Fresh M&A Talk Lifts Stocks

By: PaddyPowerTrader

US stocks fell Friday, extending a second straight weekly decline for major benchmarks, as a drop in commodities pulled oil and metals producers down amid concern the economic rebound may be flagging. Research In Motion slumped 3.5 percent as the maker of the BlackBerry smartphone was cut to “underweight” at Morgan Stanley. The firm also trimmed its share-price estimate for tech bellwether Hewlett-Packard sending the stock down by 2.2 percent the biggest drop in the Dow. Elsewhere Freeport- McMoRan Copper & Gold and Schlumberger both declined at least 1 percent to help lead declines in commodity producers.

Today a flurry of M&A stories have put a bit of life into the bourses. Brewer SABMiler are said to be mulling over a $10.9bn bid for Foster’s, Campbell Soup is reported to be considering a £1.5bn offer for parts of United Biscuits and HBSC has announced that it’s in talk to buy 70 percent of South Africa’s Nedbank. There also talk of other possible suitors for fertilizer giant Potash to counter BHP Billiton’s hostile takeover bid, while Hewlett Packard have lodged a $24 a share bid for data storage provider 3Par trumping Dell’s $188 a share deal. And mining stocks are bid on the back of the inconclusive outcome to the Australian election amid speculation that the proposed super tax on mining companies may be diluted.

Elsewhere in brief today: Oil services company Petrofac is up 2 percent after reporting first-half earnings before interest, taxes, depreciation and amortization of $321.3 million, topping the $283 million average estimate of six analysts surveyed by Bloomberg. But Amlin, the biggest insurer at Lloyd’s of London, has shed 3.8 percent for the biggest drop in the Stoxx 600 after saying first-half profit declined 39 percent as claims almost doubled. To the upside is Sky Deutschland which has put on 11 percent today on news that Germany’s biggest pay-television company is in talks with cable network operators including Kabel Deutschland and Unitymedia to combine distribution activities, Handelsblatt reported today, citing an interview with CEO Brian Sullivan.

Today’s Market Moving Stories

•Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa spoke today by phone about the economy and the yen’s advance, the government’s top spokesman said. There was “absolutely no” discussion of intervention in the currency markets to slow the yen’s rise against the dollar, Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. He declined to comment on whether monetary easing was discussed during the 15-minute telephone call. The conversation was held as slower growth and the yen’s climb to a 15-year high against the dollar puts pressure on policy makers to come up with measures to support the economy. Kan last week ordered his ministers to come up with fresh stimulus measures to spur the expansion. Sengoku declined to elaborate on what else was discussed, saying disclosing that content could affect financial markets. The Bank of Japan said the two men also talked about the global economy and financial markets, including currencies, according to Tokyo based spokesman Satoshi Yamaguchi.
•The WSJ reports that housing led the US out of seven of the last eight recessions. This time, it may kill the recovery. Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling. “If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.” Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.
•A UK index of consumer finances stayed close to the lowest level in almost a year in August and a quarterly gauge of business confidence weakened, evidence Britain’s economic recovery may be waning. The measure of finances, based on a survey of 2,000 households, was at 37.9, little changed from July’s reading of 37.2, Markit Economics Ltd. and YouGov Plc said in an e-mailed statement today. Readings below 50 indicate deterioration. The index of business confidence fell 4 points in the third quarter to 21.5, Grant Thornton and the Institute of Chartered Accountancy in England and Wales said, citing a survey of 1,000 members. “A downbeat mood spans the household income spectrum, but remains most acute amongst the lowest earners,” Tim Moore, an economist at Markit, said in the statement. “Household finances continue to suffer from a backdrop of squeezed disposable income, stubbornly high inflation and ongoing public sector spending cuts.”
•There was also a bit of Monday morning scare mongering in the Telegraph with the rather alarmist headline that UK “Interest rates ‘may hit 8pc’ in two years”.
Why? Inflation. Some choice quotes: “There is a risk that… the economy will not be able to tolerate 8 percent interest rates without the mass defaulting on mortgages that we are trying to avoid. If that is the case, then interest rates may have to be kept lower for an additional nine months and the consequence will be inflation peaking at 20 percent rather than 10percent, as in the 1970s” “The fact that scenarios such as mine are regarded as bizarrely unlikely is, to my mind, an indication that certain quarters have lost their sense of historical perspective…” “Policymakers in the early 1990s did not want inflation to exceed 10 percent – they simply lost control of the situation and were unable to prevent it. Are we really so confident that there is no chance of policymakers today losing control of events?”
•The same paper wrote (on Saturday) that the Institute of Economic Affairs has calculated that the national debt is £4.8 Trillion once state and public sector pension liabilities are included. Mark Littlewood, the IEA’s director-general, said: “The latest official national debt figure is seriously misleading. Looming in the background are pension liabilities … the ONS should include these liabilities in their calculations. It is shocking enough to see official figures revealing a jump in national debt over the last year from the equivalent of 48 percent of GDP to 56 percent, but the grave reality is that the UK’s real national debt stands at 333 percent of GDP.”
•Irish 10 year government bond spreads to Germany are close to the widest levels of 2010 at a spread of 315bps – just 2 bps inside the widest print seen back in May – before the EU intervention. One of the main reasons for this is the ongoing uncertainty in relation to the ultimate cost for the State of recapitalisation of the Irish Banks. We should receive further clarity on this in the coming weeks with the European Commission due to opine on the future of Anglo Irish Bank; the ownership of EBS Building Society decided; and additional details being released on AIB’s sale of its Polish subsidiary and its stake in M&T. In relation to Anglo Irish Bank, various media reports outline that the second tranche transfers to NAMA have been finalised with €8 billion of loans being transferred for approximately €4.8 billion, equivalent to a discount of just over 60 percent. The deadline for bidders for EBS closed on Friday with 4 parties submitting bids with a decision due before the end of September. Irish Life & Permanent is considered to be one of the leading contenders to buy EBS. Speaking over the weekend, Finance Minister, Brian Lenihan, stated that he was “committed to delivering Budgets for 2011 and 2012 which continue to bring expenditure and revenues towards a sustainable balance”. In terms of supply, the NTMA is scheduled to hold its fortnightly Irish T-Bill Auction this Thursday and will be closely watched given the clearing levels of the last auction.
•Rice, this year’s worst-performing grain, is set to rally as consumers and investors seek alternatives to wheat after heat waves, wildfires and floods ruined crops across the Northern Hemisphere. The staple food for half the world fell 25 percent this year in Chicago trading while wheat as much as doubled since June. The last time the discount was this wide was in February 2008, two months before rice reached a record in a global food crisis that sparked riots from Haiti to Egypt. Drought in Thailand and flooding in Pakistan, representing a combined 43 percent of global exports, is also threatening supply.

