Market Report: Swede dreams spark up Scottish & Southern

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The future of Scottish & Southern Energy was a major talking point in City dealing rooms yesterday. Shares in the power group jumped 7.5p to 1,017p on speculation of a bid for the company from Vattenfall, the Swedish state-owned utility.

Vattenfall already has operations abroad - mainly in Germany, Poland and Finland - and is said to be keen to expand in the UK. Citigroup argued that Scottish & Southern represents an excellent strategic asset for anyone looking to make a major move into the UK utility sector.

But it warned that the Swedish group will have to pay top dollar if it is to win the company. The US broker said: "Scottish & Southern is highly regarded by its shareholders and is fiercely independent. Therefore, any acquirer would likely have to pay a significant control premium."

Citigroup pointed out that RWE bought Innogy on a rating of 11 times earnings in 2002. Should Vattenfall decide to pay a similar valuation for Scottish & Southern, it would have to spend 1,397p a share for control of the group - a 38 per cent premium to the stock's current level. Of course, Vattenfall could also target ScottishPower, up 4.5p to 540.5p, which recently rebuffed a 570p-a-share bid from Germany's E.ON.

Meanwhile, the FTSE 100 was hit by a bout of profit taking and closed 42.7 points lower at 5,688. 8. The heavyweight banking and mining sectors, which have been among the best performers over the past few months, did the bulk of the damage. Rio Tinto fell 66p to 2,634p, Anglo American retreated 64p to 1,949p and Xstrata lost 53p to 1,423p, while HBOS dropped 15.5p to 960p, Barclays gave up 9p to 619p and Royal Bank of Scotland slipped 15p to 1,777p.

Yesterday was certainly a good day for brokers handling major share sales. Johnson Matthey dropped 52p to 1,384p as Goldman Sachs sold 5.5 million shares at 1,045p on behalf of a client. In the FTSE 250 index, Icap, down 9.75p to 388p, saw Morgan Stanley dispose of 12 million shares in the group at 338p.

Virgin Mobile retreated 15p to 367p as Merrill Lynch placed 9.2 million shares in the mobile phone group at 362p for an institutional investor. Virgin has been in takeover talks with the US cable giant NTL for more than a month. Dealers suggested that yesterday's sell order may have been prompted by reports that NTL is thinking of concluding a licensing deal with Virgin as opposed to buying the mobile phone operator outright. But many analysts were sceptical that NTL will abandon its bid and tipped the group to come in with a fresh offer at around the 370p level.

Invensys ticked 0.75p higher to 19.25p as Standard & Poor's raised its outlook rating on the engineer's debt from "negative" to "stable", reflecting "an improvement in the group's near-term prospects". According to S&P, Invensys is now generating free cash flow. This is very important for a company with the engineer's debt burden.

Along with Invensys creditors, the upgrade also spelt good news for shareholders. For a few years, equity investors have worried that Invensys borrowings are too big to handle, making its shares worth very little in their eyes. S&P's comment clearly eased such concerns and left many analysts focusing on how much upside there could be in the stock from current levels. It is worth noting that Invensys stock stood at an all-time low of 10p as recently as June last year.

Inmarsat went sharply lower in early trading amid rumours that its private-equity backers are looking to offload a sizeable chunk of their shareholdings. But the stock rallied strongly in the afternoon and finished 6.75p higher on the day at 348.75p. Abbot rose 15p to 280p after the offshore drilling contractor said it had been awarded four contracts worth $275m (£155m). Sage dropped 5.5p to 253p as Citigroup cut back its recommendation on the software group from "buy" to "hold". The broker said it was worried that Sage's purchase of the US player Versus is rather large compared with recent deals at the company and that Sage may have paid too full a price for the firm.

Central African Mining held steady at 14.25p, despite news that Capital Group, the US fund management giant, had taken a 3.8 per cent stake in the firm. Alpha Airports ticked 1.75p higher to 68p as Kevin Abbott, its chief executive, bought 30,000 shares at 67.27p. Premier Direct, 0.5p better at 139.5p, was also boosted by director share-buying. Paul Southworth picked up 36,000 at 137p.

TTP Communications rose 1.5p to 27p after the technology group said it had licensed its 3G macro product to an unnamed semiconductor supplier. Bridgewell Securities believes the deal could be worth up to £4m in upfront payments to TTP.