from Commentaries:
Chocs away! Cadbury’s snack will be terribly expensive
It's been a long, long wait for the shareholders in Cadbury. For a profitless decade since the (adjusted) price first hit six pounds, they have been hoping for someone to come along and take their sweets away on the sort of terms they saw being offered to others.
Now the boys (and girl) from Kraft have decided that putting cheese slices together with Dairy Milk chocolate presents an irresistible opportunity. Cadbury had slimmed down by demerging Dr Pepper, its also-ran US soft drinks business. Investors had heard Todd Stitzer, the chief executive, say he wanted to be a consolidator in FMCG, rather than get eaten, and they had decided that he might be right. There was little in Friday night's price of 568p for a possible takeover.
Swallowing smaller competitors is more fun for the management, but tends to leave the shareholders feeling hungry. When Mars decided to add chewing gum to Snickers, it paid a massive premium for Wrigleys. Bernstein Research, the sector leader, calculates the price at 19.5 times EBITDA, which makes Kraft's $16.7 billion cash and shares offer for Cadbury look several chunks short of a full bar.
A similar multiple would value Cadbury at 10 pounds, which is why the shares shot past the 745p value of the offer this morning. Given Cadbury's scarcity value, and the similar efficiency gains that a break-up offer from Hershey and Nestle could extract, this could turn into a re-run of the epic battle for Rowntrees, the UK's other chocolate maker, in 1988, where the winning offer was twice the pre-bid price.
Yet for all the talk of building "a global powerhouse in snacks, confectionery and quick meals" to rival the reach of Mars/Wrigley, powerhouses do not command high ratings in the stock market. Unilever, for all its valuable brands, currently stands at less than 13 times the latest 12 months' earnings.
Reckitt Benckiser, the kings of domestic cleaning products, are rated higher, at 16 times. That's just more than Diageo, the global powerhouse of the drinks industry, on 16 times, but some way below Associated British Foods, which is hugely successful but hardly an international powerhouse, on 20 times. If Kraft is obliged to pay 10 pounds a share for Cadbury, that would represent 26 times earnings.
Paying up - assuming Kraft can find the money - may make sense for Irene B Rosenfeld and her colleagues in the boardroom, with the opportunities for cost cutting and greater martket reach across the world, but from an investor's viewpoint, it's far better to be eaten than to eat these expensive morsels.
Why final salary schemes are bad for you
— Neil Collins is a Reuters columnist. The views expressed are his own –
So you’d like to work for BP? A fine company, recognisably the same business as half a century ago, and likely to be around in half a century’s time — yup, it’s a fine choice for a career.
It’s going to be an even better one for the ambitious twenty-something, because no-one joining after next March will be able to join its final salary scheme.
These schemes are comfort blankets for pen-pushing civil servants (and, of course, snouts-in-trough British MPs) so if getting into one is the height of your ambition, then perhaps BP can manage better without you.
Schemes where the employer undertakes to pay a pension linked to your salary when you retire, whatever that is, are dying, and quite right too.
Imagine you had joined BP at 25, and at 45, stuck in a cul-de-sac inside this vast company, you got an attractive offer from a small competitor.
You’d love to do it, but matching the current value of your accrued pension rights would ruin the prospective employer. You must either walk away from your biggest asset outside your house, or resign yourself to 20 more years buried inside The Organisation.
Don’t buy this index-linked debt
– Neil Collins is a Reuters columnist. The views expressed are his own –
This rather odd chart from Monument Securities says something curious — http://graphics.thomsonreuters.com/commentary/INDEX-LINKED-CURVES.pdf. — It shows that British investors (or at least the buyers of UK Government index-linked gilts) are much keener to buy protection against inflation than the holders of French and U.S. government bonds.
A yield curve plots the return on bonds against their longevity, and this one shows that in all three countries, the short-dated index-linkers promise to be pretty dull investments.
Since inflation is currently negative (on some measures) and it takes a while to get going, this is hardly surprising.
The obvious divergence is in the area of the chart covering stocks that have between 12 and 20 years to run. There is a reasonable supply around these dates, so liquidity is not an issue. All the U.S. dollar index-linked TIPS and all the French euro index-linkers yield between 2.1 and 2.2 percent, in each case protected against the relevant national inflation rate.
The British stocks are way out of line, returning around 1.2 percent on top of the UK Retail Prices Index, a full percentage less than is available elsewhere.
