Market Report: Colt Telecom surges on talk of an imminent bid

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The Independent Online

The bulk of the action in the stock market yesterday could be found in the FTSE-250 as a numbers of second line stocks were set alight by takeover speculation.

The bulk of the action in the stock market yesterday could be found in the FTSE-250 as a numbers of second line stocks were set alight by takeover speculation. By the close, Colt Telecom had registered the most dramatic rise, up 8 per cent, or 4.5p to 54.5p, on rumours of a bid for the group from Danish carrier TDC.

According to the speculation, TDC, which operates mainly in Denmark and Switzerland, is interested in buying a UK telecoms company and Colt is said to be in its sights. Analysts confirmed that the Danish group has an impressive cash pile and that it is certainly looking to expand in northern and central Europe. They also noted that TDC already has a presence in the UK telecoms market via its involvement with easyMobile but were not convinced that it has the fire-power for such a deal.

Other potential buyers of Colt are Cable & Wireless and possibly France Telecom. However, the group's future is very much in the hands of Fidelity, the US fund management group, which controls over 50 per cent of Colt. Spokesmen for both the UK group and TDC refused to comment on the rumours.

Meanwhile, Aggreko had a rollercoaster ride. The stock finished 11p higher at 202p but at one point during the day it traded at 220p as talk of a bid for the temporary power supplier circled dealing rooms. Traders piled into Aggreko convinced that General Electric had tabled a 240p-a-share offer for the company, but their ardour was quelled by a statement from the company midway through the day which said it knew of no reason for the sudden jump in its shares. It also emerged yesterday that Aggreko, which now trades at a three year high, has secured a contract to provide temporary power in Uganda.

EasyJet, 9.25p higher at 233.25p, was also the subject of heavy speculative buying as 12 million shares changed hands. The share price move immediately sparked talk that EasyJet's 10 per cent shareholder, Icelandair, is looking to add to its shareholding.

An alternatively explanation for the sudden rise in the stock is the continued retreat of the oil price. Yesterday, for a second day, the price of crude dropped, which is great news for the likes of EasyJet, British Airways, up 3.5p to 273.75p, and Ryanair, 0.15 euro better at 6.2, for whom fuel is a major cost.

In the FTSE 100, Boots jumped 19p to 634.5p on talk the retailer could attract a private equity bid. Analysts at Lehman Brothers agreed with the theory that a leveraged buyout is on the cards at Boots. It suggested that such a move could value the group at up to 700p a share.

A number of hedge funds are now also thought to be betting on a bid for the company. But unlike normal investors they are employing a clever strategy to maximise their gain, should such a scenario take place, but also minimise any potential loss should it not occur. So as well as buying Boots shares, hedge funds are also shorting (betting on a fall) in the value of the retailer's debt.

This is a clever tactic because should a leveraged buyout bid emerge for Boots, they will make money from both the subsequent share price rise in the stock and also from a drop in the value of the company's debt (which always happens when a company is about to be bought via a highly geared transaction like a private equity bid). The greatest threat to those holding Boots shares is the possibility that the healthcare retailer issues yet another profit warning. But this is not a worry for hedge funds short of the company's debt. The loss they would suffer from the inevitable fall in the value of the stock would be offset by the gain they would enjoy from the also inevitable retreat in the value of the group's debt.

Xstrata jumped 22p to 1,049p as Deutsche Bank moved its clients into the mining giant. It believes that Xstrata is set to cash in for its exposure to ferro-vanadium, which is widely used in the steel making process. The value of the commodity has rise to an all-time high in recent weeks due to its limited availability and record demand from the steel industry.

Among small caps, Xenova gave up 0.75p to 4.12p on worries that the biotech is running out of cash. Back in February, Xenova warned that it did not have enough cash to keep it going for 12 months. Elsewhere, the bear raid on Medical Marketing International intensified, sending the stock down a further 38.5p to 172.5p. At the end of last month shares in the biotech stood at a mighty 298.5p.

Finally, BTG added 12p to 115.5p on hopes that the US Food & Drug Administration will soon give the group's Varisolve treatment for varicose veins the green light. Brokers point out that the potential of the product, which could be a blockbuster, is not at all reflected in the BTG's stock market value.