Market Report: Bulls of O2 mauled by bumper share disposal

Bulls of O2 suffered a setback yesterday after the mobile phone group's biggest shareholder cashed in on a significant chunk of its stake.

O2 dropped 5p to 137.75p after Goldman Sachs sold 380 million shares on behalf of Capital Group. The placing, completed at 139p, raised more than half a billion pounds for the US fund management giant, and meant that O2 was easily the most heavily traded stock in the market yesterday. The disposal sees Capital reduce its holding in Europe's sixth-largest mobile phone operator from 7.5 per cent to 3.1 per cent and is a great coup for the California-based money manager.

It built the bulk of its shareholding in 2002, when O2 was unloved by investors and its shares tradedbelow 40p. Since then, the stock has enjoyed an amazing renaissance. This has been driven in part by a turnaround at O2's once underperforming German division and by rumours of a bid for the company.

In recent days, talk of an offer for the company has become increasingly loud, prompting City punters to pile into the stock en masse. Yesterday's drop in O2 shares was certainly a setback for them as many had helped the stock hit a fresh all-time high of 144p earlier in the week.

Dealers said Capital is unlikely to have paid much attention to the bid speculation. The fund manger is known to focus on taking sizeable positions in companies and holding them for as long as it takes for their value to reach a level that Capital believes its fair.

Meanwhile, ABN Amro pushed BAE Systems shares to a new high for the year. The defence giant added 6.5p to 301.75p as the Dutch broker upgraded its recommendation on the stock to "add" from "hold". The last time BAE shares traded at current levels was almost three years ago, and ABN tips them to hit 340p soon. It believes the group has been making good progress in recent years and is particularly impressed by strengthening cash flows at the company.

ABN also applauded BAE's acquisition of United Defence Industries in the US, which makes the company better diversified.

Exel lost ground, falling 21p to 927p, after a downgrade from JP Morgan. The US broker fears that recent takeover speculation has left Exel overvalued, and slashed its rating on the stock to "neutral" from "buy".

JP Morgan said: "In the absence of a bid, we calculate that a 14 per cent upgrade to 2006 profits forecasts is needed to justify a further rise in the shares. We see this as unlikely to occur in the immediate future." Meanwhile, Shire Pharmaceuticals added 11p to 655p after shareholders at TKT approved the takeover of the group by Shire. The UK pharmaceuticals company is tipped to reportsolid results today, boosted by strong sales of Adderall, its treatment for hyperactivity in children.

WPP gained 9p to 596p after better-than-expected results from its rival Publicis. The French advertising giant unveiled a 49 per cent jump in first-half profits.

Elsewhere, dealers reported heavy institutional demand for Sportingbet, 10.5p higher to 356p, and Empire Online, 13p better at 224p. EasyJet fell 2p to 255p as Citigroup became the second broker in as many days to turn more cautions on the stock. The US broker downed its stance on easyJet to "hold" from "buy", adding that it was concerned about the recent departure of several top managers at the airline.

Lower down the pecking order, Homestyle fell 5p to 76.5p amid nervousness before today's full-year results from the soft-furnishings retailer. Numis Securities worries that Homestyle's earnings forecasts for the year ahead could be at risk because of weak sales of big-ticket items such as beds and sofas.

The broker said: "Given the stock's current rating, there is little room for error, and any downgrades could see Homestyle shares give up much of the gains we have seen in recent weeks."

Wigmore Group, up 8p to 29.5p, is in the process of transforming itself into a European property company, and yesterday enacted a 100-for-1 share consolidation. Wigmore will be led by Jim Mellon, a former fund manager, and Howard Flight, the former Tory MP. A name change to Speymill will also take place. Regal Petroleum gained 17p to 162p as takeover talk drove its stock higher.

Griffin Mining put on 1.25p to 37p after boasting that it had sold its first consignment of zinc concentrate to local Chinese smelters. Word has it United Clearing, steady at 100.5p, will unveil a significant contract win from the US today. The company helps mobile phone operators, including Orange, settle the cost of international calls made by its customers.

Finally, Empyrean Energy floated on AIM at 35p, having raised £2.5m to develop its gas field in Germany. Its shares finished at 39.5p.