tuvalahiti listening station

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

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:

	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

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

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.

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.

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

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.

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

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.

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 

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

I apologize to my readers for any inconvenience.



John

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

I apologize to my readers for any inconvenience.



John

(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 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.

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

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

I apologize to my readers for any inconvenience.



John

My last post on Alliance Resources explored the differences between Alliance Resources (the best performing coal operation in North America) with Patriot Coal (famously and massively bankrupt).

Patriot produced only slightly less coal per worker (a key measure of cost-competitiveness) and it was higher quality coal.

Patriot had less debt.

They were about the same size - but alas - Patriot was bankrupt and so difficult to run they were closing mines in bankruptcy.

The differences lay in the balance sheet where Patriot had large post retirement benefit obligations and Alliance does not - and Patriot had large workers compensation obligations and Alliance does not.

The first one I understood. Patriot was heavily unionized. Alliance was not.

However the second one I did not understand. These were multi-mine operations in similar jurisdictions with similar numbers of employees. They both self-insure workers compensation. Unless one operation is massively safer than the other they should have similar workers compensation obligations.

I was puzzled.

So I went looking.

Here is the flows into and out of the workers compensation provision for the last full (non-bankrupt) year at the last 10-K for Patriot Coal...


Patriot Coal had $8.889 million in payments and an estimated total obligation of $185.6 million. The estimate of total obligation is 20.9 times current payments.

This compares with the last 10-K disclosure for Alliance Resources:

	2012	2011
Beginning balance	$73,201.00	$67,687.00
Accruals	$24,812.00	$22,254.00
Payments	($10,477.00)	($11,235.00)
Interest accretion	$2,739.00	$3,174.00
Valuation gain	($13,229.00)	($8,679.00)
Ending balance	$77,046.00	$73,201.00

Payments were $10.48 million - a little higher than Patriot. However reserves were only 77.0 million. The estimate of total obligations is only 7.35 times.

Alliance Resources is - relatively to Patriot - extremely under-reserved for workers compensation.

If we were to reserve Alliance Resources on the same basis as Patriot we would have to add $141 million to reserves.

This difference has accumulated over time. If Alliance had used Patriots conservative reserving pre-tax earnings (and hence EBITDA) would be cumulatively $141 million lower than were actually recorded. This is clearly part of the reason why Alliance appears so profitable relative to the competition.

More importantly because Alliance is an MLP which distributes roughly its EBITDA, if a more conservative reserving had been used Alliance's distributions would cumulatively been about $140 million lower.

I wonder how the workers expecting to be paid compensation feel about having the money backing their compensation distributed to MLP unit holders?

In my crystal ball I see a class action.





John



Post script:

Dear Class Action lawyers - there is this little disclosure in the 10-K which might make any future class action more - well - rewarding. I will leave it to the unit holders, their lawyers and the general partner to interpret this:

Your liability as a limited partner may not be limited, and our unitholders may have to repay distributions or make additional contributions to us under certain circumstances. 

As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if you participate in the "control" of our business. Our general partners generally have unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partners. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions. 

Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Delaware law, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

Perhaps the easiest financial product to sell is one that offers safety plus a high yield. Of course the product may only offer the illusion of safety plus a high yield (safety plus a high yield being rather hard to obtain). But that won't stop it selling well. Often very well.

Bernie Madoff - apart from being a degenerate wart was the best salesman of hedge funds in the history of the business. No legitimate hedge fund has ever raised $10 billion let alone $50 billion without a huge sales force. Madoff managed that. The cumulative money raised by authentic financial geniuses (Buffett or even Loeb, Einhorn et al) is a small fraction of what Bernie raised. I can assure you as someone running a completely legitimate operation we have raised less in three years than Bernie raised on many days.

In money management what sells is the illusion of certainty... a fund manager who tells the truth (the truth being that he may be wrong at any time) is a more-difficult sale but a better investment.

High yields plus the illusion of certainty make my ears prick up. And it is common enough. In Australia there were two large businesses that sold unit trusts of some description to the public which housed "safe" assets like tollways and airports. These "safe" assets were levered to the point that they were not very safe any more but the leverage and - to some extent distributions paid out of capital - gave them yield.

The managers of these trusts were Macquarie Bank and Babcock and Brown.

In some instances the story was simple. Assets were revalued, borrowings were made against those revaluations and distributions were paid.

Macquarie Bank is still with us - partly saved by the Government guarantee of bank funding and partly saved by having some real and profitable businesses. Macquarie is - like many investment banks - a shadow of its former self. But it is still a real and powerful operation.

