Market report: Tuesday close

By Mickey Clark for MailOnline
Updated: 12:03 EDT, 8 May 2007

Shares of Wm Morrison raced up to record levels today amid mounting speculation that private-equity companies may be about to turn their firepower on the supermarkets chain following the failure of a bid for rival J Sainsbury last month.

Morrison led blue-chips higher with a jump of 6p to 338¼p as more than 24m shares changed hands. At these levels the group, which bought the Safeway chain four years ago, is valued at more than £9bn - a full billion less than Sainsbury's, down 1½p at 563½p.

Evolution Securities is not surprised about the bid talk surrounding Morrisons. It has repeated its add rating and lifted its target for the shares from 315p to 345p. But the broker says a private-equity bid is unlikely to succeed. A bidder would have to offer a 'very full' 400p a share, which would put the retailer on a hefty rating of 30 times earnings.

Share prices generally fell sharply in the wake of the extended weekend break, leaving the FTSE 100 index nursing a loss of 53.1 points at 6550.6. Wall Street ended its record-breaking run this afternoon with the Dow down 74.10 at 13,238.90. Even so, this was not enough to deter the speculators, who continue to feed on news of takeovers and possible deals.

Bid target Reuters put on 14½p to 630p, after touching 659p, despite being downgraded by at least two brokers following confirmation of Thomson's offer of 697p a share, valuing the financial news and information group at £8.76bn. The shares were cut from outperform to neutral by Credit Suisse, with a price target of 595p, and from buy to hold by Deutsche Bank, which has a 650p target.

Credit Suisse reckons the Thomson offer has only a 60% chance of succeeding, although the potential cost savings of combining Thomson and Reuters could be worth between 112p and 229p a Reuters share.

Deutsche Bank says the cost synergies could be worth 200p a share. The overlap between publishing elements of the cost base would be substantial, as would the revenue overlap, creating unavoidable leakage and considerable anti-trust risk.

Hanson ran into profit-taking after last week's approach, with the shares falling 40½p to 1030p. The building materials supplier had risen sharply following an approach from Germany's HeidelbergCement.

EMI put on 1¾p to 248p, with no fewer than three private-equity bidders said to be jostling for position. Home Retail Group jumped 15p to 483p after talk vaguely linked it with a private-equity bidder.

Severn Trent lost 14p to 1510p after Merrill Lynch cut the shares from buy to neutral, having seen them rebound 10% since March. The broker says the water utility is now more fairly valued.

Rio Tinto lost 5p to 3324p despite speculation that BHP Billiton, down 33p at 1185p, could take out its rival in a £50bn-plus deal. Citigroup said BHP was a more likely bidder for the company than private equity.

'Rio Tinto's strong cashflow and nominal gearing may bring it into privateequity cross-hairs, but we think BHP Billiton is a much more likely bidder, given synergies and nationalistic control issue of Australian assets,' it said.

'Applying even a modest bid premium means that any party will need to finance a £50bn-plus deal through debt and equity. Rio's market value is now more than £44bn.'

Citigroup added that any privateequity bid would need to partner with an existing industry player such as Xstrata. Rio Tinto would not comment.

Afren, 3¾p firmer at 59p, has entered a farm-in agreement with Independent Energy for an interest in the Ofa field in the northern Niger Delta. The companies will jointly develop the field.

Afren will be responsible for paying all costs for the development of the field, and will recover those from 80% of net field revenues. After that, Afren and Independent Energy will share production revenue equally.

TAKING STOCK: market news at a glance

BANKING & FINANCE
The focus on private equity has never been greater, and 3i will attract intense speculation when it reports full-year results on Thursday. But while the public asks if the industry is making too much money, investors will want to know if it has made enough. Realised capital gains are expected to be £780m. Can it top that in the current year?

