Market Report: Bulls generate excitement in British Energy

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The Independent Online
What is going on at British Energy? In February, the electricity generator's shares were set alight by news that the US hedge fund Appaloosa - a specialist in distressed debt scenarios like BE - had taken a 4 per cent stake in group. They soared to 10.5p but were sold-off heavily after it emerged that Appaloosa had sold down its holding to below 3 per cent and made a quick profit.

What is going on at British Energy? In February, the electricity generator's shares were set alight by news that the US hedge fund Appaloosa ­ a specialist in distressed debt scenarios like BE ­ had taken a 4 per cent stake in group. They soared to 10.5p but were sold-off heavily after it emerged that Appaloosa had sold down its holding to below 3 per cent and made a quick profit.

Since then, BE shares have again been on the up and broke through their 10.5p high earlier this week. Yesterday they rose again, 1.3p better to a new 12-month high of 12.3p. Those buying into the stock believe that the company is fundamentally undervalued, despite the fact that current shareholders face a massive dilution as a result of the pending debt-for-equity swap, which aims to wipe out the company's massive borrowings.

Under the terms of this restructuring, BE's present shareholders will control 7.5 per cent of the company once the debt-for-equity swap has been completed, with the remainder going to its creditors. Ever since it was announced traders have been trying to work out what this arrangement means for the value of BE's current shares, and the consensus is that they should trade well above 10p and possibly as high as 20p.

There is a further bull case for BE. The debt-equity restructuring was hammered out early last year. But since then, BE's fortunes have improved greatly, thanks to rising electricity prices in the UK. And as a result, some investors now believe the terms of that deal should be renegotiated, giving BE's shareholders a greater slice of the post-restructuring company. Such a scenario, should it come to pass, would certainly send BE's share price sharply higher.

Elsewhere, something of a buzz surrounded MyTravel, which, like BE, is also facing the prospect of a debt-for-equity swap as a way to deal with its huge borrowings. Dealers reported that it is virtually impossible to short shares in the tour operator. Shorting is a way that traders profit from a fall in a stock price. They sell shares they do not own in the hope of being able to buy them back at a lower price in the future. The difference between the price at which they sell and that at which they buy back is the profit.

But in order to sell a stock short, a trader must find an existing shareholder ­ usually an institution ­ to borrow the shares from. For this privilege, the trader pays a fee. However, such a manoeuvre is no longer possible at MyTravel, according to yesterday's gossip, as institutional investors are refusing to lend out their stock. Shares in the tour operator ticked 0.25p higher to 8.75p.

Celtic Resources was steady at 408.5p, despite whispers that a deal with the Russian mining giant Alrosa may be on the cards. According to gossips, Alrosa is looking at selling a number of its mines to Celtic, possibly as many as five, in return for a sizeable stake in the AIM-listed group.

Stylo put on 0.5p to 47.5p after it emerged that Jack Petchey had raised his stake in the shoe retailer with the purchase of 2.4 million shares. The veteran investor now holds 9.3 million Stylo shares through his Trefick vehicle, which accounts for 22 per cent of the company.

ITE Group, the exhibitions organiser, lost 1p to 55.5p as brokers struggled to clear a large sell order from the market. Likewise, DataCash fell 1.25p to 86.5p because of a large overhang of stock. Dealers talked of an institutional seller looking to offload a large chunk of stock. Incepta was in demand, rising 0.5p to 111.75p, ahead of next week's full-year figures from the City PR group. Word has it that the company is enjoying buoyant trading, and market players reckon the results are unlikely to disappoint investors.

The FTSE 100 index finished the week on a negative note, giving up 29.8 points to 4,489.7. As did the FTSE 250, which dropped 39.5 points to 6,210.7 Abbey National jumped 20.5p to 452.5p following reports that it has received an informal bid approach from Banco Santander Central Hispano. According to the reports, executives at the Spanish bank contacted their counterparts at Abbey six weeks ago to gauge their interest.

Royal & SunAlliance gave up 3p to 80.25p as UBS downgraded its rating on the insurer to "reduce" from "neutral" after a meeting with the RSA chief executive Andy Haste. The Swiss broker is of the view that RSA's capital position remains weak despite its recent £900m rights issue and so cut its price target on the stock to 76p from 104p.

Isoft gained 11p to 408p thanks to an upgrade from ABN Amro, which raised its rating on the software group to "buy" from "add". House of Fraser has been in demand of late on hopes of a bid. But Arbuthnot Securities yesterday pointed out that the closer the retailer's share price goes to 120p, the less likely a bid is to materialise, given that price had been bandied around before the stock's re-rating. House of Fraser closed 0.25p lower at 112.75p.

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