More bad news for newsagents. The high profile collapse of payments processor, Bill Express, is causing significant hardship on thousands of newsagents across Australia. The collapse has meant that many news agencies have been unable to process bill payments, electronic mobile phone recharge pins, as well as Bill Express-owned Bopo pre-paid credit cards.

The Australian Newsagents Federation (the ANF) has had a fair bit to say about the collapse. On Thursday, the ABC reported that the Bill Express collapse could “send newsagents to the wall”, with ANF boss, Don McAskill, claiming that “there is no doubt that this is going to have serious ramifications on newsagents’ business” and that “newsagents have no choice but to continue paying around $500 a month for computer software made redundant by the demise of Bill Express”.

The irony of McAskill’s impassioned pleas were not lost on Mark Fletcher, newsagent and creator of the Australian Newsagency Blog. As Fletcher noted, “in the 2003 Bill Express/Dialtime agreement, the ANF agreed to promote the Bill Express, Dialtime and eftpos offers ‘to the exclusion of all other electronic pre-paid and eftpos offers’.” Fletcher also noted that the ANF had “pocketed more than $1 million from Bill Express”, with ANF staff “actively [promoting] Bill Express.” — Adam Schwab

No fun and games here. Things at toy-seller Funtastic are becoming less fun by the day. Seven weeks ago, the company announced that private equity firm, Archer Capital, was completing due diligence pursuant to a purchase of the business for 80 cents per share. At the time, Archer acquired an 18.8% interest in Funtastic from ABC Learning Centres (for 50 cents per share). After seven weeks of due diligence, the parties have been unable to reach an agreement, with Funtastic extending Archer’s exclusivity period. The market doesn’t appear to be too confident that the deal will proceed — Funtastic shares are trading at only 50 cents, a whopping 37 percent discount to the indicative offer price,

In trying to explain the delay, Funtastic boss, Tony Oates, claimed that “we do DVDs, we do toys, we do apparel, we do nursery to confectionary, we have offices in Shanghai, Hong Kong and US.” In Oates’ defense, he had to say something. However, you have to wonder exactly how complex making and distributing a toy could possibly be. As a comparison, JP Morgan undertook the multi-billion dollar acquisition of Bear Sterns (which also had billions worth of complex derivatives position) in the space of a weekend. In 2003, Warren Buffett purchased McLane, a company with sales of US$23 billion, from Wal-Mart. Buffett noted: “I had a single meeting of about two hours with Tom Schoewe, Wal-Mart’s CFO, and we then shook hands … Twenty-nine days later Wal-Mart had its money. We did no ‘due diligence’. We knew everything would be exactly as Wal-Mart said it would be – and it was…”

Perhaps there is more to buying and selling a DVD in three countries than we realize. — Adam Schwab

The US: where dismal failure is no barrier to advising a potential president. Guy Rundle referred last Friday to comments made by John McCain’s economic adviser, Phil Gramm, who claimed that the US was “suffering from a mental recession [and becoming] a nation of whiners.” Gramm was an interesting choice as economic adviser, having previously been a Republican Presidential contender (Gramm lost the 1996 nomination to Bob Dole) and serving as a Democrat congressman and a Republican Senator. Where things get really interesting interesting is with Gramm’s relationship with Wall Street. Stick with me on this.

In 1999, Gramm led the introduction of the Gramm-Leach-Bailey Act, which repealed the Glass-Steagall Act. Glass-Steagall had prevented companies from offering both investment banking, commercial banking and insurance services (it is believed that allowing companies like Citigroup to operate investment and commercial banking arms contributed to the sub-prime collapse). Conveniently. Gramm received funding of more than US$1 million from Wall Street between 1995 and 2000. Until April, Gramm had been a lobbyist for Swiss bank UBS, which itself has lost around US$37 billion due to the sub-prime debacle. What’s more, Gramm’s wife just happens to be Wendy Gramm. Wendy Gramm was head of the Commodity Futures Trading Commission between 1988 and 1993. During that time, the Commission legalised derivative trading in energy. That move allowed a small Houston-based company called Enron to grow to the eighth largest company in the US. Five weeks after leaving the Commodity Futures Trading Commission, Wendy Gramm was appointed to the Enron board. While Wendy Gramm was a director of Enron (and a member of its audit committee), Enron entered into illegal partnerships with its executives which cost shareholders billions (Wendy Gramm sold her shareholding in Enron before it announced bankruptcy). While Wendy Gramm was a director of Enron, the company also made financial contributions to Phil Gramm’s senatorial campaign. (Phil Gramm paid Enron back in a sense, sponsoring the Commodity Futures Modernization Act, which became known as the “Enron Exemption”.)

In some counties, Wendy Gramm would have gone to jail for role in the Enron debacle. Instead, her husband (who sponsored some of the worst legislation in decades) is chief economic adviser to a Presidential candidate. Only in America. — Adam Schwab

On banks. Crikey’s own Marcus Padley, produced another entertaining column in Saturday’s Smage. What make’s Padley columns so fascinating is that they are often psychological rather than purely numerical. But last Saturday he claimed:

NAB is not fundamentally worth 37.4% less than it was in November. At the peak of the market last year NAB was trading at $42.95 and was on a price-earnings ratio of 15.6 and a 4.1% yield. Now it is at $26.88 and is on a P/E of 9.3 (down 40.3%) and a yield of 7.5% (down 45.3%).

OK, so maybe the stock was too high at the peak. But even if you adjust for that and use the 10-year average P/E of NAB of 12.3, it still implies the share price has fallen 32% below average on the back of what has actually been an upgrade in consensus earnings and dividend forecasts.

While your correspondent is a Padley fan (and subscriber), we respectfully disagree with Padley’s logic in this instance. Stocks like NAB have fallen because the risks associated with future earnings have increased substantially. As a general rule, the riskier a future earnings stream — the less an investor is willing to pay. NAB’s current price-earnings multiple reflects the more somber future earnings growth which investors forecast the company will achieve thanks to a slowing economy. Remember, by simply placing funds in a term deposit, investors can earn around 8% (equal to a PE of 12.5). When an investor buys shares in a bank stock, they will require it to be trading at a substantial risk premium, so a share like NAB would need to be trading on a PE of less than 12.5 when short-term earnings growth is doubtful.

While Padley looked to the recent past for guidance on banks future performance, perhaps he should consider than in 1991, Westpac almost fell into bankruptcy, the State Bank of Victoria collapsed and the State Bank of South Australia went under. — Adam Schwab

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Peter Fray
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