In an international marketplace, this is strange indeed. The calculations of inflation vary somewhat between the three countries, but they should even out over time.
from The Great Debate UK:
A reality check from Standard & Poor’s
-- Neil Collins is a Reuters columnist. The views expressed are his own --
Standard & Poor's could have chosen a better day to kick the British economy, by placing the UK onto "negative outlook", the usual precursor to a downgrade of S&P's rating of an issuer's debt.
The move came minutes before the Debt Management Office closed its massive auction of 5 billion pounds of 2014 stock, and minutes after the release of figures showing the Public Sector Net Borrowing Requirement leaping to 8.5 billion pounds in April, a sum which not long ago would have been considered high for a whole year.
Economist Howard Archer at Global Insight immediately called the figure "dire, starting the new fiscal year off as it is highly likely to continue."
S&P, meanwhile, now fears that the net general government debt burden "could approach 100 percent of GDP and remain near that level in the medium term."
It's hard to describe the UK public finances as anything other than a disaster area. The forecasts made in last month's Budget looked optimistic within days, and even these require the DMO to borrow 220 billion pounds this financial year, or almost a billion pounds every working day.
Yet while the DMO soaks up cash, the Bank of England is desperately creating it. Its "quantitative easing" programme has been in full swing this week, buying in 1.326 billion pounds of a stock which looks very like the one that the DMO was issuing just one day later.
Finally a global realist speaks of our enormous debt problem!
3i in distress, please give generously
– Neil Collins is a Reuters columnist. The views expressed are his own –
Were 3i a normal investment company, its directors would be laughed off the board if they proposed raising new equity at a whacking great discount to net asset value.
Upbeat noises about a strengthened balance sheet, future access to the debt markets (sic) or the glittering new investment prospects ahead wouldn’t make a blind bit of difference. The board would have to go.
Fortunately for chairman Sarah Hogg and newly-promoted chief executive Michael Queen, 3i long ago stopped looking like a normal investment company, preferring the excitement of private equity, gearing up and returning capital to shareholders.
So they will get away with what is, in effect, a rescue from those shareholders who haven’t taken the money and run. At ruinous cost in fees (32 million pounds) and dilution (39.8 percent discount to the theoretical ex-rights price) they are invited to put up 732 million pounds by buying nine new shares for every seven they own, at 135 pence apiece.
Never mind that the company itself reckons its assets are still worth 496 pence a share — a massive 54 percent drop on a year ago — it would rather the shareholders bore the cost of its mistakes. Trying to realise some of the exciting assets in the four billion pound portfolio instead is just too painful — in other words, the forced sale value in today’s markets is much less than 496 pence a share.
Given the hole that 3i is in, there was probably no other way out, which is why the shares rose in relief to 385 pence on the news. But the directors dug the hole, and failed to see the danger of the debt repayments collapsing in on them.
from The Great Debate UK:
Labour hits the right nuclear button
-- Neil Collins is a Reuters columnist. The opinions expressed are his own --
Here's a novelty -- an awkward process that this British government has actually got right. Labour has played a fine game of grandmother's footsteps in its realization of the inevitability of new nuclear power stations, and this week has clinched the sale of two sites for them.
The auction process, pioneered by Labour with the sale of radio spectrum for mobile phones, has once again raised much more than most observers expected.
Germany's RWE and Eon are now the proud owners of land at Wylfa (on Anglesey, an island off a remote corner of Wales) and Oldbury (Gloucester, England).
Considering the relentless opposition from the tree-huggers, wind farm fans and believers in bad science, the UK government has managed the shift from "Nuclear power? No thanks" to economic reality rather well.
Having been forced to step in and rescue British Energy, the nuclear generator that dared not speak its name, it engineered the sale of the state's holding to EDF of France last year before the capital markets seized up.
Now all the German owners of these little bits of Britain have to do is find the tens of billions of pounds needed to build the power stations. Let's hope they can get them up and running before Britain's lights start to dim, some time towards the end of the next decade.
Teaching people to consume less is easier said than done, and even then would only delay the inevitable slightly.
There are no alternative sources for energy (save petro-power) that are anywhere near being realistic mass alternatives at this point and for the plannable future. Solar is expensive, unreliable, and a massive land hog. Wind is the same. Both have their applications, but neither has potential for mass replacement of current technologies.
Improvements to nuclear power technologies are probably the most promising. Until then, there are needs to be met using current systems.
from The Great Debate UK:
Don’t say aye, aye to 3i
-- Neil Collins is a Reuters columnist. The opinions expressed are his own --
It's hardly surprising that the shareholders in 3i, the listed private equity group, are deeply unhappy at the prospect of having to return 700 million pounds of the 1.75 billion pounds of capital they have received from the company in recent years.
