bid at a 10-20% premium to our current target price of 75p (unchanged).

Given the need for further international scale and a reduced risk profile, we do not expect any Sportingbet management reticence to accepting a sensibly priced deal, with augmented upside opportunities as part of larger entity.

We retain our Buy recommendation on Sportingbet; with our 75p share price target maintained due to the highly preliminary nature of talks at this stage.

We also retain our Buy stance on Ladbrokes. Although there is no certainty of a deal and therefore no indication of price, assuming a sensible in-price we would regard the acquisition of Sportingbet as a long-term positive, giving Ladbrokes (1) a market leading position across >10 global territories, (2) material synergies and (3) an enhanced trading and risk management capability. We retain our Buy recommendation on Ladbrokes and 175p share price target.

 

NH

there you go
NH

all you ever wanted to know about a takeover valuation for Sportingbet
BE

That’s plenty, thanks.
BE

Meanwhile, Caz summarises things quite well from the Ladbrokes side.
BE

Sportingbet background: Sportingbet is a sports-focused online
gaming company operating in Europe and Australia. Following its recent
acquisition of Australia’s Centrebet, over 30% of its net gaming revenue
is generated from regulated markets and will be more than 50% once
Spain and Greece regulate. Prior to the announcement, it had a market
cap of £280m.
BE

Deal attractions: Ladbrokes’ on-line offering is trailing that of its
rivals, in particular William Hill, which is strongly growing its
sportsbook, in particular its in-play offering. A potential deal with
Sportingbet would more than triple Ladbrokes’ on-line sportsbook
(c.60% of SBT European sports revenues are in-play) and make it double
the size of William Hill. We note that Ladbrokes head of online, Gary
McIlraith left the company this week after being in that position for less
than a year, as part of Ladbrokes restructuring exercise.
BE

What are the risks? (1) Regulation: A deal with Sportingbet would
dilute the quality of Ladbrokes’ online customer basis. Currently, c.70%
of its on-line business is generated from the regulated UK market, as
opposed to Sportingbet which generates c.70% of its sportsbook revenue
from unregulated markets. On the plus-side, we note that Sportingbet
entered into a non-prosecution agreement with US authorities in
September 2010 so a tie-up should not jeopardise Ladbrokes potential entrance in to the US market. (2) Price: We are less concerned that
Ladbrokes will overpay, as we note it has walked away from a deal with
888 several times (most recently in April), principally over price. On
multiples, Sportingbet does not look expensive; based on yesterday’s
closing prices, it was trading on ‘11E PER of 6.2x, 5.4x EV/EBITDA
(Bloomberg consensus) vs Ladbrokes on 9.6x and 7.0x respectively. At
yesterday’s close, SBT was trading at c.50% of its 12-month highs so we
would expect Ladbrokes would need to pay at least a 30% premium.
Regarding funding, as at December 2010, Ladbrokes had over £700m of
financing headroom. (3) Execution: It appears that Ladbrokes is still
realigning its business divisions (from separate business divisions for
digital, telephone and retail to product, channels and customers) and
therefore now would be a sensible time to execute a transformational
deal, before the new structure is bedded down.
BE

In summary, subject to the terms of any transaction, we think an
acquisition of Sportingbet would be a sensible and well-timed move
for Ladbrokes, which would help accelerate the much needed
growth in its on-line offering. Ladbrokes currently trades on 9.6x
2011E PER, 7.0x EV/EBITDA and 5.5% dividend yield.
NH

thanks for that
12:25PM
NH

right
NH

time is pushing on
NH

he market is off 60 points at 5,713
NH

thanks to gloomy Ben Bernanke overnight
NH

I guess we should mention Dixons
Dixons Retail PLC (DXNS:LSE): Last: 16.86, up 0.33 (+2.00%), High: 17.41, Low: 15.81, Volume: 28.36m
NH

they are up
NH

and I don’t really know why
NH

do you?
BE

………. no.
BE

Best Buy’s POISED TO BID!!!!
BE

*DIXONS CEO SAYS BEST BUY TAKEOVER RUMOR `UNLIKELY’ :D XNS LN
NH

never happen
NH

a merger with Comet
NH

more likely
NH

and would have merits
NH

although Kesa looks set to sell Comet
NH

although sell is the wrong word
NH

give it away with a £200m dowry is the more likely outcome
BE

And a merger with Currys would still involve closing, what, 50% of the combined stores?
NH

yes
NH

but ultimately
NH

that’s the only way to go
NH

store portfolio too big
NH

both Dixons and Kesa should focus on their overseas businesses
NH

and merger their UK businesses
NH

as a standalone business
NH

any idea for a name?
NH

Curry Comet?
BE

I’d imagine Dixons — which is reasonably managed, it appears — would prefer to buy a dozen or so stores from whichever vulture gets to pick at Comet’s dead carcass.
BE

