Bronte Capital

Self assessment Monday: an old letter to a client...

2013-06-17T13:01:00.000+10:00

About two years ago I wrote a letter to our foundation client about how we viewed the equity markets. Mike* had sent Bronte a profoundly bearish broker note.

I posted the letter on the blog. The original (reproduced below) can be found at this link.

Dear Mike

The bear case always sounds intellectually more convincing than the bull case. And it is in this broker note too. Intellectual sounding and convincing.

But America is still an amazingly innovative country, humans are ingenious and most of the imbalances will sort themselves out. Big cap equities are cheap relative to almost all other assets (especially relative to small cap equities, cash and bonds and to many assets such as commercial property that require leverage). Cash yields almost minus 3 percent after inflation and less post tax. Bonds are scary as hell and yield minus 1% after tax and inflation.

Big though difficult-to-run companies are at low teens multiples. Great franchises are at mid-teens multiples. Tesco (UK) which is a truly great franchise - is at a 14 PE ratio. And the Pound is historically cheap. WalMart and Target - both slightly less good franchises - are at 12 times. The difficult parts of Silicon Valley (eg HP) are well under 10 times PE ratios (and we feel no need to own that one). The less difficult parts of Silicon Valley (Google for instance) are at a high teens PE ratio once you take out the excess cash. We own that.

Own equities. Don't kid yourself. Mega-cap equities are generationally cheap compared to other assets - and certainly compared to the cash/bond/levered asset complex.

Just don't be blind about it. The places that there have been high returns (Asia, small caps, smaller resource companies) are riddled with fraud. Twenty five years of deregulation and the high levels of innovation mean we have high and rising levels of stock fraud. Fortunately there is much less fraud risk in mega-caps.

Don't own Australia or the iron-ore-coal-steel complex. It has run too far and has been too easy to make money. Too many stupid/aggressive/greedy people are doing too much expansion. Some of these people are stupid - but they have made much more money than you or me so they must be right!

I can find dozens of reasons to be bearish - but I look at it dispassionately and I am bullish on big caps, and bullish on America. The problems will sort themselves out and the American exceptionalism (decent institutions, free enough markets and a willingness to take risks) will work their magic again.

Anything that takes you out of real assets (businesses and property that generate real cash flow) and puts you into nominal assets is - with a ten year time-frame - a bad idea. (And why is your personal account any shorter dated than that?)

Just don't get greedy by buying things you do not understand: you will be ripped off. The underlying fraud level is as high as I have ever seen it.

Oh, and we are also bullish on France and Germany. Old Europe has manufacturing and production power of enormous levels. (Remember what they produced to fight wars? Their productive capacity is very high and Americans have forgotten that. They do engineering as well as anybody. And Germany no longer has a restrictive monetary policy to crush its consumer market.)

Also the French are in that lovely position of having convinced newly rich Asians that they are the arbiters of good taste. There are few higher ROE businesses. France has played Asia better than America.

We can see plenty of reasons to be bearish - but just the frauds makes our portfolio short enough. Indeed we are plenty short and likely to remain so until I can't find frauds with ease.

Beyond that, there is a lot of pessimism around. It has got to be time to be bullish. We certainly do not desire being 125 percent net long or hyper-aggressive like that - but we will take steps to become incrementally longer. We are if anything too short.

J

At Bronte we have done pretty well in the past two years - and a good part of the reason can be seen in this letter. Still it is worth assessing how we went on a line by line basis.

The starting call - Tesco which we still own has not been great and the turnaround is appearing more difficult. That was a dud.

The Great British Pound is slightly cheaper compared to the USD so that was also a dud. It was a dud we doubled down on by buying a large stake in Vodafone.

Walmart and Target have both been fine investments; up about 40 percent plus dividends. We only owned Target. It is pretty hard to pick the charts apart but we suspect that operationally we might be in the wrong stock. We did not think that income disparity in the US would continue to widen. However it has and a widening income disparity favors Walmart over Target. [Target is just too up-market.] Also we think the very-cheap-very-diversified retailers are the last ones displaced by the web. Walmart is about the safest name in retail.

Hewlett Packard, which we explicitly stated we did not own, was an okay short over that time. We were short but we did not do as well as the chart suggests as we were too aggressive with put options on the premise of an underfunded pension fund – which proved unfounded.

Google which we owned has been a fine stock. However after the appreciation we own much less of it. We were about 7 percent in the stock at $550 and are just above 4 percent in the stock at $870.

Explicitly not owning the Australian iron-ore-coal-steel complex has been a good call. We were short a few iron-ore names. Those mostly worked for us.

Our French and German industrial names have had more than adequate returns. Our French liquor companies have continued to sell a lot of highly priced Cognac in Asia.

The place we have been mostly wrong is on shorting some frauds. We have had irregular wins in this [alas we will not name names]. We have also had a few losses. This is a bull market and bull markets tend not to be the time-or-place for exposing frauds. Still our short book is not an abject failure. It contains a few wins and very few disasters. The most prominent loss was that we bet hard that the Focus Media acquisition would not close. Focus Media has very funky accounts - but that did not stop a multi-billion dollar acquisition.

The general call to be long big-cap stocks and avoiding Asia/China/Resources was not a bad call. This continues to be our call but we are far less convinced about it now than we were two years ago simply because the price has changed.

Where to now?

I have another person - a close friend - who has just lost her job and wants some financial advice. I would love to give it to her - but I am finding it extremely difficult to write anything as clear and well supported as the advice above.

John

*Mike is not his real name.

Vodafone - Kabel Deutschland: Meet Vittorio Colao - the new Sir Fred Goodwin

2013-06-12T18:06:00.000+10:00

Vodafone it seems has made an "informal bid" for Kabel Deutschland.

We have a largish position in Vodafone - some of which we feel compelled to sell. I want to put on the record that I believe this is a nasty diminution of shareholder value and continues the management-board record of incompetence at Vodafone.

I live in Australia - and I have other commitments - so I do not want to run a spill of Vodafone's board myself - but I am happy - indeed eager - to encourage other people to do so.

If any large shareholders in Vodafone wish to organize a spill of the board please contact me. We will be more than willing to participate and will use this blog as a platform to publicize the cause. [We cannot do it ourselves - Bronte is a small operation without sufficient resources to take on a large company.]

For the record though - this blog has only ever taken on one major British CEO. I did it early when I did a series of posts labelled "Sir Fred Goodwin Death Watch". Here is the original one. Royal Bank of Scotland was then still above GBP5 per share. I was also - well before I started this blog - one of the sources for this story in Fortune about RBS.

