Valuing Northern Rock

Investing in Northern Rock, the distressed UK mortgage lender, is now a game for hardened gamblers. The muddy confluence of desperate politics, financial greed and spin has obliterated transparency.
On paper, working out how much to pay for Northern Rock, or estimating the value of the only bid on the table, is relatively simple. Northern Rock was insolvent without government help. This week’s proposal from Richard Branson’s Virgin, roughly, could leave investors with shares worth as little as 60p. That assumes that today’s book value of £1.9bn is hit by fees and writedowns of £750m, before adding the £1.55bn capital provided by Virgin and a proposed rights issue. It also assumes that a shaky, reborn bank deserves to trade at a lowly 0.8 times book value and that Virgin Money is worth the £250m Virgin says it is (which is debatable)

Alberta raises oil company royalties

The government of Alberta in Canada may have just done the impossible – raising royalties on the oil industry without casting itself as greedy and unreasonable and driving companies out of the country.
Certainly no one is thrilled to be paying more than the current low royalties, but the increases unveiled late on Thursday are rising with the price in oil.
While many other oil-rich nations are provoking the ire of international oil companies with unreasonable demands, the sliding scale determined by the price of oil starting January 2009 seems mild by comparison.
“They will take more, but only at prices above $55 a barrel,” said Derek Butter, head of corporate analysis for Wood Mackenzie, the consultancy. So the companies will pay the same royalties if the price remains under $55 a barrel.
“The Alberta government has proposed a regime that, at first glance, looks significantly less onerous than feared,” said Doug Leggate of Citigroup Investment Research. “At $55 there is no change; at $60 – our long-term price assumption – the change is immaterial.”
Oil companies have been focused on Canada’s oilsands, the new hotspot for investment in this politically stable country amid the nationalist fever sweeping Venezuela, Russia and other nations.
Alberta has encouraged investment in these hard-to-exploit reserves, stuck deep in sand, with low royalties – just 1 per cent of revenues before companies make a profit and then 25 per cent once they became profitable.
Under the new regime, companies must pay 1-9 per cent before they make a profit, depending on the price of oil, and then royalties of 25-40 per cent of their profits, depending on the price of oil. The 25 per cent will be based on a $55 price of oil and the 40 per cent will be based on a $120 price of oil.
Mr Leggate said he expected a “strong response to any change from industry”.
“We hoped for a different result,” said Pierre Alvarez, president of the Canadian Association of Petroleum Producers, who felt the changes were being imposed in too tight a time frame. “You don’t just change the rules on stuff like this overnight.”
Yet analysts believe oil companies will remain in Alberta because the reserves are huge – the world’s biggest proven oil reserve outside Saudi Arabia – and they are unlikely to find something of this scale with such a welcoming government anywhere else.
Royal Dutch Shell declined to comment pending more details. Chevron said it remained committed to developing a leadership position in oil sands.
Amy Myers Jaffe, energy expert at Rice University, said the sliding-scale approach had been used successfully for many years in the UK’s North Sea field as it gave the oil companies predictability.

