Market Report: Colt cools after analysts hang up on bid rumours

Colt telecom was the talk of the Square Mile yesterday as rumours of a bid for the alternative carrier circulated dealing rooms. Two names were bandied about as potential bidders for Colt: France Telecom and Cable & Wireless. But analysts quickly dismissed France Telecom as a potential buyer, arguing that the business did not fit well with its core operations.

Colt telecom was the talk of the Square Mile yesterday as rumours of a bid for the alternative carrier circulated dealing rooms. Two names were bandied about as potential bidders for Colt: France Telecom and Cable & Wireless. But analysts quickly dismissed France Telecom as a potential buyer, arguing that the business did not fit well with its core operations.

They viewed a link-up with C&W as much more of a possibility. We know that C&W is on the acquisition trail. Over the past month the group has secured the purchase of Monaco Telecom, in a deal worth £100m, and Bulldog Communications, the high-speed internet services provider, for a more modest £18m. Even after these purchases, C&W still has more than £1.4bn cash, so it certainly has the firepower to buy Colt.

But analysts covering the stock generally believe a deal is not imminent. They argue that C&W would do well to first consolidate its recent purchases before going for something the size of Colt, which at the close of business yesterday was valued at £1.2bn. Such talk cooled traders' ardour for the Colt bid story, leaving shares in the group just 2.5p higher at 88p by the end of the day.

Elsewhere in the sector, Kingston Communications, which is viewed as a much more likely target for C&W, rose 3.5p to 67.5p, while Easynet gained 1.5p to 105p and BT added 2p to 187.5p. The FTSE 100 was in retreat, falling 15.3 points to 4,489.5. BP weighed on the blue-chip index, as the oil giant fell 11.5p to 480.75p after a downgrade by Merrill Lynch. The broker slashed its recommendation on the stock from "buy" to "neutral", arguing that BP now trades at too great a premium to its rivals. According to Merrill, the company's strong balance sheet and strategic framework is now fully reflected by its share price.

Brokers reported that Allied Domecq had held a series of well-received presentations to institutional investors in the US. But the group's shares fell 1.25p to 461p after Credit Suisse First Boston noted that the company's management had toned down their view on consolidation in the sector. Allied shares have been buoyed by bid speculation over the past year but the Swiss broker believes this will now start to die down.

Tullow Oil added 1.75p to 109.25p after the Irish explorer boasted of a gas find at its Lalmai-3 well in Bangladesh. It was unclear exactly how big the find is, but brokers said it was great news for sentiment towards the company and is likely to drive Tullow shares higher in the coming days. Merrill Lynch estimates the find could be worth up to 5p a share to the company. "We believe this discovery is the beginning of what will be a highly active, high-potential drilling programme over the next 12 months," the US broker said.

LA Fitness dropped 6p to 204p as Altium Capital dismissed recent takeover speculation. "We believe a bid is unlikely, primarily owing to directors' holdings amounting to 27 per cent," the broker said. LA Fitness shares have soared over the past week on the speculation, while on a 12-month view they have nearly tripled. Altium believes investors should take profits from the group and downgraded its rating from "add" to "hold". The broker also commented on Tuesday's news of a sizeable director share sale at JD Wetherspoon, up 2p to 287p. It argued that the disposal highlights that the pubs group is overvalued and urged investors to sell down their holdings.

Radstone Technology improved 6p to 355p on whispers that the group's results next week are set to impress the City. Gossips reckon Monday's numbers will show that Radstone's ICS acquisition has been a great success. House of Fraser jumped 1.75p to 116.25p after two blocks of 5 million shares crossed the market at 117p. Back in April, trading in the retailer was dominated by talk of a takeover bid and yesterday's heavy volume again set tongues wagging that either Tom Hunter or Iceland's Baugur may be about to make a move on the company. Both are already major shareholders.

Business Post ticked 2.5p higher to 502.5p after Philip Stephens, a non-executive director, disclosed the purchase of 5,000 shares at 502p. There was also director share-buying at Patientline, steady at 112.5p. Peter Coleridge, the finance director, bought 100,000 shares at 116p.

Citigroup Smith Barney pushed Christian Salvesen 4p higher to 52p after the broker raised its rating on the logistics group to "buy" from "hold" and drew investors' attention to the highly cash generative nature of the company. Citigroup set a near-term price target of 60p on the stock.

NetStore dropped 1.25p to 41.5p as investors were unsettled by the sale of 100,000 shares at 42p by Michael Jackson, a director.