Vittorio Colao the urbane but seemingly incompetent CEO of Vodafone is the new Sir Fred Goodwin.

John

Self assessment Tuesday: Alan Jones and Facebook... #fail

2013-06-11T20:16:00.000+10:00

A while ago I wrote about Alan Jones - a right-wing radio shock-jock in Australia with a well organized Facebook campaign against him.

I did not think Jones could survive the onslaught - new media I thought won.

I bet my business partner $50 that Jones would be chased off air.

I lost - and $50 duly traded hands although I took until today to pay him.

My faith in the power of Facebook to change the world is reduced. Not so keen on FB stock either any more - I find myself using FB less and less...

Worse: my thirteen year old son is not nagging me to allow him a Facebook page.

John

PS. We made a small profit on Facebook stock mostly via selling put options which eventually delivered to us at an average cost in the low 20s. We sold a few calls (and much was called away from us) in the mid to high 20s. I consider this luck. I used to think that FB was a "no brainer" in the low 20s. Not so sure any more.

Please please China - make my day

2013-06-06T10:28:00.000+10:00

China is threatening to impose punitive tariffs on European wine exports in a tit-for-tat retaliation for tariffs on solar panels.

Peter Thal Larsen (Reuters - Breaking Views) tweeted that some Europeans would like that.

I would love it.

The Australian wine industry would recover - and get a stronger entry to China than ever before.

And the reduced demand for good French plonk would lower its price - making it cheaper to develop a very refined palate.

Trade wars: bring 'em on.

John

Short selling and misrepresenting the truth - Infitialis edition

2013-06-05T12:00:00.000+10:00

I am a short-seller by inclination. Moreover I short mostly frauds and stock promotes.

If you are going to call these publicly you need to be purer than Snow White. Alas I am finding some shorts I respect to be drifting.

I am going to pick on one - Infitialis - an anonymous group. This group (I am assuming there is more than one of them) have been pretty good getting more than a few things right. I read them because some of the analysis is good.

But they are also into the misrepresentation game. This table from a recent report is just slimey:

It purports to show a track record - but it measures everything against the "subsequent low".

Hey - wouldn't you love it if you could be paid performance fees on your long versus their "subsequent high" and performance fees on your shorts versus their "subsequent low"?

This is misleading accounting. Infitialis knows better and should behave better.

John

Practical lessons in assessing exotic risks

2013-05-31T16:57:00.001+10:00

I am having a few days of surfing lessons in Bali on the way home from a business trip. Its actually quite productive because I get back from two hours of lessons pretty close to wrecked at 9.30 AM and eat. Then it is work for a bit, have a massage, work for a bit more, go out and be a tourist, eat, work and sleep. I have taken to calling my room at the surf camp "the office" which horrifies the other guests (mostly younger European - especially German speaking backpackers).

Yesterday however was unproductive. I rode a motor-scooter to Tanah Lot - a kitsch bunch of markets and an unusual coastal Hindu Temple. Now riding a motor-scooter in Bali is not risk free - indeed it is exhilarating with risk. However I thought I could reasonably list all the risks.

I could not.

I rode past a horse-drawn cart and the horse lent over and bit my shoulder.

Lesson 1: Its the risks that you can't see that get you. No risk assessment is complete without leaving space for what Donald Rumsfeld called the "unknown unknowns".

Anyway a quick perusal of the internet raises my alarm. Bali was rabies free until 2008 when what was probably a single rabid dog came from Java. Bali being Hindu has dogs roaming around - symbols of good luck. They would not be tolerated like that in most of Moslem Indonesia. There have been well over 100 deaths from rabies in the past few years in Bali. A tourist recently died after being bitten by a monkey.

A further perusal of the internet suggests that it is possible to get rabies from horses - indeed several cases have been confirmed in Canada. Horses it seems are curious creatures and have been known to walk up to strange-acting foxes leaving them vulnerable.

After some advice from some regular Bali goers I wind up at the Bali Clinic in Seminyak (a suburb of the tourist-and-flesh haunt of Kuta). This clinic is run by a mix of Western and local trained doctors and the triage process sends infectious disease cases to one of the local doctors trained at Sriwijaya University in South Sumatra. Now I know nothing about that school and little about South Sumatra other than that it is a well known Petri-dish of infectious tropical diseases (and some very good surfing). My guess is that the average doctor coming out of a university in Sumatra knows more about infectious tropical diseases than all but a handful of Harvard graduates.

So with some discomfort I conclude I am in the right hands.

The doctor sends me home. He is aware that rabies is transmitted by horses sometimes (but rarely) in North America. He is also aware that bats are a vector in some parts of the world. But to his knowledge there has never been a case of rabies in Indonesia from any animal other than a dog, a cat or a monkey. He does however clean out the wound and gives me the expected superficial iodine treatment.

The doctor is almost certainly right. Indeed I would put the chance of him being right at over 99.99 percent.

But if he is wrong I die.

This is a risk I hate taking. Every piece of my being hates taking this risk. In financial markets if you take a risk no matter how seemingly small where an outcome is total failure if you are wrong and you are taking it at the advice of a so-called expert you are likely to blow up.

Partly that is because financial experts exist to make medical experts look good. And it is because financial experts are conflicted in a way that medical experts are not. Indeed it is often because most financial experts are really just salesmen selling you the risks that their employers do not want to take.

Finally it is also because financial risks are distributed so abnormally and in financial markets you take them repeatedly - day-in-day out. Where I only got bitten by a horse once. And things you do repeatedly will get you in the end - but things you do only once probably will not if the risk-level is low enough. If you get into the habit of taking repeated wipe-out risk in financial markets you will eventually be got. I guess if I got into the habit of being bitten by strange animals in Bali I would eventually be got too.

But here I am, lying in the "office" in Bali taking precisely a risk that I promise my clients I will never take: the risk of blow-up on the assurance of an "expert".

Maybe this is the hypochondria of exotic risks. I am flying home with Garuda Airlines - and some will tell me that is an unacceptable risk too. They are now quoted as an airline with a "much improved" safety record. Whatever. It is a plane. I am in the hands of "experts" and I do it all the time.

John

Spark Networks and the strange failure of sex-starved Jewish computer science undergrads...

2013-05-30T23:03:00.000+10:00

Whitney Tilson suggested Spark Networks - a dating company - as a long at a value investor forum recently. For the life of me I could not fault it. (Here are some details on Whitney's presentation...)

Spark owns one of the truly great franchises in online dating - JDate.com. JDate - a Jewish Singles dating network is utterly entrenched in its community - mums buy their daughters subscriptions - at least then the boy will be Jewish. I know several users - people who would not consider using another site. A subscription to JDate is a rite-of-passage almost as important as a bar or bat mitzvah.

