Severn Trent, bid fails, so is it now cheap?

One of the interesting things about following a bid story is what happens in the immediate aftermath when the bid is turned down and the potential buyers withdraw their offer and walk away. 

The short back-and-forth battle between Severn Trent and LongRiver Partners has come to an abrupt end, with the consortium announcing the withdrawal of its bidding interest for the water group late on Tuesday night.

The result was a sharp drop in Severn Trent's share price on Wednesday morning, down as much as 8.0% early on.

The stock surged to multi-year highs last month after the consortium - comprising Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme Limited - first announced its intention to take over the company, the latest UK utility group to attract the attention of foreign investors.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=10090&action=news&story_id=20958376

The bid had been increased to 2200p a share which at the current price of around 1760p means that it is now some way off what the bidders were prepared to pay, and even further away from what Severn Trent themselves seemed to think was fair value. Difficult to say what that figure is, but it looks like it must have been a number that was high enough to make the bidders walk.

However, is the company now worth around 450p less than that bid price? Leaving aside looking at the fundamentals, it is always interesting to see how the market gets hyped when there is a chance of a bid, price gets pushed up to what is thought to be as close to a sale value as possible, often higher, which makes you wonder why it was priced lower in the first place. Euphoria of the bid plays its part, bandwagon jumpers get in hoping for a quick profit, but if someone was prepared to pay 2200p now for Severn Trent does that mean it is a bargain at around 1750?

Things aren't as simple as that as quite often the bidding company over values and pays too much. A few years back, a private bidder was prepared to offer over 200p a share for HMV, a company that in stock market terms went bust and is now privately held, the recent buyer getting it and all its potential future problems on the cheap. Severn Trent isn't HMV. As a utility stock it clearly has a premium value to longer term investors.

Next week the company goes ex-dividend, so anyone buying before the ex-div date will pick up 45.5p a share. By then, given the failed bid and the current state of the markets in general, the share could fall even further. Therein lies the problem, at least in the short term Severn Trent is in a down trend and anyone buying in for the dividend may well see further falls until the dust settles and market sentiment decides it's looking cheap again and their must be other potential bidders out there. One might assume that at some stage in the future, further bids, not necessarily from the same consortium, are likely to be made in what is an attractive sector for takeovers and you have to wonder if 2200p is now the minimum benchmark for anyone interested in Severn Trent.

Phytopharm, when blue sky goes wrong

Yesterday the share price of FTSE Fledgling Phytopharm ended the day at around 2p having fallen over 80% on the day after reporting bad news that its clinical trials for what may be its only potential product Cogane, had no beneficial affects on patients. Today it is falling again, around 5% as of writing.

As potential blue sky stories go there are lessons here for investors and traders. Some companies are essentially one trick ponies and if the trick doesn't come off, the downside from failing can be swift and horrendous for both the company and investors. The unexpected announcement will hit a share price hard and this is especially true with the smaller companies. One time big companies, HMV springs to mind, will often have a slow, painful death once bad news sets in, but smaller companies can find themselves going under very quickly.

I quite like blue sky stories, because the potential for big gains is clearly there, but it is important to make sure that the story you are attracted to does have some merit and potential upside from a range of products or services that are attractive. Small pharma companies looking for cures that may deliver a big return if they come good, like cancer, have about as much chance as succeeding as some of the more hyped up oil or mining exploration companies. It can be a goldmine if it comes right, but total disaster when it goes wrong.

Who knows what the future holds for Phytopharm? As of yesterday they didn't seem too sure themselves. For the investor and trader, blue sky opportunities should always be a case of buyer beware and know the potential risk of what you are getting into.

Profit warnings jump

Perhaps as a timely warning that despite the euphoria in the markets since the start of the year it isn't necessarily a one way ticket, yesterday there was a report that profit warnings from UK listed companies are at the highest level since 2008.

The number of UK stock market listed companies warning over profits leapt to 86 in the fourth quarter from 68 in the previous three months, taking the total to 287 or 15% in 2012 - the highest since the credit crunch and banking sector meltdown in 2008.

http://www.independent.co.uk/news/business/news/profit-warnings-jump-to-highest-level-since-height-of-financial-crisis-8468045.html

This isn't a disaster, but reminds us to be careful and perhaps suggests that looking for key words in company reports is just as relevant now as before. This is a system that the Naked Trader, Robbie Burns talks about in his book for finding both long and short opportunities which can be quite profitable. Companies announcing a profit warning often deliver more than one, a case in point being HMV before its demise, while companies that produce a good trading statement that exceed expectations will often deliver again and again. It is always worth looking out for positive or negative trading statements ahead of results as often the trend will continue in the direction of expectations, good or bad.