BUILDING & PROPERTY
Storage provider Safestore reported a 15.1% increase in revenue to £34.7m in the six months to 30 April as average annual rent per square foot went up 8% to £20.95. It also expanded its property portfolio, adding an extra 112,000 sq ft of self-storage space in Slough and Burnley. The firm said fullyear results will be as expected.

CONSUMER
C&C will tomorrow set out to convince investors that it can repeat in Europe the phenomenal success it achieved with Magners cider in the UK. trials have started in Spain and Germany. In Britain, it faces competition from Scottish & Newcastle's Bulmers while evidence from pubs suggests that thirst for cider is abating.

ENGINEERING
The weak dollar is set to take the shine of engineering group Fenner's halfyear results tomorrow. Dresdner Kleinwort reckons currency issues could knock about 10% off revenues. Investors will focus on demand for conveyor belts in the US coal industry, as well as Australia and China where capacity is an issue.

HEALTH
The sale of Bupa's 26 private hospitals could top £1.5bn after six bidding groups - dominated by big international private-equity companies but also including Australia's biggest operator, Ramsay Health Care - battled to land the deal. Private health insurance giant Bupa is selling the hospitals to fund overseas expansion.

INDUSTRIALS
The recent investors day hosted by Smiths Group did little to change broker Numis's thoughts on the company. It is advising clients to stick with the shares in the hope that a break-up would value the shares at up to 1300p. In the meantime it calculates earnings growth of just 8% over the next three years.

LEISURE
Holiday Inn and Crowne Plaza hotels will be in the spotlight when owner InterContinental Hotels hands out its half-year report tomorrow. Recent stakebuilding by the Barclay brothers has raised hopes of a bid either from the Barclays or from a private-equity consortium. Analysts are looking for up to £46m operating profits.

MEDIA
Trinity Mirror shareholders will be agitating for news on the sale of the Racing Post at Thursday's AGM. The deadline for bids for the Post, for which it wants at least £200m. is 16 May. Word is that Times Educational Supplement publisher Exponent Private Equity is leading the field, although other strong contenders remain.

NATURAL RESOURCES
Strong copper prices should encourage Antofagasta to ramp up production throughout the year, according to Numis. The broker says that recent rises far outweigh higher mining costs. It plans to upgrade its estimates for Antofagasta if metal prices remain significantly above its current forecasts.

RETAILING
Home shopping group N Brown should please with tomorrow's results. Analysts are looking for a 13% jump in topline sales to £530.5m and broker Numis reckons this should translate into a 19% rise in earnings per share. It thinks the shares deserve to trade at 19 times December 07 earnings and has a target of 345p.

SUPPORT SERVICES
China's biggest bank, Industrial and Commercial Bank of China, is in early talks to buy Travelex, the foreign-exchange giant that is owned by tycoon Lloyd Dorfman. The big Chinese banks have been keen to find places to invest their new-found wealth and are on the lookout for overseas opportunities.

TECHNOLOGY
Shares in nCipher have risen 21p since the software group said it would buy back shares at 285p in a £34m cash return. But broker Charles Stanley believes nCipher could easily top 345p in the next 12 months. It advises clients to buy now and tender for their entitlement, generating a return of about 5% in the next twomonths.

TELECOMS
Virgin Media could sell its business telecoms arm to concentrate all its resources on the quadplay of telecoms, mobile, TV and broadband aimed at consumers. The division, which has annual revenues of £169m. is the former NTL-Telewest business. Discussions on a sale were held with Kingston Communications last year.

TRANSPORT
Ryanair's recent warning that load factors and yields were running below expectations has implications for easy-Jet, which reports half-year figures tomorrow. Broker Collins Stewart says there is 'scope for disappointment', and more worryingly notes that easyJet is already trading at a 15% premium to fair value.

UTILITIES
Charles Stanley's enthusiasm for British Energy has been fired up by the new focus on reducing losses. It anticipates that the company should be able to cut unplanned losses to around 5% in the next 12 to 24 months. It says increasing awareness that the UK faces an energy deficit beyond 2010 should further boost shares.