JDate has been around for a long time - and still goes strong.

I suggested the stock to a friend (who probably wishes to remain anonymous) and here is what he said:

I cannot think of a sector more likely to be disrupted in any industry.

The thing about dating is that the lifespan of a dating person is roughly 18-25 years old (or at least that will always be the median so that demographic will set social norms, even for 40 year old divorcees). So you are dealing with people who live and breath technology and 'live' for only seven years. 'Science advances one funeral at a time' same with tech but here everyone dies young. So the base rate of innovation and cultural evolution is super high. There is a huge backlash against static dating pages as they are inaccurate (i.e., everyone loves travel, hiking no one says they love dungeons and dragons) ; every girl finds the one amazing photo of themselves.

Secondarily, you are at the beating heart of the mobile revolution. Dating requires physical proximity so there are a wave of companies trying to do stuff like meetups of 4-6 people for a drink and then they can assess each others dating potential.e.g., www.grouper.com (one could do six Jewish people meeting up too).

Thirdly - the over representation of Jewish entrepreneurs is insane- Ballmer. Zuckerberg, Page and Brin etc. Zuckerberg only invented FB to get a date! You are literally betting against every sex starved Jewish computer science undergrad. Bad bet.

My friend is almost certainly right - at the end a bet on Spark Networks is a bet against every sex starved Jewish computer science undergrad (SSJCSU) and that is likely a very bad bet. Flatly stupid even.

But so far legions of SSJCSUs have not succeeded in knocking JDate off. Sure they invented Facebook - but the original JDate franchise is still there - robust through all of this. I am sure that some SSJCSUs have tried and indeed are still trying.

So why does JDate still exist? Why this strange failure?

John

An undisclosed cause: Mr Mulacek and Interoil

2013-05-29T10:53:00.000+10:00

Today Interoil published a solicitation of proxies. Buried in this - about twenty pages in - is the following extract regarding the recent resignation of Mr Mulacek - the CEO.

Phil Mulacek – Chief Executive Officer

In February 2012, we entered into an employment agreement with Phil Mulacek as then Chief Executive Officer. No contract had previously been in existence governing our employment relationship with Mr. Mulacek. The employment contract provided for an initial three year term and for automatic one year extensions thereafter in the absence of notice of termination from the Corporation.

The employment contract provided that if during the term of employment Mr. Mulacek's employment was (i) terminated by us except for "Cause" before or after a “Change of Control”; (ii) terminated due to "Disability"; (iii) terminated by him for "Good Reason"; or (iv) terminated within 3 years following a “Change of Control” of the Corporation, then Mr. Mulacek would be entitled to be paid, in the aggregate and within 30 days, (a) a lump sum amount equal to $3,600,000, (b) all accrued and unused annual leave which leave had accrued at the rate of 60 days per year from the commencement of the employment agreement, (c) an amount equivalent to 365 days’ paid annual leave as a “Foundation Leave Benefit”, and (d) an annual bonus amount equivalent to 50% of Mr. Mulacek’s base salary pro-rated from the commencement of the calendar year until the date of termination.

Payments were subject to certain conditions including, (i) provision by Mr. Mulacek of a general release to the Corporation in an agreed form within 21 days of termination, (ii) not competing with the Corporation’s business or soliciting its employees for 90 days after such termination, and (iii) maintaining confidentiality of the Corporation’s “Confidential Information”.

In the event of Mr. Mulacek’s death during his employment under the employment contract, his estate beneficiaries would be entitled to receive a lump sum payment of $3,600,000, together with any other accrued and unpaid benefits existing at his death.

We were permitted to terminate Mr. Mulacek's employment contract for "Cause". Cause includes wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement.

Mr. Mulacek retired as an employee of InterOil effective 30 April 2013.

So what "wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement" permitted Interoil to terminate Mr Mulacek's contract for cause?

That is of course interesting - but this is downright peculiar from the same document:

Election of Directors
Our Articles of Continuance provide that we must have a minimum of three and a maximum of fifteen directors as determined by a resolution of our Board. The number of directors is presently eight. Directors elected at the Meeting will serve until the next annual meeting of Shareholders or, if earlier, until they resign, are removed or are disqualified. The term of office of each of our current directors who is not re-elected will expire at the Meeting.

The Board has set the number of directors to be elected at the Meeting at eight. Management of InterOil proposes to nominate each of Gaylen Byker, Phil Mulacek, Roger Grundy, Roger Lewis, Ford Nicholson, Sir Rabbie Namaliu and Samuel Delcamp (each of whom is currently a director), and Sir Wilson Kamit, as directors of InterOil. Mr. Christian Vinson, currently a director, and also Executive Vice President Corporate Development & Government Affairs, has indicated his intention to retire as an employee and director of the Corporation and will not seek re-election as a director at the Meeting.

It will be interesting to see how these observations from the same document are reconciled.

John

There is of course a possibility that the words "were permitted" do not mean what they appear to mean. Indeed this is almost the only way I can reconcile the two observations above.

J

Charlie Ergen, patriot, scoundrel, thief: some comments on the Softbank vs DISH battle for Sprint

2013-05-26T18:49:00.000+10:00

It seems fitting that the best case that Charlie Ergen and DISH can muster for their bid for Sprint is false patriotism. Softbank they say will be a national security risk. Fitting because Samuel Johnson warned us almost 240 years ago that patriotism is the last refuge of the scoundrel - and Charlie Ergen is a scoundrel.

The misdirection from DISH was from the beginning. Here was the pitch for the DISH offer from the beginning:

The case for the DISH's offer is that it offers $4.76 per Sprint share in cash plus 32 percent of the surviving company. Softbank by contrast offers $4.03 per share in cash plus only 30 percent of the surviving company.

More cash and a larger proportion of the surviving company - what is not to like about that?

Calling Charlie's bluff on this - plenty actually. You see the surviving company in the Softbank case is Sprint after Softbank has injected $8 billion into it. It is a highly credible competitor for AT&T or Verizon.

And the surviving company in Charlie Ergen's example is a highly levered beast called DISH-Sprint. DISH Sprint will be bereft of cash and loaded with debt because the cash part of the offer comes largely from leverage.

So it is worth understanding what DISH is.