The board has got itself into a hole. That paid-out capital, plus a further 400 million pounds in share buy-backs, was largely financed with borrowed money, and those debts are now coming up for repayment.
A 550 million euro convertible bond launched in August 2003 was designed to provide fresh equity, but it had to be rolled into a 430 million pound convertible bond, and the conversion terms are now pie in the sky. That bond falls due in 2011.
Were 3i an industrial company, it could blame hard times; were it a bank, it would already have abandoned any pretence that a rights issue was anything less than a rescue. It's neither. It's a sort of glorified investment company, valued in normal times by reference to its net asset value per share.
Analysts at Cazenove calculate the current NAV at 521 pence, against the credit-crunched market price of 330 pence. The brokers suggest a one-for-one issue at 175 pence, which would raise 738 million pounds before expenses.
It's almost impossible for an investment company to issue new shares at a significant discount to NAV. It's highly dilutive to shareholders, and begs the question: if the assets are really that valuable, why not sell some to raise the cash?
from Neil Collins:
An unexpected bonus for National Statistics
"Mr Deputy Speaker, the UK economy contracted by 1.6 per cent in the last quarter of 2008. For the first quarter of this year, I expect the economy will again contract by a similar amount."
Thus spake poor old Alistair Darling at lunchtime on Wedesday. Less than 48 hours later, the first (of many) of his Budget forecasts was proved wrong, as UK National Statistics reported that the economy shrank by 1.9 per cent in the first quarter.
This difference is a little matter of 4.5 billion pounds, and it makes his forecast of minus 3.5 per cent for this year look even less plausible.
Still, there's a certain grim satisfaction over at National Statistics. It proves that the accusations of ministers being allowed to see the figures before publication, to spin them they way they want, are unfounded. It's an ill wind...
from The Great Debate UK:
A bet against Castro’s immortality
-- Neil Collins is a Reuters columnist. The opinions expressed are his own --
LONDON, April 23 (Reuters) - "Practically everyone who follows Latin American events agrees that Castro's end is near." Thus one Laurence W Tuller, writing in 1994 in his manual on high-risk, high-reward investing. Defaulted Cuban government bonds had jumped on hopes of a settlement to allow the country back into the international capital markets. Today, former leader Fidel Castro's end is 15 years nearer, but he's still there, albeit in semi-retirement, and holders of these pre-Castro bonds with a face value of around $200 billion are still waiting. Castro's regime kept good records, but have paid no interest, and ignored redemption dates since his revolution half a century ago. Few Americans can remember why their administration has been so beastly to Cuba for so long. Those who can mostly live in Florida, a key swing state, and many risked everything to get out of Cuba. They do not want to see their investment devalued by hordes of their former compatriots simply walking off the Delta Airlines flight from Havana. Last week U.S. President Barack Obama eased the squeeze somewhat. Americans can now visit Cuba, but only if they have relatives there. This gesture has re-ignited the bondholders' old hopes. Past settlements of defaulted sovereign bonds have tended to pay about half the total of accrued interest plus principal, so the buyers see plenty of upside. Exotix, a specialist trader in "frontier markets", says its price for a typical Cuban bond instrument has risen from around 9 cents on the dollar at the start of this month to 14 cents on April 23. Mind you, the spread is wide, the market thin and as events crowd in on the President, he might feel there are more pressing problems than to risk upsetting those key-voting Floridian Cubans.
