ARBITRAGE TRADERS had a busy time of it yesterday as news broke that BMW is about to launch a bond that converts into its 10 per cent stake in Rolls-Royce. Shares in the aerospace giant plummeted4.75p to 177.75p as traders dumped the stock with the aim of raising cash to let them buy BMW’s bond.
The bond will raise EUR560m (pounds 394m) for the German car- maker and pay an interest rate of between 1.6 and 2.1 per cent. It also gives investors the option to convert the debt into Rolls- Royce shares if they rise 40 per cent by 2008, the date at which the bond matures. So why would traders want to hold this bond? Well, by buying into it they are betting that in five years’ time Rolls- Royce shares will trade above the 240p level.
Should that prove to be the case they will have the right to convert their bonds into BMW’s Rolls-Royce stake at 240p and then sell them at what will be a higher market price, pocketing the difference. If Rolls- Royce shares fail to top the 240p level in five years time investors will get their original investment back having accrued interest on the way.
“If you are bullish of Rolls-Royce share on a long-term view then you should buy the BMW bond,” argued one trader. And it seems like a fair bet. If the current economic upturn matures then Rolls-Royce can expect a boost to its earnings and share price from the resulting aerospace industry revival. Historically, BMW has had a stake of about 2 per cent in Rolls-Royce since 1990 and raised this to 10 per cent in 1999 when Rolls acquired full control of the joint venture company.
Meanwhile, the wider market was also in retreat. The FTSE 100 fell 13.8 to 4,378.2, as investors awaited today’s all-important US employment figures. Centrica jumped 6.25p to 196.75p after a number of brokers met with the group’s management team and returned to their desks in a bullish mood. The company is believed to have assured those present that it will not suffer unduly in the next few years from rising power prices. Brokers are also believed to have come away impressed by the group’s plans to develop its renewable energy assets.
Marks & Spencer gained 6.25p to 278.25p after JP Morgan upgraded its rating to “overweight” from “neutral”. The US broker told it clients that a roadshow it had been on with the retailer revealed that the company is tackling issues that have most weighed on its financial performance of late, namely childrenswear, women’s formalwear and the performance of the its smaller stores.
Lloyds TSB put on 3p to 416p after Goldman Sachs reiterated its “outperform” rating and slapped a 590p fair value target on the group. According to the heavyweight broker, Lloyds shares should not trade at a discount to peers, as they currently do, given the bank’s growth opportunities.
William Hill, up 3p to 419.75p, saw John Brown, its chairman, sell 200,000 shares at 415p. At Ultraframe, up 2p to 232p, director trade flow went in the opposite direction. David Moore, the chief executive, and Rodney Sellers, the chairman, bought 5,000 and 2,000 shares respectively. Ultraframe stock took a pasting earlier this week as the outlook statement accompanying the group’s full-year results failed to impress investors.
Bid speculation drove Singer & Friedlander 6p higher to 216.5p. TT Electronics added 5.5p to 124p following its purchase of sensor manufacturer Optek Technology in a pounds 30m cash deal. Soco International gave up 4p to 289.5p as analysts from Seymour Pierce came away from a meeting with the oil explorer slightly unimpressed with what they heard. The broker is said to have cut its net asset value estimate for Soco. However, before investors get too bearish it is worth noting that Rui de Sousa, a non-executive director, bought 70,000 shares earlier this week.
Ask Central dropped 11.5p to 158p on talk that merger negotiations with City Centre Restaurants, down 1p to 72.75p, have hit a snag. Speedy Hire put on 2.5p to 370p as gossips talked of a large contract win for the group in the near future from a listed construction company.
Anite ticked 0.5p higher to 52p as investors prepared for next week’s interim results. Word has it they will reveal that Anite is generating strong cash flow. Some reckon cash flow could be up by as much as 30 per cent on last year.
Planit Holdings, steady at 27p, posted a first-half pre-tax profit of pounds 740,000 up from pounds 642,000 a year earlier. Hawtin, unchanged at 8.5p, disclosed the sale of its Spaform whirlpool and swimming pools business for pounds 4m. The Cardiff- based mini conglomerate continues with its plan to return to its historic roots of being a property developer and will use the cash raised to pay down debt. It also emerged yesterday that Laxey Partners, the hedge fund, had sold its 3.5 per cent stake in the group.
Evolution Beeson Gregory tipped Ocean Power Technologies, steady at 100p, to be a major beneficiary from a recent government Bill that aims to promote renewable energy in the UK. It believes the Bill will cause most major utilities to start looking at how they will go about meeting their current and future renewable energy obligations and are likely to look to OPT’s PowerBuoy wage power system.
