BREAKFAST DEALS: UBS blow

UBS takes a $US2 billion hit after an alleged rogue trader is found in its ranks and the Swiss banking giant now looks likely to report a loss for the third quarter of 2011. While the $US2 billion loss won't sink the UBS ship, the reputational blow could be far more damaging. Meanwhile, Myer keeps the faith even as retail conditions continue to soften and Asciano's boss John Mullen puts the demerger issue to rest.

UBS

Swiss investment banking giant UBS is facing the prospect of a severe reputational battering in the wake of news that an alleged rogue trader in its UK operations has lost close to $US2 billion. UBS sent European markets buzzing overnight after it revealed that unauthorised trading is now going to hit the bank's bottom line and could potentially force it to report a loss for the third quarter of 2011. Police later identified Kweku Adoboli, a 31-year old trader in UBS's London-based exchange traded funds business, as connected to the unauthorised trading. While UBS maintains that no client positions were affected, and it will leave no stone unturned to get to the bottom of the situation, the damage may already have been done. UBS is no stranger to controversy in recent times, given the massive losses suffered during the credit crisis and the tax scandal where bankers were caught assisting rich US clients to dodge taxes. This latest black eye – which incidentally comes three years to the day when Lehman Brothers crashed and burned and a year or so since Jerome Kerviel was sent to prison and fined €4.9 billion for his unauthorised trades that caused a $US6.5 billion hole in Societe Generale's balance sheet – will raise doubts as to whether UBS learnt anything from the Kerviel experience and whether it's time to implement even harsher regulations to protect old-fashioned retail banking from the vagaries of so-called 'casino' banking. What will further reinforce the regulatory stance will be the apparent ease with which a trader can dodge internal risk protocols which presumably have been reinforced since Kerviel's actions in Credit Suisse. The $US2 billion hit isn't going to sink UBS's ship, not by a long shot, but analysts reckon the scandal could give the bank's detractors at home the ammunition they need to renew their calls for the group to split off or sell its investment bank and focus exclusively on its wealth management arm. A quick round-up of analysts' reactions on The Wall Street Journal highlights some of the aforementioned fears and, from a Australian point of view, the bank's 1200 local staff would understandably be worried about their business. However, as mentioned earlier, UBS is more than capable of absorbing the loss. We will have to wait and see if it's just as capable of fending off questions about whether it should have been more vigilant and prevented the trading in the first place. We will also have to wait and see whether the allegations against Adoboli are proved, but if he is found guilty the 31-year-old will take the third position in the rogues' gallery of traders who went too far. The first spot is sealed by Kerviel, while the silver medal – or should that be the copper medal? – goes to Sumitomo's copper trader Yasuo Hamanaka, who in the 1990s tried to corner the global market for copper and ended up costing the Japanese giant $US2.6 billion. It's early days but Adoboli could potentially displace the infamous Nick Leeson, the man who brought Britain's oldest merchant bank, Barings, to its knees with his $US1.3 billion worth of failed punts on the derivatives markets. Meanwhile, in other local news related to UBS, the local head of capital markets and joint head of equities at UBS, Robbie Vanderzeil, is taking a well-earned break and will be returning to the fray next January.

Myer

Given the doom and gloom pervading the local retail sector, Myer's net profit for the full year to July 30 wasn't that far off the mark and the forecast 10 per cent slump in FY12 profits is also in line with what the department store retailer had flagged earlier in the year. The thing for Myer is that cost management and discounting is only going to work so far and unless consumer confidence picks up the numbers are going to turn sour. So the key for Myer boss Bernie Brookes is to stem the decline in sales and Brookes, to his credit, is taking action. One of these measures has been to purchase designer brands like Sass & Bide and make them exclusive house brands and there could be more such acquisitions in the pipeline, with Witchery and Mimco seen as potential candidates. The other is to revamp the Myer One loyalty program, which has a healthy following, and leveraging that advantage to maximise its online push. Brookes has flagged that Myer is going to spend around $9 million on a new website, which is scheduled for launch in November. So, there is plenty going on behind the scenes at Myer, which would explain Brookes' bullish tone, despite the headwinds in the sector.