Babcock and Brown has gone to meet its maker though a surprising number of ex-B&B staffers are very wealthy.

The investors in the unit trusts mostly did not fare so well. Still some trusts survived - and ex-ante it was hard to tell the Ponzis from the merely over-levered from the well managed. Even ex-post it is hard to tell Ponzis from over-levered - and nobody has been charged with anything criminal anyway.

Often compared to Macquarie and Babcock was the Canadian operation of wheeler-dealers known as Brookfield Asset Management. Unlike Macquarie and Babcock Brookfield is still with us - and largely unimpaired. Its unit holders are not yet angry let-alone resigned to their losses. [Babcock structure unit holders are well past the "resigned" state now...]

But the formula seems remarkably similar (and similar to some MLPs). The formula - find an asset that is fairly stable - not riskless but low risk - and sell a structure based on that asset to mostly a pensioner-needing income investor set. The yield is made possible by either leveraging the asset with debt or endless capital raises.

In all the nasty cases (and in some less nasty cases) the wheeler-dealers did considerably better the holders of the investment vehicles. Pay was not commensurate with long term performance.

Anyway I spent a lot of time (often wasted) picking apart Macquarie structures before the bust. I should have been picking apart Babcock structures because Babcock performed far worse than Macqaurie.

I never got around to picking apart Brookfield because it was so darn complicated. Just breathtakingly complex.

But that doesn't mean it is not worth the effort. If you want to understand what it was like to try and understand Babcock or Macquarie before the denouement you can.

And you do not have to make much of an effort. Roddy Boyd (bless his hard-working soul) has done much of the work for you. And put it online.

Go read it.

The investment required is not large. But reading Roddy is low risk. And this time I can promise you a high yield.





John

Alliance Resources (a minor obsession of mine) is financially the best performed coal company in America. The stock is near all time records - and distributions are large and unimpaired.

Patriot Coal is in a spectacular bankruptcy.

I thought it reasonable to compare the best of the best with the worst of the worst - just to see how different they really were - perhaps so I could pin down what made Alliance Resources special.

Here the companies are compared by tons, employees and tons per employee.

	Patriot Coal			Alliance Resources
	tons (millions)	Employees	tons/ employees	tons (millions)	Employees	tons/ employees
2007	22.1	2300	9609	24.3	2600	9346
2008	28.5	4300	6628	26.4	2955	8934
2009	32.8	3500	9371	25.8	3090	8350
2010	30.9	3700	8351	28.9	3558	8123
2011	31.1	4300	7233	30.8	3832	8038
2012	24.9	4100	6073	35.2	4345	8101
2007-11	145.4	18100	8033	136.2	16035	8494
2007-12	170.3	22200	7671	171.4	20380	8410

Alliance is better - it is smoother for instance - which means less hiring and firing. And it does not have the crash in productivity at the end - but that crash happened after the bankruptcy.

But it is not massively different.

It probably makes sense to use the balance sheet data from 2011 (before multiple restatements) rather than 2012 to examine Patriot because that was before the bankruptcy mucked everything up. In those days Patriot was still humming along (admittedly in some distress).

Patriot had considerably less machinery but more "buildings and improvements" than Alliance. That figures - some of Patriot's operations were open-cut whereas Alliance is entirely an underground miner. Open-cut mining involves lots of "improvements" (although some would argue removing hills does not constituted improvement.)

Patriot produced far better coal. Some of their coal was metallurgical - and most was lower sulfur. This coal should get a massive premium price - so that is one in favor of Patriot.

Patriot had in 2011 way less debt than Alliance has now. This is kind of amazing - you can go spectacularly bankrupt with an operation this size and this level of productivity.

The main difference is in the size of other balance sheet liabilities. Patriot had $238 million in workers compensation obligations (2011) versus Alliance having only $68 million (2012). Even more pronounced is the post-retirement obligations where Patriot had $1387 million (2011) versus Alliance at  a mere $31 million. Alliance might say that this was the benefit of a non-unionized workforce but if that is the case then union concessions would be enough to revive Patriot (and that does not look likely).

There is quite a deal that is strange and unusual about this story.



John

The Wall Street Journal is again suggesting that Verizon may buy Verizon Wireless from Vodafone. As noted in the previous post this is insane. It incurs a completely unnecessary twenty billion dollar tax bill.

The only deal that makes sense is for Verizon to buy Vodafone in its entirety.

If Vodafone will not sell there is a solution for Verizon: go hostile.