DISH is a second-tier satellite provider that lost the battle for quality subscribers to DirecTV. Charlie always had an inferior offer based on low cost - when DirecTV had The Sunday Ticket, and was first to market with high definition and other quality-improving features. The Sunday Ticket was a clear - albeit expensive differentiation - it allowed you to watch your home team NFL game even when you did not live in your home town - a great offer in a country with as much upper-income job mobility as the USA. That combined with relatively poor service and lack-of-speed with high-definition meant that DISH found itself caught in a low average revenue per user (ARPU), low growth world.

Until Charlie hit upon a new business model. The Hopper.

The Hopper is a standard personal video recorder (PVR) attached to the satellite receiver - however it records live the whole of prime time television every night. It then allows you to watch the TV with the advertisements removed for you. To quote DISH's website:

Hate commercials? DISH created commercial-free TV so you can save an hour each night! Now you can instantly skip commercials in recorded primetime TV. Only DISH gives you ad-free TV with the Hopper®.

What an offer - the TV you were going to watch anyway without those pesky little adverts.

But there is of course a problem: the TV networks did not agree to this. Indeed this is as much a threat to the business of commercial TV (which is still advertising supported) as Napster was to the music business. It is thievery, nothing more. And all four networks are suing DISH for this. You can read the story in The Hollywood Reporter if you wish under the unsurprising title of Charlie Ergen is the most hated man in Hollywood.

The Hopper has done wondrous things for DISH. Subscriber numbers are growing sharply after stagnation. The question of course with the Hopper is how does it end? Does it end with Charlie having to stop it after lawsuits, or some legislative change or the death of commercial TV all up. Either way it looks to be an unsustainable advantage built on an unethical and possibly illegal business model.

It is small wonder Charlie is in the game of diversion. He claims his offer is superior but he is offering crappy DISH stock and is diverting with Patriotism in the time honored method of scoundrels and thieves.

And he is doing it for a reason. He doesn't want anyone looking at DISH (and hence DISH-Sprint) too hard. Because unethical and arguably illegal businesses should trade at a discount - and - dear Sprint shareholders - you should not accept stock in one in exchange for your perfectly good phone company.

John

PS. Disclosures - Bronte owns both Sprint and Softbank. I have not communicated with anyone from Softbank - but Masa Son, if I am in Tokyo you owe me a sake.

Our big holding is in Softbank.

The end game for Universal Travel: Ms. Yan, 47, has had many years of experience in financial engineering

2013-05-17T08:50:00.000+10:00

Universal Travel was the first Chinese reverse merger company I mentioned on this blog. Here is the original post (Travelling Through China)...

The company has since collapsed. It traded up after my original post - something that seems amazing until you work out that an elderly and formerly rich retired car dealer in the Central Valley of California (a man since deceased) spent almost $10 million dollars buying shares.

Those shares are down 98% and the charities that man left his money to wound up nearly empty handed.

Universal Travel's dynamic CEO Jenny Jiang has since resigned. You can see her dynamism in this now classic film of her ringing the opening bell of the New York Stock Exchange:

The 8-K announcing Ms Jiang's resignation also announced her (temporary) successor - a Ms Yan - who used to be the Finance Officer and also the Chief Operating Officer.

Here is what they say about her:

Ms. Yan, 47, has had many years of experience in financial engineering...

So now they tell us...

John

Gulf Keystone share transfer

2013-04-23T17:18:00.001+10:00

First - a recent release from Gulf Keystone Petroleum concerning the CEO - Mr Todd F Kozel disposing of 10 million shares - the bulk of his holding:

Director's Shareholdings

Gulf Keystone was informed on 19 April 2013 by Mr Todd F Kozel ("Mr Kozel"), Executive Chairman and Chief Executive Officer of the Company, that on 19 April 2013 he transferred ten million (10,000,000) common shares of USD 0.01 in the Company to a third party, in respect of a repayment in full under a financing arrangement, at a price of £1.6875 per share. Mr Kozel no longer has any interest in the common shares transferred. Mr Kozel has no present intention of disposing of the balance of his common shares.

As a result of the transfer of common shares, Mr Kozel now holds:

	Common shares held directly	Interests in common shares held subject to the discretion of the EBT Trustee	% of enlarged issued share capital	Number of options over common shares under the Share Option Plan
Todd Kozel	255,004	-	0.03	13,961,473

Second - An old video of Todd Kozel being interviewed on CNBC Europe.

http://video.cnbc.com/gallery/?video=3000042718

No further comment.

John

Bedtime reading

2013-04-23T14:19:00.002+10:00

I am about to lie on the couch at work with the main light off, a lamp behind me and a blanket on.

I plan on reading AT&Ts annual report cover to cover. We own the stock.

I hope not to fall asleep.

Being a hedge fund manager is not entirely glamorous.

John

Scared - Verizon, Vodafone

2013-04-19T22:32:00.001+10:00

Few things scare me more than Vodafone management selling their one good asset (the stake in Verizon wireless) to waste in their usual manner (see Australia). By far the best asset owned by Vodafone is the one asset they do not manage - and there is a (management) reason for this.

But there was an a quote in yesterday's Verizon conference call that was somewhat contrary to my prior opinion...

With respect to Vodafone, obviously, we made a public announcement on April 2, and I would reference all of you back to that announcement. Of course, as we've always said before, we are very interested in acquiring the 45% stake in Verizon Wireless that we don't already own. I will say, though, that there has been a lot of speculation about the tax consequences of a purchase of this 45%, and we are extremely confident that such a transaction could be accomplished in a manner that is very tax-efficient and would not result in a tax on the gain in that stake. So beyond that, I don't think there is really much else to say. So with that, I will pass it on to the next question.

I am worried that Vodafone will take the money. Very worried.

John

Speculating about the future of Apple in China

2013-04-18T12:44:00.000+10:00

This post is a speculation from my experience of an Android phone I think from Saudi Arabia.

I am speculating that Apple is going to have a much tougher time in China than anyone imagines.

To see why you need to go back to my original Samsung Desire HD - which I blogged about in June 2011.

I purchased this phone on Ebay and it came shiny and new in a white box, however the operating system was dodgy. It had a limited choice of language - Arabic, English (UK), Farsi, Urdu.

Most importantly it did not contain any access to the Google market place (Google's equivalent of the App store). It had limited apps and no possibility of adding more. It contained a non-standard web browser and a non-standard email client (leaving open the possibility of the State watching what I wrote and said). It was not possible to put a Voice over IP app on it. That phone was almost useless - a smartphone without apps. The smartphone of an oppressive regime.

The solution was to root it and load something great (insanely great even). I loved that phone until my wife put it through the washing machine.

