Market Report: Citigroup warning shakes Vodafone and mmO<SUB>2</SUB>

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The Independent Online

The cost of mobile phone calls could fall by 15 per cent a year when the UK's big operators launch third-generation (3G) services.

The cost of mobile phone calls could fall by 15 per cent a year when the UK's big operators launch third-generation (3G) services. Competition will be fierce and the lower costs are not likely to encourage the higher use of mobile phones that operators imagine. Share prices in this sector are overvalued, and investors should dump their holdings of Vodafone and mmO 2, the owner of O 2.

These were the starkly bearish conclusions of a new analysis by the respected telecoms team at Citigroup, which sent Vodafone shares tumbling 3 per cent, off 4p at 129.5p. It was the worst performance by a FTSE 100 stock. The Citigroup team, led by Terence Sinclair, is particularly highly rated by hedge fund managers, who trade stocks more frequently than your average manager, so it was no surprise that Vodafone accounted for one in every seven shares traded yesterday.

Mr Sinclair reckons the mobile operators, not just in the UK but across Europe, are in for a tricky few months, as investors get wise to the fact that profit margins will fall. He wrote: "Most of the managements we talk to are clear that prices will fall, and the euphoria we felt from mid-2002 to late 2003 as tariffs rose has faded. This is a sector whose management believes in deflation as a tool. The biggest call we have to make is, how far will customers respond to price cuts? Will they repay companies with bigger volumes, or pocket the price cuts? We argue the latter."

Vodafone shares were most vulnerable to a sell-off, since it is the biggest operator and its shares have risen most in recent months. After an early decline mmO 2 clawed its way back to par at 94.5p in twice the usual volume of trading.

The FTSE 100 ended 12.9 points lower at 4,545.6, but that was an impressive performance given the weak retail sales data out of the US and the rising oil price (which pushed British Airways shares down 5.5p at 221.25p). Dealers said there were rumours of one investment bank trading desk with a giant futures position open, which could cause volatility between now and the futures expiry on Friday. Private punters are always told to stay out of the market in the hours before the futures expiry on the middle Friday of the month.

There was more keen buying interest in ITV, whose shares rose another 1.25p to 108p after Monday's influential "buy" note from Citigroup. Yesterday, though, there were mutterings that something more significant might be behind the rise. A US bid, perhaps? Since the merger of Granada and Carlton, the company has been seen as a likely morsel for an American media giant. There was also another rumour: "What do you think would happen to ITV shares if Greg Dyke, the former BBC director-general, joined?" one bullish broker asked.

SMG, which owns two Scottish ITV franchises, rose a further 3.5p to 107.5p in anticipation of ITV launching a bid for those assets. And switched-on investors were also buying Ulster Television, which has the Northern Irish franchise. Its shares were up 11.5p to 404p. It has results next week that are expected to show good advertising revenues, but it was the suggestion that ITV would make a bid for the franchise that was really spurring the shares.

GlaxoSmithKline, the UK's biggest drugs maker, jumped 15p to 1,181p after the top-rated pharmaceuticals team at Lehman Brothers turned positive on the shares. GSK has a strong pipeline of new drugs, the broker says. AstraZeneca, whose own most promising new drug was rejected by a regulatory panel in the US last week, could make back only a little of the ground lost yesterday, ending up 8p at 2,348p.

Retailers were the focus of much trading activity yesterday as Next (up 41p at 1,558p) and French Connection (down 43.25p at 329.25p) showed that trading has not been uniform across the high street. Who else might be losing out? Ted Baker was fingered as one potential disappointment, its shares falling 2.5p to 413.5p despite taking analysts to its new central London stores.

Moneybox fell again: the cash machines group which floated less than six months ago issued a big profits warning on Monday and the company's future performance is suddenly so much less exciting that even its own broker, Numis, was advising clients to sell some of the shares. Moneybox raised £48m at 47p in April but Numis now says the shares are worth 25p tops. They fell 7.5p to 19.5p. With Moneybox saying fewer people than expected were using cash machines which charge for withdrawals, its smaller rival Scott Tod was under pressure, down 3p to 67.5p. Investors had already sold off rival CardPoint on Monday, but Numis reassured that trading there has not deteriorated and its shares snapped back 5.5p to 122p.

Gareth Rhys Williams, the chief executive of Vitec, doubled his stake in the camera equipment maker, snapping up £30,500 of shares. The stock has plunged since a July profits warning, but was back up 14.5p at 312.5p.

Market movers

↑ Dixons 164p (up 1.25p, 0.77 per cent). Brokers highlight nigh-on 5 per cent dividend yield.

↑ Bionex Investments 1.7p (up 0.3p, 21.4 per cent). Its stake in Ark Therapeutics has risen 17 per cent in value this month.

↑ Petra Diamonds 58p (up 1.25p, 2.2 per cent). Long-awaited agreement with BHP Billiton to develop Angolan mine.

↑ Cookson 34.25p (up 1.25p, 3.8 per cent). Merrill Lynch upgrades to "buy" after praising electronics division.

↑ Eurotunnel 19.75p (up 0.5p, 2.6 per cent). New business travel marketing push planned.

↑ WPP 520p (up 12p, 2.4 per cent). Further positive broker comment on £845m acquisition of Grey Global.

↑ NETeller 236p (up 6p, 2.6 per cent). Gossips believe it is about to sign up a big US retailer as a client.

↑ Transvision Resources 3p (up 2p, 200.0 per cent). Shell company, looking for acquisitions in energy or mining sectors, rises on first day of dealings.

↑ Manpower Software 1.5p (up 33.25p, 4.7 per cent). Hopes that results this week will result in upgrades to financial forecasts.

↑ Advanced Medical Solutions 8.37p (up 0.62p, 8.1 per cent). Losses narrow after overseas expansion.

↓ J Sainsbury 276p (down 3.25p, 1.2 per cent). Price deflates as takeover talk turns out to be hot air.

↓ Sage 171p (down 1p, 0.6 per cent). Vicious broker note on the software group is said to be in preparation.

↓ Warthog 0.57p (down 0.35p, 38.0 per cent). No sign of the partnership deals promised at the time of the computer games developer's 2p-per-share rescue rights issue in March.

↓ Legal & General 102p (down 1.75p, 1.7 per cent). Bad publicity from tribunal on endowment policy mis-selling.

↓ Kingfisher 289p (down 4p, 1.4 per cent). Caution ahead of results.

↓ Raven Mount 67.5p (down 7.5p, 10.0 per cent). Managing to achieve diminishing profits from housebuilding despite the house price boom.

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