Background

As detailed in the previous post Vodafone has been had a decade of modest successes and abject failures made good by a single amazing success. The amazing success is that they owned 45 percent of Verizon Wireless - the best performed US Wireless company.

I noted that Vodafone's great success is the only substantial asset that they do not manage.

Several UK fund managers (reasonably) pointed out that this was not entirely fair. The history is instructive. During the tech-bubble Vodafone got properly carried away. Not only did they pay up for spectrum (which may not have been a choice given WorldCom competing at auctions) but they paid top-dollar for several assets entirely by choice. The biggest mistake was that they purchased Mannesmann at the height of the bubble for $170 billion USD. This deal is second only to AOL-Time Warner as the most stupid large deal of the tech-bubble era.

Over the next couple of years the delusional bubble-era management were replaced by bland mediocrities who did not do very much wrong at the cost of not doing very much right. Vodafone had completely "rogered" its balance sheet during the bubble and as a result did not participate in the cheap spectrum auctions around the world that happened during the 2002-2007 period. Getting carried away in a bubble has permanent effects (just ask Citigroup or BofA if you need more recent examples).

My UK fund-manager contacts thought that I was being harsh on Vodafone criticizing current management for their complete lack of spark. They thought the current management were chosen to be boring and fulfilled that task admirably.

By contrast, the Baby Bells did not participate much in the madness of the tech bubble - leaving that to the CLECs (anyone remember McLeod) and Worldcom and Enron Broadband, Global Crossing and the like. The Baby Bells were boring.

As befits the end of a bubble - the meek were left standing and inherited much of the USA. The Baby Bells consolidated to form Verizon and AT&T and have solid balance sheets, good businesses and the absence of insane competition.

Their cycle was the opposite of Vodafone. They were boring when Vodafone was exciting and they are now strong when Vodafone is weak.

In any deal Verizon deals from that strength - strength created more than a decade ago.

Hostile bids

Sir Brian Pitman once told me that the only real bids are hostile bids. He had a sort of logic: in a negotiated bid it is highly unlikely the acquirer is getting an outright bargain. Negotiated bids happen with a willing seller.

Hostile bids however change the world. The stock market is full of incorrectly valued securities. It is fairly common for stocks to lose 70 percent of their value or triple. As a corollary the stock market is full of securities trading at a third of fair value and three times fair value.

If we could pick which were which we would all be rich. Alas it is very hard to pick what is cheap and what is expensive - and the investing world is full of "if-only" statements. [If only I had purchased Citigroup below a dollar...]

Hostile bids are typically done without due diligence - and the range of outcomes is large. In a hostile bid you might pick up an asset for a third of fair value or three times fair value. These extreme outcomes don't happen so much in negotiated bids.

The result: hostile bids change the world. Extreme variation makes hostile bids either extremely good or extremely bad.

This bid does not require much due diligence

Hostile bids can be extremely good or extremely bad because you can't do due diligence.

However in this case if Verizon were to bid for Vodafone Verizon would know what they are getting. The WSJ story linked above suggests that the Verizon Wireless stake is worth between $106 and $137 billion. I have a slightly higher number.

The total market cap of Vodafone is $137 billion.

Vodafone is trading below what I think the stake in Verizon Wireless is worth.

Verizon can bid fair value for what the Wireless stake is worth and get the rest for free - and it is obviously worth more than nothing. Even the Australian asset has some value!

And Verizon obviously do not need to do due diligence on Verizon Wireless.

In other words Verizon can have all the pluses and very few of the negatives of a hostile bid.

A hostile bid is possible of course because the UK fund managers have little faith in the mediocrities that now run Vodafone. Vodafone is cheap because of management.

I know if there is an American bid for this UK champion there would be all sorts of nationalistic squeals in the UK. But the UK fund management community would donkey-like eventually just accept the bid. For Vodafone that is the cost of a decade of failures.

And the meek (the Baby Bells) would in fact inherit the earth.




John

The blogosphere is full of people who are livid at the end of Google Reader. I am angry too - and would move many of my Google services if there were better alternatives. [I no longer feel secure in the Google promise to continue providing services that are critical to my life...]

Google has not budged. Reader - by far the best RSS feed for people who get their information by reading - is going dark.

Nobody I know however has indicated what this says about Google. So I am going to try.

(a). Reader is a service that not many people use - except that it seems inordinately popular with a bunch of thought-leaders including many of the most widely read bloggers. It amazes me that Google can't take a service that popular with thought leaders and turn it into a mass-market product. This is a management failure - Google is clearly not immune to them.

