With the US preoccupied with Thanksgiving celebrations there is a possibility that the all-action drama that is the bid for the London Stock Exchange will move into a quieter phase. For at least a day or two.
There is a good chance that the LSE will now fall to a bidder — Nasdaq is most likely of course, not least because of the 29 per cent stake it holds. It is hard not to assume that the takeover tussle has entered the end game. Once a takeover proposal is mooted as seriously as it has been here, a deal of some sort is usually done. In rough terms, there is probably an 80-85 per cent chance that the LSE will be bought at or above £12.43, the price offered by Nasdaq.
But that leaves a 15-20 per cent chance that the company will be left on the shelf. If it is, the shares are destined to drop. The price may not go all the way back to the 600p seen three years ago but it could well slip back below £10.
Nasdaq has said that it will not increase its terms unless the LSE board agrees to a deal or a rival offer emerges. A rival bidder may appear. Nasdaq may also tempt the LSE board back to the negotiating table by digging deeper into its pockets. But it is a 50-50 bet that the Nasdaq terms on offer at present are the only ones laid out. If £12.43 is all that is offered, sellers at yesterday’s £13.21 would feel smug.
The stakebuilding by Samuel Heyman may even provide Nasdaq with a face-saving exit route if the US exchange thinks the bidding is getting too hot to handle. Nasdaq could be left nursing some losses on its stake. But it may conclude that it has less to lose than if it shelled out more money to complete the deal.
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The LSE would have everyone believe that the shares are cheap, even at current levels. It is true that shares in rival bourses trade on p/e ratings that are even more punchy than that seen at the LSE. But the LSE p/e of 25 does suggest the stock is fully priced.
If shares in other bourses trade higher still, it may be that they are ridiculously expensive rather than just uncommonly dear.
If LSE continues to increase profits, the p/e rating will become less stretched. But it will get progressively harder to raise the profit bar. It is almost inevitable that competition will bring the exchange tariffs down. There is little reason to believe that the volumes of business conducted will do anything but continue to rise. However, narrowing margins could well impede profits growth.
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Cautious investors may have already baled out. LSE shares have looked expensive before, only to move on up again. But the temptation to lock in profits at £13.21 may prove impossible to resist. While the Yanks digest their turkey and trimmings, investors should take the opportunity to tiptoe away. Sell.
Kesa Electricals
Kesa, the owner of the Comet electricals chain, yesterday appeared to emerge as a clear beneficiary of the logistical problems that bugged its rival DSG International, the owner of Currys, at the end of this summer.
While Currys meandered along with 5 per cent sales growth in the six months to November 11, Comet streaked ahead with an 11.6 per cent rise in sales, clearly gaining market share.
Strong sales of flat-screen televisions, which appear to have held up even after the World Cup excitement, have helped both retailers.
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But Comet seems to have won the battle over large kitchen electricals. After more than a a year of sales declines, they are back on shopping lists.
Currys’ distribution issues affected its availability of staple kitchen goods such as washing machines and fridges, so it largely lost out on this upturn. It was a good three months for Kesa which even managed to produce the first rise in underlying sales at BUT, its French chain.
But at what cost? Kesa may have given away as much as a full percentage point of gross margins over the period. This fall is partly the result of the lower margins achieved on high-tech goods, which are currently forming a larger part of the ranges stocked. But Kesa will have to run harder only to stand still if margins are on the wane.
Meanwhile, the rate of sales growth began to slow towards the end of the quarter, perhaps a worrying sign as the group heads towards the all-important Christmas trading period.
At yesterday’s closing price, shares are at the equivalent of 18 times expected earnings per share. Vague bid hopes are buoying the stock, and some support is afforded by the 3.6 per cent dividend yield. It is hard to see how the shares will make significant progress in the short term. Sell.
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WS Atkins
Metronet is grabbing all the headlines and for good reasons. The failures with the London Underground repair and maintenance contract are startling and perturbing. It cannot be any good for WS Atkins if Metronet is losing money.
But it is important to put the woes in context. Atkins’ share of the Metronet losses in the half year was £400,000. Total pre-tax profits, however, climbed 9.5 per cent to £30.9 million.
Sales grew even more impressively, by 17 per cent, and had it not been for a non-cash pension technicality, the operating profit margins would also have grown.
There is no shortage of construction projects, here and overseas, requiring the architectural, engineering and surveying services provided by Atkins. The 33 per cent jump in the dividend payout also indicates there is plenty of internal confidence about prospects. Buy.