Saudi Arabia (or whatever Middle East state it was) could demand smart-phones that were neutered because - well - they had a copy of the source code for Android and could demand and implement any changes they liked. Open source is a force for good or evil and in this case it was evil. Google could distribute "good Android" and the oppressive authorities could force their phone companies to distribute "bad Android". There will always be an elite who can root their phone and load CyanogenMod or similar - but that will be an elite.

Will this be the oppressive phone of China?

My guess is that will suit China just fine. The phone companies are controlled by the State and they will sell handsets controlled by the State.

You can't really do that with Apple. Apple is not open source and there is no root operating system that an oppressive state can modify to suit their whims. So the State needs to lean on Apple to do their evil work for them - and that doesn't work brilliantly. Apple is not going to give away its secrets and the Chinese state will demand more and more.

====

So I am assuming that if Apple goes mass-market in China it will sell systems with enough "apologies" to the cultural differences of China. Those "apologies" will make a rooted Android massively superior to a botched-up Apple. The elite will want their Samsungs... Some bulls on Apple and China may be just flat wrong...

Just a speculation...

J

Postscript. The WSJ comes to a similar conclusion.... The key observation - Android in China comes without an App Store as per my Saudi phone... Here is the quote:

Ironically, Google's Android mobile operating system dominates the smartphone market in China, despite the company's strained relationship with the government. But those devices don't come with Google services that are standard elsewhere, such as YouTube, search, and Google Maps. Also, without access to the Google Play store, Chinese users have a weaker selection of apps to choose from.

Mt Gox, bitcoin, Hordes of Chaos, Demons and armies of Orcs...

2013-04-17T16:41:00.000+10:00

MtGox.com is the main exchange for bitcoin. I am not inherently opposed to bitcoin as a small and interesting speculation (though I would not do it for my clients). I think bitcoin probably goes to zero - but only probably...

If you want to understand bitcoin the best explanation I have found is on the self-evident blog...

However it is the history of MtGox - that amuses me...

MtGox started as an exchange for trading cards in a fantasy role playing game. It stands for Magic The Gathering Online Exchange.

But between trading playing cards and trading encrypted tokens certified with a file-shared registry it distributed an online game called "The Far Wilds". Archive.org preserves some of the website:

The Far Wilds is a unique turn based strategy game. Configure an army and fight on a random battlefield.

Battles are dynamic. You must adapt your strategy to different battlefields conditions and opponents....

The Celestial Imperium moves out toward the northern wastes to respond to the rising tide of the Hordes of Chaos. Disciplined and Powerful Psions wield their minds against twisted Mutants. Priests and Paladins of Xosa battle with Demons and armies of Orcs across the wilderness of the Borderlands.

John

Once every few years I feel compelled to republish Alan Sokal

2013-04-09T22:13:00.003+10:00

Warning: no financial content at all

A link. Driven by a comment on a recent blog post.

http://www.physics.nyu.edu/sokal/transgress_v2/transgress_v2_singlefile.html

J

PS. For those who need an explanation of perhaps the funniest thing I have read in my life - a reasonable summary is here on Wikipedia.

Apology to CUPID PLC

2013-04-08T21:03:00.001+10:00

Dear readers of my blog

Following correspondence received from Cupid plc's solicitors, I have removed recent blogs concerning Cupid from my website. I apologise for any factual inaccuracies contained within those blogs and I wish Cupid good fortune in its future endeavours.

John Hempton

JCPonderings

2013-04-08T10:32:00.000+10:00

I do not do links much - let alone non-finance links. However like much of the financial world I am wondering whether Johnson can transform JC Penney before he has no liquidity left to play with. The financials are a train-wreck. But leaving a third tier retailer alone in America is also a near-guaranteed train wreck - if you left JCP untouched it would slide from irrelevance to bankruptcy over maybe a decade.

The turnaround logic looks from the outside like:

We must do something.
This is something.
Therefore we must do it.

The link below is a nuanced fashion-based examination of this issue.

http://jcponderings.weebly.com/

Enjoy.

John

PS - The link to this article in Vogue is worth the price of admission ... http://www.vogue.com/vogue-daily/article/what-price-glory-jcpenney/#1

The HP Board Changes

2013-04-06T00:25:00.000+11:00

I want to make a comment on the HP Board changes of today. I do not know how the HP Board missed the Autonomy fraud. It puzzles me because

(a). Autonomy accounts were superficially funky (for instance receivables were over double unearned income in a software firm),

(b). some of the press - particularly FTAlphaville (by far the best finance blog at any newspaper) were persistently but gently skeptical of Autonomy and

(c). several short sellers (most notably Jim Chanos) were all over it.

If I were forced to blame anyone it would have been Ken Thomson - the former Wachovia/First Union chairman because Thomson over all other board members he should have had the skills to pick up the accounting fraud by noticing the superficially funky accounts. [Not everyone on a board should have those accounting skills. Some for instance are highly skilled in some aspects of technology or staff management or any of the other myriad skills a board needs.]

But that is not why I am writing. I am not in any way privy to the board discussion of Autonomy and I do not understand how the mistake was made. And it is not for me to speculate really...

I am writing to praise the departing Ray Lane.

Over the years I have written to several companies (at least a dozen) to ask/query/complain or speculate about funky things in accounts. The reaction is often hostile and usually the more hostile and the less transparent the worse the situation is. Sometimes there is some smoke and some fire but not quite in the form I surmised. [This is a problem with misleading disclosure. When disclosure is misleading you can often accurately surmise things are not right and not as they seem and be totally wrong when you take a guess at the underlying reality...]

HP however was by far the most transparent company I have ever speculated about. I wrote them a fairly aggressive letter and discussed it a little on the blog.

I was wrong. Flat wrong in my speculations. That will happen.

However the process set in place by Ray Lane in response to my original letter was exemplary. It was transparent, thorough and efficient.

The HP board may have got many things wrong - but in my only substantial contact with them they were way better than many.

Just saying.

John

Cupid's profile count

2013-04-03T15:52:00.002+11:00

This post has been removed an an apology can be found here.

I apologize to my readers for any inconvenience.

John

Cupid PLC's strange balance sheet

2013-04-02T12:39:00.000+11:00

This post has been removed an an apology can be found here.

I apologize to my readers for any inconvenience.

John

Wondering whether the social sciences are forever stuffed

2013-04-01T23:15:00.000+11:00

(Warning: this post is written after a glass or two of wine and is about the things that concern me after a glass or two of wine. It is not about investment.)