Christmas cheer for Home Retail Group and Dixons

I mentioned on the HMV post the other day the potential for other retailers, Home Retail Group and Dixons and that both would be reporting this week.

Dixons share price had been falling prior to its results, it had been going well for some time and there was a case to be made for saying that the good news was in the price, but a pre-results rumour of a possible profit warning also didn't help. Home Retail Group on the other hand didn't seem to have any questions raised against it. Today's results and market reaction suggest that the market likes it more than Dixons, but both have actually done well and defied the consumer gloom and bad news story on the High Street.

First, Home Retail Group.

As a result of good operational management and cash generation over the peak trading period, we now expect Group benchmark profit before tax for this financial year to be about £10m ahead of the current market consensus of £73m and the year end cash balance to be in excess of £300m.

http://www.digitallook.com/news/rns/20628399-198512/HOME-Interim_Management_Statement_html

HMV, a comedy of errors

Well, the inevitable has finally happened for HMV, after a long battle to fight off its decline and after another bad Christmas, the decision to go into administration does not come as a surprise.

Music and DVD chain HMV is to appoint an administrator, making it the latest casualty on the High Street and putting about 4,350 jobs at risk.

Deloitte will keep HMV's 239 stores in the UK and the Republic of Ireland open while it assesses the prospects for the business and seeks potential buyers.

Trading in HMV shares on the London Stock Exchange has been suspended, HMV said in a statement.

http://www.bbc.co.uk/news/business-21021073

Since coming to the stock market back in 2002 it has been almost a comedy of errors watching the company, the last five years being particularly painful for it as everything it did seemed to backfire. It became one of the favorites for short sellers who no doubt will now argue that they were right all along. Probably so, but for HMV listing on the stock market was probably the wrong decision in the first place. Once the decline set in, the pressures from the market would speed everything up. The need to do something is far greater when you have the market breathing down your neck and institutional shareholders to please.

Part of this comedy of errors was the decision back in 2005 to turn down a takeover bid.

Online shopping - don't get left behind, a lesson some struggle to learn

There has been much written about the growth of online shopping and the effect that this has been having on the High Street. In the UK companies like HMV have seriously suffered from most of its products now being offered either cheaper online or simply in the form of a new technology that makes the old way of doing things, selling a physical product, almost defunct.  HMV is now in a serious battle to survive, which to a large degree is down to its own failure to adapt to change earlier.

In the gaming sector, companies like William Hill have stolen a march on rival Ladbrokes, with its involvement with Playtech and takeover of Sportingbet in order to enhance its online offer. Ladbrokes, turning down the opportunity to buy Sportingbet itself got left behind, it's web presence being seen as inferior, something it has now resolved to put right, the latest being a deal with Betdaq.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/leisure/9786343/Ladbrokes-nears-deal-with-Betdaq.html

Yet despite all the evidence of the importance of an online presence, some companies still seem to think that they can get by without it. It's even more amazing when the company happens to be in the FTSE100 and is still largely sitting on the sidelines while its competitors are enjoying massive online growth.

So, let's talk about WM Morrison.

An HMV lifeline, sharing the loss.

Interesting story in the press about HMV and the potential cost to others from a shared liability with its suppliers should the High Street minnow go under. It could be as much as £150 million owed due to an old agreement made when HMV was part of EMI.

EMI guaranteed rental agreements on HMV stores when the retailer was spun out of the record label in 1998. It is understood that Universal then assumed these guarantees when it acquired troubled EMI.

The bill would only reach £150m if HMV collapsed into administration and the stores were not re-let. However, the precarious state of Britain's high street means demand for shops is fragile. 

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9766168/HMV-survival-boost-from-suppliers-liable-for-150m.html

Perhaps this explains why some of  HMV's suppliers are keen for the last man standing on the High Street in entertainment retailing to survive and why just before Christmas they stepped in with financial help. It might be cheaper for them to continue to support the company as a loss making concern that might just turn things around in time. On the other hand, much will depend on the banks and whether they are prepared to keep the financial lifeline going after HMV reports to them in January.

Update, 31/12/12

This is an interesting development;

HMV’s lenders plan to block efforts by turnaround fund Apollo to buy the firm’s debt as they plot a revival of its fortunes.

Music industry sources said Apollo Global Management had been planning to buy the retailer’s debt, which would give it control of HMV.

