Market Report: BSkyB and BT hit by fears of a bidding war

A bidding war looks set to break out between BSkyB and BT Group over AOL's UK business, with traders getting nervous over the two companies trying to outbid each other into winning an asset that is hard to value.

With increasing competition in the home broadband market, some sort of consolidation is thought to be inevitable, although most sector watchers agree that this deal has come up sooner than expected. The broker Cazenove pointed out that if BSkyB is successful some investors, hoping for a large capital return from the company this year, will be disappointed.

Traders said the auction represents something of a dilemma for BT and BSkyB, as neither company wishes to fall behind in the battle for home broadband, but overpaying for AOL could have grim financial repercussions further down the line. One trader said: "With a lot of investment still to be made by both groups in home broadband, this auction is coming at the wrong time. The only real winner is AOL, although, if the price goes too high, Carphone Warehouse, having made the first big move, could also benefit." Shares in BT fell 3.25p to 232p, BSkyB shed 10.5p to close at 561.5p, while Carphone Warehouse were 2.5p weaker at 334.75p.

London trading had a subdued feel to it as the market spent almost the entire session nursing small losses. There was little volatility and the FTSE 100 index of leading shares closed 34.3 lower at 5,620.9. There was little in the way of direction, with most major sectors including some winners and losers.

The medical devices group Smith & Nephew was strong again as rumours of a bid from a US rival gained momentum. Johnson & Johnson is the current favourite to make an offer, with traders saying that the bidding will start at 500p. As expected, other names have been thrown into the ring by traders, and Bristol Myers, the US pharmaceutical giant, is also thought to be planning a raid . Smith & Nephew rose 2.5p to 436.5p, with 8.3 million shares changing hands.

Vodafone, the mobile telecommunications giant, was weaker after reports claimed that the activist investment group Hermes would oppose the re-election of several board members, including the chief executive, Arun Sarin, at the company AGM, due to take place on 25 July. The shares dropped 3p to close at 117.5p, although many traders remain convinced that the group will sell its 45 per cent stake in Verizon Wireless before the AGM.

Old takeover rumours of London Clubs International did the rounds, sending the shares 4.25p better to 113.75p. Rank Group and Stanley Leisure have been mooted as possible bidders in the past although yesterday's chat focused on private equity groups. Traders said talk of a deal valuing the casino group at up to £290m or 130p per share excited investors, but that the identity of a possible suitor was wide open.

Forth Ports, one of only two remaining independent UK port operators, was stronger as traders speculated that its independent status would not last much longer. With a market capitalisation of only £755m, Forth is well within reach of most large private equity houses. The shares climbed 45p to 1,700p.

Smiles will have been even brighter than usual at the dental practice operator Oasis Healthcare. The group confirmed on Friday that is in talks that may lead to an offer being made for the company, and yesterday said that if an offer comes it will be significantly above Friday's closing price of 24.5p, itself a 44 per cent gain on Thursday's close. The shares added another 6.25p to close at 30.5p, a 25.8 per cent gain.

Any investor who hung on to shares in the online retailing group Premier Direct after April's profit warning will have been kicking themselves yesterday after the group warned for the second time this year. Premier blamed difficult market conditions and said it would move back into profitability in the second half of the year. The group's chairman and chief executive bought shares, but were unable to stop the rot as the shares plummeted to close at 56.5p, a fall of 53p or 48.4 per cent.

Online auction group QXL Ricardo suffered one of its worst days of the year, as the shares lost 933p to close at 9,410p, a low for 2006. Even so, the shares were the top performer in the London markets in 2005, and market makers were at a loss to explain yesterday's fall as only 2,431 shares changed hands.

The broker Corporate Synergy brought Worthington Nicholls to Aim yesterday, and after a weekend of sweltering weather the air conditioning services group attracted plenty of buyers. The group raised £7.5m of new money via a placing at 50p, giving the company a market capitalisation of £32.5m. By the close of trade, the shares were trading at 52p, a 4 per cent premium.