Brian Cox (read one of his books if you want some light amusement) pointed me (via Twitter) to this abominable article in the The Times Higher Education Supplement. It is quoting an Belfast Professor arguing for a "values based" higher education in the social sciences. To quote:

“At the back of all this is my vision for the public responsibility of social science: we’re about educating global citizens for the 21st century, not just factory-like graduates with their 2:1s,” Professor Brewer said. “It’s about inculcating within our students a set of values, an attitude towards others, that realises the public value.”

The Professor (John Brewer) is aware of the obvious criticism... to quote the Times article...

Although he is well aware that many people would like to remove all talk of “values” from the social sciences, Professor Brewer said he sees himself instead in the tradition of 18th-century Scottish moralists such as Adam Smith and David Hume - “the cohort of people who gave us social science in the first place as it grew out of moral philosophy. They did not see any incompatibility between their practice as scientists and their argument that society was based on values.”

Professor Brewer tells us that David Hume - of all people - did not see any incompatibility with his practice as scientists and his argument that society was based on values. Well - only if you ignore the fact that he wrestled with it extensively. This is probably the single most famous paragraph ever written by David Hume:

“In every system of morality, which I have hitherto met with, I have always remark’d, that the author proceeds for some time in the ordinary way of reasoning, and establishes the being of a God, or makes observations concerning human affairs; when of a sudden I am surpriz’d to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not. This change is imperceptible; but is, however, of the last consequence. For as this ought, or ought not, expresses some new relation or affirmation,’tis necessary that it shou’d be observ’d and explain’d; and at the same time that a reason should be given, for what seems altogether inconceivable, how this new relation can be a deduction from others, which are entirely different from it … [I] am persuaded, that a small attention [to this point] wou’d subvert all the vulgar systems of morality, and let us see, that the distinction of vice and virtue is not founded merely on the relations of objects, nor is perceiv’d by reason.”

Hume here is quoted as "the distinction of vice and virtue is not founded merely on the relationship of objects, nor is it perceiv'd by reason".

Hume had plenty of ideas of where morality comes from but they were incompatible with the practice of a scientist no matter what John Brewer says.

John Brewer - and his attitudes - are precisely what make the social sciences useless. The social sciences can work on some entirely useful facts - and these facts can inform decision making independent of values. Try these for size for recent important arguments:

(a). Did Saddam Hussein in any way contribute to the 9/11 events.

(b). Does the Chinese political system preclude any deal including China on global warming? If so what deal?

(c). Would further regulation of semi-automatic weapons in the US actually reduce the chance of a Sandy Hook like event or are the guns irrevocably in circulation such that this regulation would not make people safer.

(d). Would a three trillion dollar expansion in the US Government debt funded entirely by expanding the balance sheet of the Federal Reserve increase inflation substantially? If so by how much?

(e). Would reducing the penalty for illegal drugs - especially cocaine - reduce violence in Mexico and ultimately would it reduce the illegal immigration pressure on the US-Mexico boarder?

All of these are questions that might concern social scientists (including economists) and in every case people who start with prior ideological commitment (an "ought statement") to one or other position disqualify themselves from the debate. If you don't start by thinking you might be wrong you are far more likely to be wrong. Being guided here by ideology (or the belief in God or John Brewer's values) will make you intellectually useless. Whether printing more money (d) increases inflation is a simple fact - and if you thought it did you might have made your bet and lost considerably...

But hey then - I should not be concerned about a(nother) generation of intellectually useless social scientists and mad classics professors coming out of the British schools. The people who think that Ernest Rutherford was not an intellectual make great trading counter-parties. The best people to trade against are people who do not devise tests for their ideas - whether the tests are as simple as chatting to a few Herbalife distributors or putting a profile up on a Cupid PLC owned dating site.

So - selfishly - I want to wish John Brewer and his ilk the best at destroying the minds of a generation. I only wish he taught at Oxbridge or Harvard (not some Belfast school) as it seems to be Oxbridge and Harvard types I trade against.

John

Alliance Resources - prices received for coal over time

2013-03-28T20:56:00.000+11:00

Alliance Resources has - as my posts have shown - pretty ordinary operating metrics but exceptional financial metrics. Labor productivity is low and falling - profit is high and rising.

On an operating level this looks very like the (bankrupt) Patriot Coal. On a financial level it is world-beating.

Bluntly this is strange.

So far though I have shown only one explanation - and it only explains about 140 million pre-tax in cumulative profits. Alliance Resources seems to systematically under-reserve for (self-funded) workers compensation.

That is important - it invites a class action for instance - but the amounts of money are nowhere near sufficient to account for the differences in performance. There has got to be more to it.

One of the main differences between Alliance and its competitors is the price it receives for its coal. Alliance sells almost entirely high sulfur Illinois Basin coal. There is no price series for Illinois Basin coal in Bloomberg any more. When the series ended in 2007 high sulfur coal traded at a $5 per ton discount to mid-sulfur coal. If you look at Arch Coal's numbers their high sulfur coal trades at a $3.50 discount. The closing discount makes sense because more of the power stations have scrubbers.

Anyway here is the price series for Alliance Coal (by source) versus the mid-sulfur index.

What you see is remarkable. There was a period where ARLP sold coal under contract at prices quite a bit lower than spot.

However the price they receive is now rising and well above spot.

In particular ARLP is now obtaining about $8 of premium per ton for their coal over Illinois Mid Sulfur coal. Whilst Bloomberg no longer have a price series for Illinois Basin high sulfur coal my contacts (and comparison with Arch Coal) say that ARLP coal instead of trading at an $8 premium it should trade at a $3.50 discount.

That $11.50 makes a huge difference. Alliance produces about 30 million tons of high sulfur coal - so the difference equates to $345 million in pre-tax earnings or EBITDA. Income from operations in 2012 were $334 million - so the higher prices accounts for all of it.

This price comparison has quite strong backing. Here is the price disclosure from the last Arch Coal annual:

Arch sells Illinois Basin coal at $42.50 under contract. That is almost $14 below ARLPs latest blended received prices - however I think on a like-for-like basis [stripping out a some Appalachian coal] the difference is closer $11.

If prices were reset to market (that is $10-11.50 lower) then the ability of this MLP to make distributions goes away. Indeed it is hard to see how they pay their debts. Bankruptcy is the likely outcome. If the prices go towards the $42.33 that Arch Coal is contracted to (in 2014) for Illinois Basin coal then Alliance debt holders will wind up extremely short.

This is by far the main explanation I have found for the superlative financial performance of Alliance Resources. Alliance has just contracted at far higher coal prices than the opposition.

Without these high prices Alliance would look like another very stretched coal mine with mediocre operating performance - but with a lot of debt - and it will probably go bankrupt.