Company / Equity News

•Irish building materials and insulation group Kingspan has reported H1 results significantly ahead of the group’s guidance provided with its last IMS on 13 May. Group sales increased +1.1 percent on a reported basis and were -3.8 percent lower on an underlying basis. Our expectation had been for H1 sales to show a fall of -4 percent after a -6 percent run rate for the first four months of 2010. Operating profit increased 9.2 percent to €33.1m which was significantly better than the c.-10% decline guided in mid May and our -9 percent expectation. On a constant currency basis the growth in operating profit was 6.2 percent. As guided with the full year results last March dividend payments have been reintroduced. The group is to pay an interim dividend of 4c which is ahead of our 2c forecast. Given the stronger than expected H1 outcome it is perhaps unsurprising that the overall tone of the release is quite positive despite being mindful of the macro backdrop. Kingspan states that the improvements seen in Q2 have continued into Q3 and are expected to underpin a strong H2 sales result. The group is confident of achieving a “solid outcome” for FY10 given the strength of order books across the business. The stock is up 10 percent today.
•Goodbody’s Have a good piece on the recent spurt in M&A in oil and exploration stocks today. Amid a recent flurry of M&A activity among the UK based E&P group, notably that involving Dana (hostile bid from KNOC) and Cairn (proposed sale of Indian stake to Vedanta), reports surfaced on Friday that the Chinese state oil company, Sinopec, had hired advisers with the reported aim of vetting UK targets.
•That, despite of the general market backdrop, combined with a statement from KNOC that it had secured non-binding agreements from 48.6% of Dana shareholders to acquire Dana shares, helped push UK E&P share prices up. Outside of Dana, which saw its share price appreciate 6% following the KNOC announcement, notable out-performers included Premier and Soco (both up over 2% on the day) with the market clearly eyeing each as potential candidates on any Sinopec ‘wish’ list.
•While asset gathering on the part of national interests and large ‘corporates’ is not confined to the oil & gas industry as evidenced by the $39bn BHP bid for PotashCorp, an obvious conclusion is that sovereign funds continue to base decisions from a strategic long term perspective and thus look beyond the current short term recessionary environment. An implied consequence is that valuations within the UK E&P group are likely to outperform the broader market, while such speculation continues to circulate in the media. That said, they continue to argue a case of ‘horses for courses’ with the 52% holding of ENOC providing an obstacle for external interest in Dragon, while recent events in Ghana (Kosmos failed attempt to sell its interests to ExxonMobil) and Uganda (pre-emption rights of partners) may well act as obstacles in the case of Tullow. Premier, on the other hand, has a concentration of assets in more developed markets (North Sea and South East Asia) as well as an onshore gas production base in Pakistan.
•UK homebuilder Bovis today released a H1 update posting revenues of £115.5 million weaker than expectations of £129.3 million and also weaker than expected profits of £3.5 million. Positively a dividend is set to be reinstated at the end of the current financial year assuming continuing current market conditions. The group completed 803 homes in the period (754 in 2009) with 762 of these private homes at an average selling price of £153,500. This equates to just a 3 percent increase in sales prices over the past 12 months however margins continue to increase with gross margin more than doubling to 16.3 percent. This is a function of both increased selling prices and lower land costs. Further savings in the form of lower build costs will not be seen until H2. An aggressive acquisition program saw 1,874 plots purchased at a cost of £107 million with 80 percent in the South of the country. This continues to be the area of most pricing resilience and is a similar acquisition strategy to peers. Overall the housing market was “stable in H1” but became more fragile post the UK election. As such the group remains cautious on outlook on both pricing and future volumes. Todays release has positives in the form of a reinstated divided in 2011 and further margin improvement expected in H2 from lower build costs however the results represent a disappointment in both the top and bottom line despite the positive tone.