Oh – name – that’s got me.
NH

Curmet. Very good BBB+
NH

EmoticonEmoticonEmoticonEmoticon
BE

Crusty?
NH

any comment on the results?
BE

Yeah – sure.
BE

FY results (clean PBT £85.3m vs £90.9m) were bang in line with recently lowered guidance, and after two
trading statements since Xmas and an analysts visit and UK update at Newark recently, little new was
expected. We recently upgraded our long-standing sell recommendation from sell to neutral on valuation
grounds and because we do feel that that the UK operations are starting to improve. However anyone
hoping for rapid capacity reduction in a very tough UK electrical market will be disappointed. Moreover the
FY accounts do tend to focus attention on the group’s precarious financial position and poor cash
generation and the departure of the CFO is not encouraging in this respect. We remain neutral with a 17p
target price.
BE

That’s Liberum.
BE

And here’s Merrill.
BE

Tough trading ahead, impairment and restructuring charges
FY11 results have already been well flagged by management last May so we
think the main focus today will be on the challenging outlook, the £310mn
impairment and restructuring charges (£39mn cash impact, incl. £8mn in FY11)
related to exit of Spain, and poor performance in Greece and the e-commerce
division, and Dixons’ update on its renewal and transformation plan. Dixons also
announced that current FD Nicholas Cadbury has resigned and will be replaced
by Humphrey Singer (internal appointment).
BE

FY11 results for the year ended April were broadly in line with our estimates and
management’s recent guidance with PBT of £85mn (BofAMLe £85mn) excluding
Spain and EPS of 1.6p (BofAMLe 1.56p). Slightly better net debt of £207mn has
already been flagged by the company (£30mn positive impact from timing effects).
By division, retail profit was £71mn in the UK (BofAMLe £70mn), £106mn in the
Nordics (BofAMLe £93mn), a loss of £22mn in other international (BofAMLe loss
of £23mn) and £1mn profit in the e-commerce divisions (BofAMLe £7mn).
BE

We remain Underperform as we fail to see how the gloomy outlook will revive the
shares. Short-term, Q1 comps look very demanding (World Cup, Ipad exclusivity
in the UK last year), and longer-term structural pressures on electrical retailing
remain. Therefore we think it will be challenging for Dixons to reach its targeted 3-
4% group EBIT margin. Although we think management is doing the right thing
with its refurbishment program, we doubt that the UK consumer can support such
growth, and are now becoming more worried about Dixons’ best-in-class Nordic
franchise with raising interest rates affecting consumer spending.
NH

thanks for that
NH

I reckon we are done
NH

back to Chariot
NH

rumours is Fidelity selling stake
NH

via Citi
NH

in fact
NH

Fido
NH

have been rumoured to be selling lots of
NH

oil stocks recently
Heritage Oil Plc (HOIL:LSE): Last: 213.00, down 3.5 (-1.62%), High: 215.80, Low: 211.76, Volume: 625.82k
NH

that’s another
NH

has there been a change of fund manager?
NH

Right
NH

rabble we are off to Pont de Tour
NH

for a spot of lunch
BE

Yup – nice day for it.
BE

(An anagram of “Currys + Comet” is nearly “Cure My Sector.”)
BE

(It lacks one E though.)
NH

the FTSE 100 is down64 points at 5,709
BE

Oh – did mean to mention on Temenos
BE

We have a better explanation for today’s fall.
NH

yogabbagabba – Fido selling them to HOIL
NH

go on
BE

Metavante (prior to being acquired by FIS) had a partnership with Temenos from 2007-9 to develop a core banking app for the US.
if FIS new see’s Misys’ Bankfusion as the better alternative to offer to US banks
then Temenos loses a lot fo ground in any attempt to gain US market share
BE

Apparently.
NH

breaking
NH

Warren James Holdings can now stop Pinewood from being delisted
Pinewood Shepperton PLC (PWS:LSE): Last: 210.00, down 0.5 (-0.24%), High: 211.25, Low: 210.00, Volume: 1.89m
NH

they have 25%
NH

unlucky MR Whittaker
BE

Diamond geezers.
BE

And we have a Chariot RNS
NH

go on
BE

Heads of Terms signed on two licence areas offshore NamibiaChariot Oil & Gas Limited (AIM: CHAR) is pleased to announce that it has signed Heads of Terms with two companies for two of its licence areas offshore Namibia.

NH

and….
BE

Further details of these agreements will be announced in due course. Discussions continue on the third licence area.Paul Welch, CEO commented, “Whilst the negotiations have taken longer than expected, we are very pleased to announce that we have signed Heads of Terms agreements with two partners for two of our licence areas. Details remain confidential but we will update the market with further information as soon as we can.”

BE

That’s it.
NH

rubbish
NH

smacks of trying to support the share price
NH

rallying at the moment
NH

but I wonder for how long
BE

Holding statement.
BE

Ok – are we all done now?
BE

We’re hitting 100 minutes again.
NH

we are
NH

we must go
NH

cya tomorrow
NH

tsubie – are you a satellite delay?
NH

that’s it
NH

bye

This entry was posted by support on Thursday, June 23rd, 2011 at 11:03 and is filed under Uncategorized.

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