The stunning performance of Alliance is a little from under-reserving workers compensation but mainly because the management team have extracted contract prices massively better than the competition... this is a company where the successes have been by senior management and white collar employees (those who sell the coal) rather than the workers who mine it.

The chart itself suggests the explanation: the prices in the contract look like they are regularly escalating. They were way below market for a while and are now a fair bit above market. It looks like the company entered some escalating price contract when its bargaining power was very strong.

My first take: the contracts will adjust

This is what the last 10-K said about contract resets:

Virtually all of our long-term contracts are subject to price adjustment provisions, which permit an increase or decrease periodically in the contract price to reflect changes in specified price indices or items such as taxes, royalties or actual production costs. These provisions, however, may not assure that the contract price will reflect every change in production or other costs. Failure of the parties to agree on a price pursuant to an adjustment or a reopener provision can, in some instances, lead to early termination of a contract. Some of the long-term contracts also permit the contract to be reopened for renegotiation of terms and conditions other than pricing terms, and where a mutually acceptable agreement on terms and conditions cannot be concluded, either party may have the option to terminate the contract.

These are not reset to spot prices. These are reset in prices due to changes in operating costs and the like. Still resetting of the prices for this company to anything akin to market means likely bankruptcy - so the contract resetting terms are critical.

I figured that I have to look at more detail at the contract terms, price and volumes.

And what I found made left me with a few options - all ugly.

The mathematics of Alliance contract terms...

Unfortunately, you are going to have to bear with me through a little bit of arithmetic.

The 2009 form 10-K contains the following disclosure:

Coal Marketing and Sales

...[W]e have entered into long-term coal supply agreements with many of our customers. These arrangements are mutually beneficial to us and our customers in that they provide greater predictability of sales volumes and sales prices. In 2009, approximately 92.6% and 91.1% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2010 to 2016. Our total nominal commitment under significant long-term contracts for existing operations was approximately 138.7 million tons at December 31, 2009, and is expected to be delivered as follows: 29.2 million tons in 2010, 26.9 million tons in 2011, 20.4 million tons in 2012, and 62.2 million tons thereafter during the remaining terms of the relevant coal supply agreements. The total commitment of coal under contract is an approximate number because, in some instances, our contracts contain provisions that could cause the nominal total commitment to increase or decrease by as much as 20%. The contractual time commitments for customers to nominate future purchase volumes under these contracts are typically sufficient to allow us to balance our sales commitments with prospective production capacity. In addition, the nominal total commitment can otherwise change because of reopener provisions contained in certain of these long-term contracts.

The way to think about this: 25.0 million tons were sold in 2009 – 92.6 percent under long term contracts. That is 23.15 million tons were sold under contracts. The next years – as stated – are 29.2 million, 26.3 million and 20.4 million. After that we do not really know (we only know the totals) so I have assume 20 million tons per year – but marked this in the following table in yellow [to indicated that it is a guess].

We can complete the table for 2010. Here is the relevant disclosure:

In 2010, approximately 92.4% and 89.0% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2011 to 2016. As of January 28, 2011, our nominal commitment under long-term contracts was approximately 31.1 million tons in 2011, 27.3 million tons in 2012, 24.1 million tons in 2013 and 19.0 million tons in 2014.

Tons sold in 2010 were 30.3 million.

And the same for 2011 – here is the relevant disclosure

In 2011, approximately 92.2% and 90.5% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2012 to 2016. As of January 28, 2012, our nominal commitment under long-term contracts was approximately 33.8 million tons in 2012, 33.5 million tons in 2013, 27.2 million tons in 2014 and 19.8 million tons in 2015.

Tons sold in 2011 were 31.9 million.

And we for 2012:

In 2012, approximately 94.2% and 94.3% of our sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with committed term expirations ranging from 2013 to 2020. As of January 28, 2013, our nominal commitment under long-term contracts was approximately 38.5 million tons in 2013, 30.7 million tons in 2014, 23.4 million tons in 2015 and 18.7 million tons in 2016.

Tons sold in 2012 were 35.2 million.

This gives us a more complete table thus:

Just can also work out the size of the incremental contracts sold in each year. This is in the following table.

The table has one startling implication: the company has never quite delivered the contractual amounts under contract. For example in 2009 they had contracted for 29.2 million tons to be delivered in 2010 under contract and they only delivered 28.0 million tons under contract. Incremental contracted volumes are negative in every year - though contracted volumes are positive in the out-years.

Prices in each year:

We also have the price received for each year. This is disclosed in the relevant 10-Ks.

From 2009 form 10-K

We reported Net Income of ARLP of $192.2 million, an increase of 43.2% in 2009 compared to Net Income of ARLP of $134.2 million in 2008. The increase of $58.0 million was principally due to improved contract pricing resulting in an average coal sales price of $46.60 per ton sold, compared to $40.23 per ton sold in 2008, partially offset by lower sales volumes and higher operating expense per ton sold in 2009.

From the 2010 form 10-K

We reported record Net Income of ARLP of $321.0 million in 2010 compared to $192.2 million in 2009. This increase of $128.8 million was principally due to increased tons sold and improved contract pricing resulting in an average coal sales price of $51.21 per ton sold, as compared to $46.60 per ton sold in 2009.

From the 2011 form 10-K

We reported record Net Income of ARLP of $389.4 million in 2011 compared to $321.0 million in 2010. This increase of $68.4 million was principally due to increased tons sold and improved contract pricing resulting in an average coal sales price of $55.95 per ton sold, as compared to $51.21 per ton sold in 2010.

From the 2012 form 10-K

A higher average coal sales price in 2012, which increased to $56.28 per ton sold as compared to $55.95 per ton sold in 2011, resulted from improved contract pricing for Illinois Basin coal sales offset partially by lower coal volumes sold by our Mettiki mine into the metallurgical export markets.

Prices per year were thus $46.60, $51.21, $55.95 and $56.28.

These higher prices were achieved in an era of falling prices and when older and presumably higher priced contracts were not entirely delivered.

The bull case for ARLP (and for many other MLPs) is that the revenue is ensured by longer-term contracts. But these longer term contracts appear to be priced further and further out of the money - and incremental prices achieved appear to be way-out-of-the money.

Explanations

At this point I expected to be reverting to my (late) high school linear algebra but it does not work [this can only be solved if the prices per incremental ton contracted are implausibly high].

The company did not even deliver its contract and yet realized price per ton kept rising despite spot prices falling.

