Friday tips round-up: Babcock, London Stock Exchange

28th Mar 2014 09:21

There is a risk that Babcock may have bitten off more than it can chew with its takeover of Avincis. Just when some thought that talks between the two firms might have gone cold they announced a full take over, instead of just the purchase of a 50 per cent stake. As well, some believed that in the end the valuation paid was more than initially expected. That is not so, says Babcock; rather, it reflects an increase in the order book while negotiations were under way and the purchase of a scandinavian business. Be that as it may, Babcock will now have to carry out a 1.1bn pounds rights issue. On the other hand, analysts have pointed out how even after the transaction, its financial gearing will remain below the levels reached when it bought Vosper Thornycroft in 2010. Investors should definitely take up their rights, given the sharp discount to the theoretical ex-rights price. Nonetheless, at 17 times the theoretical ex-rights price the shares are not cheap and there are execution risks with a deal of this size. "I am not sure I would be buying at this level," The Times´s Tempus says. The London Stock Exchange is doing spectacularly well from the boom in equity markets and as companies rush to list their stock. The daily value of share trades increased by 8% in the 11 months to the end of February while the amount of fresh equity raised through flotations soared by 91%, to reach £28.3bn. However, the yield on the Sets electronic trading system, the amount of money which the LSE gets from each trade, declined as larger trades translated into lower fees for each one. As well, profits from acting as a counterparty and holding cash in Italian clearing will fall given that interest rates are low. In parallel, the derivatives business via LCH.Clearnet is down as Liffe´s new owner, Intercontinental Exchange, shunts trades towards its own clearing service. At 19 times' earnings and given that shares of LSE no longer have an M&A premium embedded they look fully valued, Tempus writes. AB