Asciano

Another company with a bullish tone yesterday was Asciano, which told its investors that the company was in a solid position and ready to boost its pre-tax earnings by 15 to 20 per cent within the next three years, and meet its cost of capital by 2015. The tone was appreciated by the port and rail operator's shareholders, who sent shares soaring around six per cent and, while the company's relatively-new boss John Mullen has so far been on the defensive as he fended off questions on the demerger and why it wasn't pursued, he finally had a chance to spread some positive vibes. Speaking to Business Spectator in a KGB interview, Mullen made it quite clear that the issue of the demerger is now well and truly on the backburner and, while some major investors had clamoured long and hard for a split of Asciano's coal and rail units, the majority were happy as long as they saw value in the share price. Mullen also said that Asciano might have the right mix when it comes to building that value, with plans to put money into integrating port terminal and rail infrastructure to provide local miners with a "Pilbara-type model” of end-to-end logistics service with greater efficiency.

BHP Billiton, Rio Tinto, Blackthorne Resources, Anvil Mining

Moving to the resources sector, union shenanigans at BHP Billiton Mitsubishi Alliance's coal operations in Queensland have reportedly enraged the mining giant, with threats of legal action now bandied about. According to the Australian Financial Review, the miner has threatened action against the unions over advertisements and an internet video claiming that miners would be forced to work on Christmas Day under the terms of an industrial agreement proposed by BHP. BMA has categorically rejected the union's allegations. Meanwhile, Rio Tinto will spend $US833 million on power and fuel infrastructure as part of its five-year program to increase iron ore production in the Pilbara. The program, started last year, aims to increase the mining giant's production capacity in the region by 50 per cent to 333 million tonnes per annum by the first half of 2015. The heavyweight miner has also priced $US500 million of five-year, $US1.15 billion of 10-year and $US350 million of 30-year SEC-registered debt securities. The five-year notes pay a coupon of 2.25 per cent and will mature on 20 September 2016. The 10-year notes pay a coupon of 3.75 per cent and will mature on 20 September 2021. Barclays Capital, BNP Paribas Securities, Morgan Stanley, Citigroup Global Markets, HSBC Securities and SG Americas Securities acted as joint bookrunners. In other news, Blackthorn Resources managing director Scott Lowe has told the AFR that his company is not in takeover talks with its largest shareholder and partner in the Perkoa zinc project, Glencore International. Elsewhere, TSX- and ASX-listed copper producer Anvil Mining has hosed down rumours that it is in exclusive takeover talks with a Chinese party. The miner confirmed that it was in the middle of a strategic review and has the support of its major shareholder, Trafigura Beheer, to consider all options to maximise value. Anvil operates in the Democratic Republic of Congo.

Foster's Group

Moving to some news on Foster's, with The Australian reporting that the takeover target has launched an aggressive campaign to keep its market share stable. According to the paper, Foster's CEO John Pollaers has promised major customers, Coles and Woolworths, millions of dollars in incentive payments if they agree to measures related to the amount of floor and fridge space devoted to Foster's products and its share of the retail promotional calendar. There is no hint of discount pricing but, as the paper points out, the brewer's keen to avoid suitor SABMiller casting any aspersions on its market share as its gets ready to lob its bidder statement.

Wrapping up

Supermarket chain Franklins' South African owner, Pick'n'Pay, has pretty much laid it all out on the table, reportedly telling the Federal Court yesterday that Franklins is facing a bleak future unless the issue of Metcash's $215 million bid for the chain, opposed by the ACCC, is resolved as quickly as possible. Meanwhile, The Australian reports that wheels might be in motion with regards to the sale of Brisbane's RiverCity Motorway, which collapsed under $1.3 billion of debt about six months ago. According to the paper, RiverCity's receivers KordaMentha have put out requests for proposals for the asset, with Goldman Sachs the front runner to advise on any sale of the asset. In other news, Macquarie Airports (MAp) has received approval from the European Commission under the EU Merger Regulation for its asset swap agreement with Ontario Teachers' Pension Plan Board. Under the terms of the deal, MAp is acquiring OTPP's 11.02 per cent direct and indirect interest in Sydney Airport, while OTPP is taking MAp's interests in Brussels Airport and Copenhagen Airports. Completion of the agreement remains on track to occur in the fourth quarter of 2011. Finally, China's Cofco, the owner of Tully Sugar, has not given up hope of nabbing Proserpine Sugar from the clutches of Sucrogen. The Chinese suitor has launched a revised $120 million bid for Proserpine which reportedly includes promises of financial support for the mill to refinance any debt.