(b). The mass-market RSS alternative is Twitter. However among the more wordy-and-literate-and-older RSS is still important. My readers are older, better read, and better educated than the average internet user and I have about four times as many RSS followers as I do Twitter followers. Still as a blogger I needed to face the new reality and get a Twitter feed. In abandoning RSS Google is showing the sort of petulance that a mega-company has when it missed a mass-market trend. It seems pretty obvious now that Google is going to want to buy Twitter.

(c). Google is in the process of abandoning its mission. Google's stated mission is to organize all the world's information and make it universally accessible and useful. RSS is a way that a small number of us organize our information. Google no longer cares. It seems what they care about is mass-markets - see the Twitter comments above.

(d). Twenty percent time is dead at Google. Reader was a great product produced by twenty percent time but it was never shown any love - and no serious attempt has ever been made to monetize it. Even if you manage between 8PM on Saturday and 10AM on Sunday (your twenty percent time) to develop a modestly successful product Larry Page will not care. If you want to be entrepreneurial work elsewhere.

(e). Obvious steps to use the RSS feed to extend or expand other Google products have not been made. The idea of shifting your RSS feed into your Google+ account was seemingly not tried. Rather than abandoning Reader Google could have directed all the thought-leader eyeballs to Google+ - and offered more product. I guess Google has also given up trying to make Plus a serious alternative to Facebook. If it is not a mass-market Google is not interested in it.

(f). Google's slogan is "Don't be evil". But the only agenda now is to go after mass markets and make lots of money. Larry Page's self-image is benevolent dictator but really this guy is demoniacally going after big prizes. Larry Page is as evil as Larry Page perceives necessary.

(g). This obsession is going to lead competitors to openings. Yahoo for instance could immediately get all those thought leaders by offering a clone of Google Reader and offering a seamless transition. Feedly might get there (but Yahoo! will then buy them). Ignoring people around the fringes of your market is dangerous.

Bronte owns Google stock and has done so for some time. The new - and evil - Larry Page is going to make lots and lots of money. Short term the stock will probably continue to go up. Long term I am not so sure. Google is annoying its more entrepreneurial staff by killing any pretense of twenty-percent time. Further, Google is leaving openings for competitors. Finally Google has snubbed people around the fringes of their market and deeply pissed off users are clearly negative for Google. Google relies critically on the trust of their users.

I - along with many others - feel betrayed.




John

In the last post of my Alliance series I demonstrated on key operating metrics that Alliance Resource Partners was not just a bad coal mining operation - it was a flat-out terrible operation.

It had raised its capital intensity 350 percent, substantially reduced the grade of the coal it exported and reduced labor productivity over 20 percent. And it had become more bureaucratic at the same time.

Moreover the maintenance capital expenditure per ton produced has risen from 43c to over $8. These seem to be fairly brittle machines - put a ton of coal through the chute and you have induced $8 of repair obligations on the kit. Like wow - imagine all the people running around repairing stuff.

This is - to put it mildly - surprising. It is surprising because Alliance Resource Partners is the highest valued coal mining operation in America with the best performing stock. There is at this company a very large disconnect between operational performance and financial performance.

To be fair though - rising capital intensity is a problem across the industry (it is just more intense at Alliance). Peabody is the biggest coal mining company - and a good comparable.

In 2000 Peabody had $5.2 billion of property, plant, equipment and mine development with which they produced roughly 190 million tons. That was roughly $27 of PP&E per ton. (Many of Peabody's tons are lower-quality Powder River Basin tons.)

By 2000 Peabody had 15.4 billion in gross PP&E was 225 million tons. The capital required per ton was now $68.4. The capital intensity had gone up 2.5 times. Clearly this is an industry trend - albeit a worse trend at Alliance than at Peabody.

Employee numbers had moved from 7200 to 8200. Tons per employee thus moved from 26,400 to 27,400 - a slight improvement in labor productivity.

Peabody does not separately identify maintenance capital expenditure - but suffice to note that Peabody's total capital expenditures per ton are well below Alliance's maintenance capital expenditures per ton. Peabody's equipment is clearly less fragile...

The same trends are everywhere I look. The industry has substantial increases in capital intensity - but not as intense as Alliance Resources, but marginal improvements in labor productivity. It is on the labor productivity metric that Alliance stands out most intensely. Alliance has declining labor productivity.

However just how startling Alliance is is better demonstrated when you look only at the plant and equipment part of property plant and equipment.