•Confirmation this morning that HSBC has formally proposed to buy the controlling interest in Old Mutual’s Nedbank stake. The offer is to acquire up to 70 percent of the Nedbank Group shares. The making of a binding offer by HSBC is subject to a number of pre-conditions which HSBC has an exclusivity period in order to fulfil. Old Mutual’s shareholders will need to approve a deal and there will also need to be regulatory approval as Old Mutual needs permission in order to take all of the sale proceeds out of South Africa. The deal comes as no surprise as there was always credibility attached to it given investment and trade flows between Africa and Asia and the fact that earlier this year HSBC had stated an explicit ambition to benefit from the same economic trends as Standard Chartered is enjoying. At current prices, 70% of Nedbank would cost USD6.4bn = 4 percent HSBC market cap so not small size but manageable with internal resources.
•RSA Insurance Group Plc will need to raise its offer for Aviva Plc’s insurance unit by 10 percent to reach an agreement, the Daily Telegraph reported investor Martin Brown as saying. Brown, an investment manager at Ignis Asset Management Ltd. whose fund owns shares of both companies, said RSA’s 5 billion pound approach undervalued the Aviva business, the newspaper said. Paul Mumford, a fund manager at Cavendish Asset Management who also holds both companies, said there is room for a higher offer though he is happy with Aviva in its current form, according to the Telegraph.
•Mobile-phone companies foresee applications downloads becoming their main source of revenue in developed markets within three years, the Financial Times reported, citing a survey of executives by the Economist Intelligence Unit. Voice services make up 70 percent of operators’ revenue at present, the newspaper said.
•LG Electronics Inc. will form a joint venture with Telefonaktiebolaget LM Ericsson in the U.S., named LG Ericsson USA, Maeil Business Newspaper reported today, citing unidentifed industry sources. The joint venture will produce Internet phone systems and network platforms, according to the report.

•BHP Billiton Ltd. and Rio Tinto Group rose in Sydney trading after the ruling Australian Labour party failed to win a majority at the weekend election, raising optimism its proposed mining tax may be scrapped or diluted. Australian Prime Minister Julia Gillard, 48, and opposition leader Tony Abbott, 52, who’s vowed to scrap the tax on iron ore and coal, need to broker deals with independent lawmakers after neither major party won enough seats to form a government in the 150-member House of Representatives. Under Labour’s plan, BHP, Rio and rival producers will pay A$10.5 billion ($9.4 billion)more in tax in the first two years.
•Potash Corp. of Saskatchewan Inc. was contacted by China’s Sinochem Group and Brazil’s Vale SA as the company tries to fend off a hostile takeover offer from BHP Billiton Ltd., said a person with knowledge of the matter. Sinochem and Vale both made preliminary inquiries with Potash Corp.’s board of directors late last week about the possibility of holding future talks, said the person, who declined to be identified because the information isn’t public. Other companies also contacted the board, and talks may not materialize, the person said. Any interested company would go up against BHP, which took its $39 billion bid for Potash Corp. to shareholders last week after the Canadian fertilizer company rejected the offer. Potash Corp.’s board and its advisers are focused on preparing a document that will explain to investors why they find BHP’s proposal inadequate, the person said.
SABMiller may make a £7 billion offer for Carlton & United Breweries, the beer-making unit of Foster’s Group Ltd., the Sunday Times reported, without saying where it got the information. SABMiller may make an offer for the unit before it is listed as a separate company, the newspaper said. Nigel Fairbrass, a London-based spokesman for SABMiller declined to comment when contacted on his mobile phone.
•Campbells Soup is preparing a £1.5 billion offer for parts of United Biscuits , the Sunday Times said, without saying where it got the information. Campbell wants to buy United’s biscuit making operations, which make up about three quarters of its business, the London- based newspaper said. Campbell Soup spokesman Anthony Sanzio declined to comment when contacted by telephone today.

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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