Apollo has already acquired ten per cent of the debt and must now negotiate with about six banks.

However, the lenders are understood to be reluctant to sell their loans too cheaply and are still hopeful that HMV can survive without a takeover.

A source said: ‘There is a feeling among the banks that they have come this far, so let’s see it through.’

http://www.thisismoney.co.uk/money/news/article-2254598/Lenders-debt-battle-plan-HMV-revival.html?ito=feeds-newsxml

HMV, struggling to find any Christmas cheer

HMV has been in decline for some time, fighting a rearguard action against the tide of technology that is moving away from its core products CD's, DVD's, a once member of the FTSE250 now languishes with the smaller company minnows, its share price at around 2.5p a mere fraction of the glory days of 225p+. The HMV story has been one of a classic value trap all the way down to its current sorry state and no matter what the company has attempted to do to put things right, another bolt to its chances of surviving always seems to be just around the corner.

So, today's news of further decline in sales and a probable breach of its banking agreement in the new year offset the news a few days ago that its suppliers were backing it over the Christmas period with financial support, the shares are currently down 35% so far on the day.

...conditions meant the business was facing "material uncertainties" and warned of a "probable covenant breach at the end of January 2013".

But, the chain added that it was in "constructive discussions" with its banks and was keeping them fully informed on current trading.

First-half sales at HMV slipped 13.5pc to £288.6m, while like-for-like sales fell 10.2pc, with the chain saying it had been affected by a "poor release schedule" across the summer months as suppliers avoided events such as the Diamond Jubilee.  

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9741691/HMV-faces-probable-banking-agreement-breach.html

Losses of £37.3million were actually down from £48.1million for the same period from the previous year, but apparently Christmas is off to a slower than expected start this year. HMV has always made most of its money in the second half, especially over the Christmas period, can they afford for it to be a bad one? Much will depend on the banks that back them.

Unlike Dixons and Home retail Group (Argos), HMV has not been able as yet to turn things around and is now a pure gamble play on any long term recovery. It's the type of share which at a price of 2.5p you would simply buy and probably forget, but only with money that you can afford to lose and assuming you think that there is still the potential there for recovery. If it goes under and there is a chance of that, then you gambled and lost. If it recovers then there is the potential of a Dixons type gains from here. The problem is that its debt makes HMV the Greece of the UK High Street and one wonders how it can ever get back to making enough profit to repay what it owes. As the last man standing in entertainment retailing on the UK High Street, the last thing HMV needs is another bad Christmas.

Comet, another big name UK retailer to bite the dust?

The UK High Street may be about to lose another big name icon retailer with reports that Comet is about to go into administration.

Comet, the electrical retailer, is close to going into administration, putting about 6,000 jobs at risk, reports say.

The company, bought by private equity firm OpCapita last year for just £2, has struggled from the downturn in consumer spending.

Two weeks ago, OpCapita said it was examining a number of potential bids for 240-strong chain.

But there are reports Comet will appoint an administrator imminently.

http://www.bbc.co.uk/news/business-20164228

Comet was once part of the Kingfisher Group, which has managed so far to avoid the fate of other retailers and has actually been a case of steady as she goes with a solid performance over the last 5 years. They clearly saw that the writing was probably on the wall some time ago for Comet, competing in a crowded market place with the likes of Dixons, Currys, PC World, etc. Dixons share price this morning is up around 13% at time of writing, partly due to a last man standing in the High Street approach that suggests that once Comet has gone it will pick up some market share. Same could be said for Home Retail Group.

The FTSE game of relegation and promotion

Today the FTSE100, 250 and smaller companies index have a slightly different look about them because of the quarterly promotion/relegation battle that goes on which can see each index change over time.  Without going into the calculation that determines who gets promoted and relegated, these changes should be noted and if necessary acted upon by investors and traders.

For long term buy and hold investors it can be a big negative if the company that you hold gets relegated. Usually, the relegation is known well in advance, so it is possible to act before the change actually happens.  Whether you act will depend on how you see the prospects for the company going forward.  A few quarters back hedge fund manager Man Group was one of those relegated from the FTSE100 to the 250 index and since then its share price has continued to fall.  It had been in freefall for some time prior to its relegation, so the writing had been on the wall that the company was facing difficulties.

On the other hand, if you hold a company that is promoted often the share price will rise as the bigger buyers come in to add to their positions.  This probably is more the case with smaller companies promoted to the FTSE250, but also companies promoted to the FTSE100 might see some price rise as FTSE 100 funds will look to buy.

So, what changed today?