Market Report: Aquarius shines on Xstrata bid speculation

Aquarius Platinum was firm yesterday after market rumours mooted the possibility of bid interest from Xstrata, the acquisitive Anglo-Swiss mining giant.

The talk suggested Xstrata may offer as much as 1,100p per share for the southern Africa-focused platinum producer, which has been cast as a likely target for a larger mining group before.

A rival rumour suggested Xstrata may bid in concert with an unnamed Chinese state-backed group.

"It would not be surprising," said one analyst who pointed out Xstrata acquired Eland Platinum, another platinum producer, last year. "It would fit in with their strategy," he added.

The market seemed to agree: at the close, Aquarius was up 10.5p at 827.5p while Xstrata was down 128p at 4,153p.

The FTSE 100 closed down 32.5, or 0.6 per cent, at 5,634.7. The London benchmark was held back by weakness among retailers, and in parts of the mining, and oil and gas sector. A new report from the British Bankers' Association, which revealed mortgage approvals touched a record low in May, contributed to the slide. On the upside, Resolution's offer for the FTSE 250-listed Bradford & Bingley, which rose 11.25p to 77.25p, sparked a rally among banks, which helped keep the FTSE 100 off earlier lows.

The FTSE 250 closed down 128.3, or 1.4 per cent, at 9,192.3 after housebuilders traded lower following the release of the BBA report.

On the FTSE 100, HBOS rose 4.5p to 274.75p, but remained below its 275p-per- share right issue offer price. Beside the news from Bradford & Bingley, the stock rose thanks to some positive commentary from Collins Stewart.

"Using our WEV [warranted equity value] model, the current price implies HBOS never again generates a return above cost-of-capital, a situation we feel regulators/and or consolidators are unlikely to allow to persist," the broker said, upgrading the stock to "hold" from "sell". Collins Stewart added: "It also implies a further £6.1bn of net losses in the bank and zero growth generation."

In the wider banking sector, Barclays was up 11p at 310.75p and claimed second place on the FTSE 100. Royal Bank of Scotland was also strong, rising 4.75p to 219.25p.

Retailers were less successful after the BBA figures reignited investor concerns about an economic slowdown and an accompanying downturn in consumer demand. Next shed 35.5p to 959.5p and Tesco lost 12.9p to 365.1p. J Sainsbury, which was also hurt by weak TNS figures, was down 10.5p at 314.75p

On the FTSE 250, worries continued about the debt position of Punch Taverns. Traders cited a recent report from Morgan Stanley in which the broker said the company "faces four debt-related obstacles to overcome in the next three years, which will likely continue to weigh on its share price", and another from Redburn, a small London-based broker, as reasons for weakness in the stock, which slipped 19.75p to 318.25p.

"If we are to assume that the UK enters a recession (as seems likely), the stock that continues to cause us concern is Punch Taverns," said Redburn, "Our analysis of Punch's three securitisation structures means that IF WE DO ENTER A RECESSION we think it is almost inevitable that it will trip all three restricted payment clauses, denying the group holding company (and thus shareholders) from accessing any of the cash in the group."

The broker also said that, in the event of a recession, the company may trip the default debt service coverage ratio covenant on its "B" bond structure in late 2009 or early 2010.

"As such, in these circumstances, we think it very likely Punch will require a recapitalising rights issue some time before the middle of 2010 – our model assumes a 3 for 2 rights at £3.10 in early 2010," added Redburn.

After the market closed, Punch bought forward its third-quarter interim management statement. The company said it was confident of meeting market expectations and that its balance sheet remains strong.

The gaming group Rank gained 4p to 82.75p following reports that the Government is set to announce a relaxation of limits on slot machines in bingo clubs. The expectation took the stock up to seventh place on the mid-cap leader board.

Millennium & Copthorne Hotels was ahead at second place, up 36.5p at 345.5p, on news that CDL Hotels, a wholly-owned subsidiary of M&C, had entered into an agreement with Kangho AMC to dispose of its holding in CDL Hotels (Korea). CDL Korea owns the Millennium Seoul Hilton Hotel.

The telecoms group Thus swung to an intra-day high of 161p, up 5p, after market rumours suggested Cable & Wireless was preparing to table a 200p-per-share bid. The talk follows C&W's earlier 165p-per-share bid for the company, which was rejected. Thus eased back to 155p, down 1p, by the close as investors took profits. C&W was up 1.5p at 151.5p.

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