You see, most of the PP&E at Peabody is land and coal interests - just the right to mine. This is the breakup:

Peabody - $million - 2012
Property, plant, equipment and mine development
Land and coal interests	10947.7
Buildings and improvements	1321.3
Machinery and equipment	3162.2
Less: accumulated depreciation, depletion and amortization	-3629.5
Property, plant, equipment and mine development, net	11801.7

Peabody is only using roughly $4.5 billion gross in buildings, improvements machinery and equipment. And it produces 225 million tons annually.

Alliance Resource partners $million
Mining equipment and processing facilities	1435
Land and mineral rights	304
Buildings, office equipment and improvements	208
Construction in progress	130
Mine development costs	285
Property, plant and equipment, at cost	2362
Less accumulated depreciation, depletion and amortization	−832
Total property, plant and equipment, net	1530

Alliance it seems uses over $1.6 billion (gross) in mining improvements, processing facilities and building improvements to produce about 35 million tons of coal annually.

To put it mildly - Alliance Energy uses a lot of machines both relative to competition and relative to its size and relative to its history.

This thing keeps installing machines and its labor productivity keeps falling.

Very strange. Doubly strange because the profitability measures at Alliance are so outstanding.





John

I read with a sort of resigned alarm that Vodafone is considering selling its stake in Verizon Wireless. This is absurd - and if it happens it will mark an important part of the British business establishment (and the entire Vodafone board) as both venal and incompetent. Vodafone is our third biggest position at Bronte: this matters to us.

Background

Vodafone has - for the last decade or so - been a collection of modest success and abject failures - made good by one spectacular success. The spectacular success is that they own 45 percent of Verizon Wireless - the best performed wireless carrier in the US.

The failures range from grotesquely overpaying for spectrum in the tech bubble (and hence crippling the balance sheet for a decade) to incompetently stuffing up the most America-like (hence desirable) market out there (my home market of Australia).

The Australian melt-down of Vodafail has been well documented on this blog - but 18 months after the video below - and 18 months after they declared the problem fixed - Vodafone is still the butt of television jokes in Australia:





Vodafone has had some modest successes - eg Turkey - but even their home market has been so unprofitable that Vodafail has been questioned for paying no domestic corporate tax. Of course they should not pay tax if they are not required to do so - but as a shareholder I would prefer them be highly profitable and with big tax bills.

India - which should have been OK - has also been difficult for tax reasons - caused it seems in part by inept management.

There has however been one success - a marvelous success. They own - but do not control Verizon Wireless. It has been a good - no a fantastic asset - and their stake is now worth more than the entirety of Vodafone.

Pointedly this one great success is the one asset they do not manage.

This record has a consequence. Almost all long-term shareholders of Vodafone are not showing substantial gains - and selling their stake would result in only a modest capital gains tax bill - if any bill at all.

However because Verizon Wireless has been so successful selling Verizon Wireless would result in a massive tax bill.

This makes it far more tax efficient for Verizon to buy Vodafone in its entirety than to buy Verizon Wireless. Tens of billions of dollars more efficient.

Any deal where Vodafone sells its Verizon Wireless stake rather than selling itself starts with a tens-of-billions of dollars disadvantage in post-tax shareholder value. It would be insane.

The only justification for such a deal is that shareholders trust Vodafone management to be tens of billions of dollars better with the shareholder money than the shareholders would be themselves.

And sorry - Vodafone management has not earned and does not deserve that sort of trust.

Bluntly, if Vodafone management pursue any deal to resolve the Verizon Wireless issue then the entire Vodafone board should be sacked for venal and costly incompetence.

The best outcome would be the sale of the whole of Vodafone at a good price. (I would be happy with a combination of cash and Verizon stock.) The next best outcome is no deal at all. At least the good asset is well managed by Verizon.

But with the demonstrated record of failure of Vodafone over the past decade Vodafone has surrendered its right to make a deal - any deal - which leaves management to squander the proceeds from the best asset they have - the only asset they did not manage.




John

This is the second post in my Alliance Resources series. The first post is here. 

When I get researching a company I have been known to read very old filings just to see how business has changed over time. In a case like Alliance Resource Partners this is critical. ARLP is by-far the best performed coal mining company in America and it has had the same management team since the late 1990s. The changes since that time have all be wrought by management and circumstance.

This company's record is so extraordinary that it is worth understanding it in a very long term manner.

So I started with the oldest Alliance Resources 10-K in the SEC database.

