Market Report: Hopes of consolidation excite telecoms firms

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The Independent Online

The telecoms sector was flavour of the day among investors. Positive broker comment combined with hopes of further consolidation in the industry to push Cable & Wireless 5.5p higher to 158.75p, Vodafone 3.5p stronger to 148.75p, BT Group up 3p to 232.5p and O2 1.25p better to 142.75p.

Talk of a major deal in the industry has been rife since the start of the week. On Monday, Deutsche Bank told its clients that the flow of mergers and acquisitions in the industry is unlikely to abate any time soon, and named O2 as prime candidate in the European arena for takeover.

Hot money has flowed into O2 in the past few months as a handful of bid stories have done the rounds of the City. Now, shares in the mobile phone group stand within a whisker of an all-time high.

After the boom, most major telecoms companies suffered painful debt-reduction programmes. But this process is almost complete and the industry is once again flush with cash, which is why acquisitions are back on the agenda. For example, France Telecom, which just a few years ago was one of Europe's most heavily indebted companies, now has billions of pounds in spare cash for deals. It has been tipped as a likely buyer for C&W, which recently admitted to being in negotiations aimed at the purchase of Energis.

Meanwhile, Nomura Securities got behind Vodafone and upgraded its recommendation on the mobile phone giant to "buy" from "sell". The broker was particularly upbeat about Vodafone's European operations, which it believes are steadily gaining market share.

The FTSE 100 dropped 14 points to 5,256. Market professionals said two-thirds of this decline was accounted for by the 13p drop in BP stock to 629.5p. The oil titan skidded lower after it unveiled its second-quarter results. Exel, meanwhile, leapt to a fresh high of 948p, up 9p, as punters once again clamoured aboard the logistics group in the hope that it will soon be acquired. Exel will announce its interim results tomorrow and analysts expect the group to reveal a healthy rise in profits. Punters hope the figures will be accompanied by news of a bid.

The Exel takeover story has circled the Square Mile for several months and, despite denials from the company, the market's ardour for the saga has not diminished. Traders are convinced that Deutsche Post wants to buy the company, believing that a formal bid is taking a long time because of the cumbersome nature of the decision-making process at big German corporations. One trader said: "Don't forget that trade unions get board seats in Germany. I just can't see them speeding up the decision-making process."

Elsewhere, easyJet fell 2.75p to 257p after Merrill Lynch downgraded its stance on the budget airline to "hold" from "buy". The US broker noted that easyJet shares have risennearly 30 per cent during the past six months, adding thatit can see little that will drive them higher. Merrill also expressed concern that the recent bombings in London could negatively impact passenger numbers at the airline.

A belief that the explosions in the capital have undermined trade at House of Fraser caused Paul Smiddy, a retail analyst at RW Baird Securities, to reduce his estimates for the retailer. Mr Smiddy said: "We are cutting our current-year forecasts on the understanding that current trade is weak. The weather, the summer events and the bombings have not been kind to House of Fraser." Shares in the department store group dropped 0.75p to 107p.

Severfield-Row dropped 7p to 750p after John Severs, the managing director of the engineer, disclosed the sale of 177,000 shares at 739p.

Bloomsbury Publishing rose 6p to 348.5p on hopes that the latest Harry Potter book has enjoyed record sales. Pursuit Dynamics ticked 3p higher to 198p on news of a licensing deal for its PDX system with Premier Foods. Shortly after the announcement, Investec Securities said: "It seems that the company is beginning to build significant momentum in terms of converting blue-chip customers to its technology."

Finally, Ark Therapeutics fell 0.5p to 96.5p as investors were unnerved to hear that Merlin, the venture capital group behind the biotechnology company, had sold most of its shares. Merlin confirmed it reduced its stake in Ark from 3.1 per cent to 0.05 per cent.

This move by the venture capital group, led by Sir Christopher Evans, comes before crucial trial data from several Ark projects. Jonathan Senior, an analyst at Evolution Securities, was perplexed by the disposal. He said: "Significant news flow is expected from Ark in the next few months that should explain the situation."