from The Great Debate UK:
Darling gambles with Britain’s credit
-- Neil Collins is a Reuters columnist. Christopher Fildes is a guest columnist. The opinions expressed are their own --
LONDON, April 22 (Reuters) - The Treasury is the UK government's finance ministry. There are many other government departments, but in the years since 1997, all have been turned into subsidiaries of the Treasury, the power base of Prime Minister Gordon Brown when he was chancellor. His ambition was to micro-manage in every one of them. Today we saw the true cost of this disastrous experiment. All major countries have serious problems with their government deficits, but the most entrenched of Britain's are home-made. Britain's public finances, which had been deteriorating for years, are wrecked. Even on his successor's rose-tinted projections, they will not return to a balanced Budget for at least the next nine years. Given that no Treasury projection for more than three or four years out bears any resemblance to reality, and given the there will have been at least two elections between now and then, this is a post-dated cheque drawn on the Bank of Fantasy. Alistair Darling has learned at the feet of the master of obfuscation, double counting and footling detail. So we heard all about the green recovery, from a government that sees no contradiction between raising the cost of fuel and granting tax concessions to North Sea explorers. There may be more oil there, but for the state, this is now a dry well. The Chancellor did not dare say what he and his advisers really think about the green-tinted scheme wished on them by Peter Mandelson, the Trade Secretary, to scrap your old banger for 2,000 pounds towards a new one. At least they managed to limit the damage to a single year. If your car is not 10 years old by next March, it will be junked in the ordinary way. Junk is what the last Treasury forecast has now become. It's barely five months since Darling's last emergency package. It looked like a work of fiction then, and now there's no doubt. In his Budget a year ago, he was expecting to borrow 43 billion pounds in 2008/09, crowing that the previous peak was much higher, at 7.8 percent of gross national product. The sum would come down after that. By November, there was no crowing. The projected borrowing requirement was 78 billion pounds, and was going up, to 118 billion in the following year, not down. Even those horrible figures have now been left far behind. Last year he needed 90 billion pounds, and in 2009/10, he says, it will be 175 billion pounds, or 12.4 percent of GNP. The forecast is then for a fall, although not by much. In 2010/11 he - or his successor - will still be 173 billion pounds short of balancing the books. So in three years the government will have borrowed 5,600 pounds for every man, woman and child in the country. That's over 20,000 pounds for what the prime minister routinely calls the average hard-working family. In any business, from a corner shop to a multi-national, this arithmetic would be immediately fatal to those who had put it forward. Their credit would be ruined, and the business's credit could not be restored while they were still in charge. Britain's credit is ultimately expressed in the external value of sterling, as Brown himself has said. The pound has already been devalued informally by a greater amount than the two previous formal devaluations in 1967 and 1992. The short-term effects have been mostly benign, but the possibility of a flight from the currency is always there. This Budget makes it a little more likely. In this context, everything else is detail. The biggest detail is the attack on what Darling describes as "those who gained the most". This is a sop to his fractious party in parliament. From next April anyone earning over 150,000 pounds a year will be paying 51.5 percent on every extra pound earned, the highest rate in Britain for 21 years. They will also lose their tax-free allowances and half the tax relief on their pension contributions. The small print betrays that the government is relying on these measures to bring in 7 billion a year, sometime in the middle distance. This looks as unconvincing a forecast as any in Darling's portfolio. Well-paid labour is highly mobile nowadays, and will go where the prospects are high and the taxes low. Nothing else in the 250 pages of the Budget Report is worth a row of green beans. Even the Treasury can't put a price on the measure to reduce VAT on children's car seat bases. Despite its name, "enhanced capital allowances" will actually raise more money -- 10 million pounds, or enough to run the government machine for about eight minutes. Thrashing around for something cheerful to say, Darling kept telling us how much worse off other people were. To assert that "we and other countries have been battling against a succession of shocks which have hit the world economy" suggests that our luckless planet had crossed orbits with a large economic meteorite. The former chancellor, now prime minister, assumed the sun would shine forever, and that he had somehow managed to suspend the usual rules of economics -- or as he himself put it, "no more boom and bust." In recent years, he produced growth by borrowing, pouring the money into the public services for ever-decreasing returns. Each time he borrowed more than he had forecast. Now the bill has arrived, and it's plain that neither he nor his successor has the slightest idea of what to do. Marc Ostwald of Monument Securities summed it up within minutes: "a Budget of tinkering with the public sector financial sector meltdown, with no substance or obvious strategy whatsoever." One day the Treasury will remember how to mind its own business, under a chancellor who grasps that until the public finances are put in order, nothing else will go right. The longer the wait, the worse will be the reckoning.
Now we can all get very technical about the financial state of the economy but it is a political question now and a question of incompetence – and this government will get judged very soon. Heads will just have to roll. Shame the next shower of politicians will be or do no better. What we all forget is that politicians are very inept by their very nature. Most could not even run a sweet shop on the street corner without losing their shirt or their parents money (i.e other peoples money). I could just imagine it. And we all expect them to run an economy – laughable. Rarely could you find a politician that you would employ with any serious management responsibility. The reason is simple: over inflated egos and a sense of righteousness. Politics attracts people with ego problems and an unhealthy lust for saying they are always right about everything. We should put them on a commission basis. When they get it right, they get paid. When they get it wrong they don’t receive anything. Seems a good idea to me.
Sure it may be fair to tax high wage earners more (they have escaped perhaps for too long) but in this case it is nothing more than a political stunt and diversion. The extra revenue from this tax increase will do nothing. Nothing to help anyone but those politicians themselves win a few votes. The revenue is a drop in the ocean.
So “Let’s all blame the rich”. What a great idea and just what was needed to make us all feel better. I wish I could have thought of that. It is nearly as bad as invoking patriotism. The final step. The last vestige of the scoundrel as Dr Johnson put it..