Alliance Resources (ARLP:NASDAQ) is a listed master limited partnership (MLP) in the coal mining space. The General Partner (AHGP) is also listed. The GP is also structured as an MLP.

Alliance mines roughly 35 million tonnes of coal annually which makes it a big mining operation but only about a seventh of the size of the American giants (Peabody, Arch Coal) and those are small compared to BHP which has over 13 billion dollars in coal revenue.

Alliance is unique among large coal companies in that the stock price and profitability is at an all time high.

Everyone else is suffering - or at least guiding to some sufferance.

This is the first of a series of notes to try and work out why. You can color me skeptical up front. The performance of Alliance is - relative to the competition - flat-out extraordinary. And that gets my spidey-sense on full alert.

Background to Alliance's operations and the current state of the coal industry

Alliance mines are mostly high sulfur and underground - some in the (very) high cost Appalachia but most in the lower cost Illinois Basin.

It is also no secret that the coal mining industry in America is stretched. Very stretched. There are a bunch of reasons - but for thermal coal the main one is that coal fired power stations are closing - driven by two main factors:

• 1. Very low natural gas prices are making gas-generated electricity very cheap - cheaper than coal generated electricity in many cases and

• 2. High environmental costs (especially mercury amelioration) causing plants to close.

These are related problems. It might be worth retrofitting old boilers with scrubbers for mercury if the electricity price were high. But because of cheap gas there is no prospect of that.

And there are plenty of signs of the stress. I am going to quote the last conference call of CSX - the railway company that hauls lots of coal - because it is Alliance's main carrier:

Finally domestic coal declined 21% although the rate of decline moderated somewhat from what we saw earlier in the year. Now let’s take a closer look at some of the individual markets in more detail and let’s start with coal. Coal revenue declined 18% to $747 million. Domestic volume declined 21% as natural gas prices remain low leading to the continued displacement of coal and high stockpiles at many utilities. In addition, electrical generation declined in the Eastern United States. Export coal volume declined 10% as demand for metallurgical coal softened particularly in the Asian markets. Total revenue per unit was flat as core pricing gains in domestic markets offset lower export rates. Looking ahead at this point export coal volume is expected to decline in the first quarter and our best estimate of full year volume is about 40 million tons. 

Furthermore we anticipate our rates to be pressured as we work with producers to keep U.S. coal competitive globally in an environment where underlying commodity process for thermal and metallurgical coal are low. At the same time domestic coal headwinds will persist but we expect them to continue to moderate throughout 2013. As a result we anticipate domestic volume will decline in the 5% to 10% range for the full year.

It is however fair that in this misery Illinois Basin coal has done relatively well. Whilst Powder River Basin (PRB) coal is still cheaper Central Appalachian Coal is flatly noncompetitive. Quoting from the question and answer session in the same conference call:

David Vernon - Sanford Bernstein 

Okay. And just as a quick follow-up with the length of haul increase on the domestic, is that a change in type of coal is it the Illinois Basin coming in perhaps going into a plant that used to be taking PRB or is it just the ebbs and flows across the network? 

Michael Ward - Chairman, President and Chief Executive Officer of CSX 

Some of it is Illinois Basin coal, but it’s not going into plants that took PRB, it was going into plants that took Central App. And the rest of it has just been the ordering patterns of the utilities fulfilling their coal contracts.

This appraisal of Illinois Basin coal displacing Appalachia coal is widely reported. The Energy Information Administration has reported the same thing - with rising volumes for Illinois basin coal but falling prices. They have reported falling prices and volumes for Appalachian coal.

Alliance has bucked these trends. It has produced rising volumes in both the Illinois Basin and the Northern Appalachia (with falling volumes in the Central Appalachia due to regulatory issues). And - contrary to all industry trends - they are reporting rising prices in the Illinois Basin. Specifically in the recently filed 10-K the price achieved in the Illinois Basin rose from $50.45 per ton in 2011 to $52.51 per ton in 2012. Not only are these prices not following industry trends but they are several dollars per ton higher than prices reported on Bloomberg for Illinois Basin coal of similar grades.

Coal mining is not a complicated business - and unless you have a substantially better resource than anyone else it is difficult to make these sort of numbers. Moreover whist one mine may be extraordinary  Alliance operates eleven mines. It is unlikely they are all extraordinary.

So it must be something done by the management. Something truly extraordinary done by the management. The main point of this series of blog posts is to work out precisely what.




John

PS. As readers know I am a short seller. Whenever I see something like this I am skeptical. In this case you can assume I am short.