There are only three alternatives I can see:

(a). The contracts have very large escalation clauses – clauses that are by and large not disclosed

(b). The contracts are fixed price – and as market went down the utilities paid big termination fees (which are entered as part of realized price) and after which the company entered new contracts at lower prices. However the termination fees ensured the realized price went up each year. Explanation (b) would also explain why contracted volumes are consistently not delivered or

(c). The accounting disclosures are simply fiction.

I have been around US capital markets long enough to know that you can never quite dismiss the third explanation (that the accounting disclosures are just fiction). But that is still a big step.

Explanation (a) large escalation clauses - is consistent with the price chart above. Alliance sold at prices well below market in 2008 and sells well above market now. However (a) has a very big problem. This is that none of the 10-Ks tell us about a coal price escalation clause. And the management team are promotional and would normally tell us.

Explanation (b) thus looks more plausible... The prices received are an artifact of cancelling old contracts set at higher prices. That would also explain why the company has failed to deliver its contracted tonnage in every year studied. In that case the new tons must be at much lower prices.

We get some guidance in this matter from the accounts of the two largest customers - the Tennessee Valley Authority and LG&E (the large German owned utility). Both these companies suggest that they have derivative liabilities on coal contracts - that is they are contracted to buy coal at above market prices. However in both cases the derivative liabilities are falling fast (consistent with explanation b above).

The disclosure from the TVA is most germane:

At September 2012 The Tennessee Valley Authority had 46 million tons contracted and they were $267 million underwater on those tons. In other words their coal was $5.80 per ton overpriced.

By December they had 48 million tons contracted but were only $224 million underwater - or $4.67 a ton underwater.

At this rate by early 2014 The TVA will have rid itself of all out-of-the-money contracts. They may be doing it this fast by paying their way out. Whatever happens Alliance Resources (whose biggest customer is The TVA) will be receiving closer to market prices.

Future outcomes

If (a) is true then the contracts will wind up being reset. There is a huge contract that was there in 2009 (and still accounts for the bulk of contracted value). That contract does roll over fairly sharply now. When it rolls off prices will be much lower.

If (b) is true then the profitability of this company is going to crash because the forward contract prices are massively lower than realized historic prices. This decline will happen fairly fast in this case.

Under both scenarios (a) and (b) it is difficult to see how this partnership services its large debt. Any price close to what Arch Capital receives for its coal will result in fairly rapid bankruptcy. Debt-holders beware!

The third possibility (c) is probably the best one for shareholders. The third possibility is that this is a massive fraud. In that case it can keep going as long as the management keep lying. In the fraud possibility the stock might take a while to crash (as lies can be very long-lasting) - especially if they can - Ponzi like - continue to raise capital. They will keep paying dividends as long as lenders in particular are dopey enough to continue to lend to them.

This is one of those rare cases where I am a short seller and I am hoping the company is not a massive fraud. If its not a massive fraud I am going to get paid fairly quickly.

If it is a massive fraud I might be waiting some time. As a short seller I hope it is not a fraud - then I get a quick fairly guaranteed collapse.

John

Vodafone news of the day

2013-03-25T23:25:00.000+11:00

Reuters today have a piece out on the Vodafone-Verizon issue. To quote:

By Kate Holton, Chris Vellacott and Sinead Carew

(Reuters) - Almost five years after taking the helm at the world's second-largest mobile phone company, Vittorio Colao doesn't want to be the third Vodafone boss to be stumped by its seemingly intractable U.S. 'problem'.

The urbane Italian, who has streamlined a company built on the foundations of aggressive expansion, is exploring what to do with the one remaining asset he does not control - the stake in U.S. operator Verizon Wireless, which makes up about 75 percent of the firm's value.

On paper Colao has several options, each with pros and cons: sell all or part of the stake to majority owner Verizon Communications, maintain the status quo in the face of Verizon's desire for a deal, or sell Vodafone in its entirety to Verizon.

I desire problems like Vodafone's intractable "US problem".

The US problem is that they own - but do not control - an asset that has appreciated, appreciated some more and gone up a bit after that.

Most of Vodafone's shareholders would love to have that problem because Vodafone has fallen a bit, got a little depressed, then gone into a decline and - well - recovered somewhat in recent years because it got just too cheap. And it had distributions from its US operation to fund its dividend. If Vodafone did not have its US problem its stock price might resemble France Telecom by now...

But with an asking price for Vodafone's 45 percent stake in Verizon Wireless around $115 billion and a potential $20 billion tax bill on the capital gain, Vodafone investors worry that Verizon may not be willing to pay enough for a business it already controls.

No. What Vodafone investors are scared of is that Vodafone will sell its best asset grotesquely tax-inefficiently to buy inferior assets at prices two turns higher.

The inability to do that so far has been the US problem in a nutshell. The US problem is the only thing that has saved the shareholders here.

Verizon has one huge advantage in this deal. They are dealing with self-centered imbeciles rather than shareholder focused players. Later in the article they say:

Vodafone has lawyers from Linklaters, bankers from UBS and consultants from McKinsey looking at deal options and structure, and for ways to reduce the tax bill, according to three people familiar with the situation.

You bet they are. But as an American analyst points out:

It is not clear how a large proportion of any capital gains tax liability could be mitigated while allowing Vodafone to make a clean break from US. Even if a feasible solution could be found we disagree with the bull-case view that any point of tax law would be clear cut. In our view, Vodafone could face protracted debate with tax authorities, something we believe it wants to avoid.

But even this analyst is not correct. What our "urbane Italian" wants is to avoid isn't difficulties with the IRS. It is being shafted when he sells the business which belongs to shareholders (including my clients).

Personal concerns for employment for Vodafone's board and management - not tax - is the issue here.

In praise of unjust enrichment

The only deal that makes sense is to sell the whole of Vodafone to Verizon.

That is obvious.

The main people it does not make sense to are the Vodafone senior management.

So I will suggest a solution for Mr Colao.

The deal should be done with termination payments - huge ones - maybe a cumulative half a billion dollars.

So much so that the "urbane Italian" and his ilk have enough money to be pointlessly urbane for the rest of eternity.

Enough money so their heirs and successors can be dynastically "urbane" as well.

It will be unjust.

It will be a reward for a decade of failure.

But as a shareholder I would vote for it. These clowns are so bad it might be worth half a billion dollars to make them go away.

Still if Verizon want to save that half a billion dollars (and then some) they can force the issue. Go hostile. Go now. Go hard.

Go before Vodafail's startlingly inept management work out just how much the Square Mile really hates them.

John

Gonorrhoea, online dating and credit card phising scams – examining Cupid PLC

2013-03-23T00:02:00.000+11:00

This post has been removed an an apology can be found here.

I apologize to my readers for any inconvenience.

John