Financial centres set aside rivalry

New York and London on Friday set aside their fierce rivalry as Michael Bloomberg, New York city mayor, hosted talks with City of London officials and Treasury secretary Hank Paulson on how to reduce regulatory barriers between the two financial centres.
The development is a sign that, even as the two cities are competing for financial services, they have quietly started a dialogue to help the world’s largest financial groups do business more efficiently in both places.
That is being driven by a recognition that the top financial firms in both cities are the same large investment banks, and that they want the cost of doing business cut by reducing regulatory differences on both sides of the Atlantic.
It comes as there is increasing recognition by regulators such as the Securities and Exchange Commission and the Financial Services Authority on the need to work more closely together to streamline regulatory standards to cut transaction costs.
Michael Snyder, the City of London Corporation’s policy chairman, attended the meeting at Gracie Mansion, Mr Bloomberg’s official residence .
He said: “’London versus New York’ is often how the show is billed - but the real game is ’efficiency versus economic drag’. Both cities share the same interest in seeing market-friendly solutions adopted worldwide.
“It’s not a zero-sum game, either, and both London and New York will benefit from cooperation on key matters. After all, some of the biggest employers in the City are US-owned - so our interests are closely linked when it comes to jobs,” Mr Snyder said.
The dialogue is also being driven by a belief that the two markets must iron out regulatory differences to deepen overall liquidity ahead of the emergence of large capital markets in Asia – especially India and China.
“Clearly if we are to get deeply liquid markets, we need to be as joined up as possible and that will help in engaging with and indeed helping the markets in Mumbai, Shanghai or Hong Kong,” Mr Snyder told the Financial Times.
A series of high level reports – including one by consultancy McKinsey and backed by Mr Bloomberg – have warned that New York risks falling behind London in financial services if the US does not tackle a range of problems.
They include a culture of “excessive” liability and securities litigation, a stifling “rules-based” financial regulatory structure and inflexible visa policies. The SEC recently started discussing a regime of “mutual recognition” of standards with other foreign regulators.
Friday’s talks included ways of extending mutual recognition for UK and US, as well as US and European Union regulators. This included the need for International Accounting Standards to be accepted in the US, alongside the US standards – an issue that the SEC is working towards.
Mr Paulson told WABC radio: ”I do believe New York is the financial capital of the world, that the strongest capital markets in the world are in New York, and they benefit our whole country. But I also believe having strong capital markets in London benefits all of us.”
The two cities examined “ways to increase liquidity in both the London and New York markets”, Mr Snyder said, “to make the world’s top two finance centres work better”.
That included a need to improve transport links in and out of their respective international airports, airport security and immigration facilities in both countries.
”We also discussed … mutual ways in which the two cities can better tackle the threat of terrorism, and of economic crime, including money laundering,” he said.
Mr Paulson’s involvement in the talks yesterday is significant because he is pushing a project at the Treasury to produce a “blueprint” for US financial regulatory reform.
He has said that if the US were to start designing its system of financial regulation from scratch it would not pick the current system which is “fragmented” between multiple regulators.
This month, the Treasury issued a set of 30 questions for public comment, including one that asked whether the UK’s “principles-based” regulatory style was worth adopting.
Mr Bloomberg acknowledged on Friday that the two cities were competing for business, but said they are exchanging ideas on tackling transportation problems, fighting terrorism and crime, and making financial regulation more understandable and transparent.
But he added: ”I’ve always thought New York had a better hand to play.”

Chinese consumers prefer own products

Most Chinese consumers say they trust domestic brands more than foreign ones, according to a McKinsey survey that amounts to a stark warning for multinational companies about nationalist sentiment in China’s booming market.
In spite of the furore this year in the US and Europe about the safety of China-made goods, the survey also shows that Chinese consumers are increasingly confident about the quality of products made in their country.
Andrew Grant, head of McKinsey’s China practice, said the results indicated that multinationals that sought to make a virtue of the fact that their products come from a specific foreign country could struggle in the Chinese market.
“That model might have worked 10 years ago when companies were aiming at wealthy consumers in Shanghai,” he said. “But now that there is a broader affluent class, that strategy is much less effective.”
According to the survey results, 53 per cent of the 6,000 respondents said they preferred Chinese brands, up from 46 per cent when the same survey was conducted in 2005.
McKinsey, which conducts similar surveys in a number of countries, said this was an unusually large change in sentiment for such a short period of time.
Only 11 per cent of consumers said they had a “strong” or “moderate” preference for foreign brands – and nearly half of those people said they would shift to a domestic brand if offered a product of similar quality or price.
The only sectors where support for foreign brands matched or exceeded domestic products was in consumer electronics and cars – although in the latter category Chinese brands are rapidly becoming more popular.
The good news for multinationals is that there is considerable confusion about the national identity of some products, with many Chinese consumers believing that brands produced by multinationals are actually home-grown.
In the case of two well-known US toothpaste brands, for instance, more than 80 per cent of respondents said they thought they were Chinese.
“The successful foreign companies have usually made a real effort to listen to Chinese consumers and create local brand management teams, rather than import approaches from other markets,” said Mr Grant.
McKinsey said companies also needed to be more aggressive in introducing new products to the Chinese market.
“In developed countries, companies will often seek to refresh their brand around every three years,” said Mr Grant. “In China, you need to do something new every six months.”
In the past, many Chinese companies had often been happy to make products that were cheap and of reasonable quality, he said.
However there was now a big opportunity for those companies to invest in establishing brands that appeal to Chinese consumers