Market Report: BSkyB sparkles amid News Corp bid talk

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The market rumour mill was in full motion around British Sky Broadcasting last night, with speculators piling in on talk that Rupert Murdoch's News Corporation may mount a bid for the shares it does not own in the FTSE 100-listed pay-TV provider.

The chatter was based on the prospect of a Conservative victory at the general election, and a more Sky-friendly regulatory environment thereafter. In an attempt to capitalise on such a change, News Corp, which owns around 39 per cent of Sky, was said to be mulling over an offer of up to 750p per share to assume full control, delist the broadcaster and take it private.

Though the rumours drove Sky to a late high of more than 6 per cent, market opinion was divided, with traders labelling the speculation as nothing more than end of week gossip. The electoral theory was dismissed as wide of the mark, and there were questions about the financing of such a large deal.

UBS's analyst Polo Tang added that News Corp already had "effective control and it could have acquired BSkyB in the past at a lower share price". "In our view, the only strategic rationale for News Corp making a move on BSkyB would be if they thought it was significantly undervalued and was about to enter a period of significant cash generation post significant investment in its broadband rollout," he added in a note to clients. "However, BSkyB may potentially face further investment in fibre."

But the speculators persevered, betting on the possibility of a full takeover as the stock, which gave back some gains in early afternoon trading, began climbing higher as the session came to a close, ending 28.5p stronger at 598p.

Overall, the prospect of deal activity helped the FTSE 100 firm 8.39 points to 5,625.65, while the mid-cap FTSE 250 index rallied by 87.12 points to 9,941.56. Firmer metals prices underpinned a rebound in the mining sector, which was hit by a wave of profit-taking on Thursday.

Kazakhmys, for example, was 21p higher at 1,517p as fears of monetary tightening in China receded, while Fresnillo added 4p to 846p and Rio Tinto gained 7.5p to 3708.5p. The Eurasian Natural Resources Corporation, the target price for which was raised to 1,400p from 1,100p at RBS, was among the strongest, rallying more than 4 per cent or 51p to 1,173p.

Parts of the banking sector strengthened amid hopes of a settlement between Dubai World and its creditors. Fears that some big players might suffers heavy losses on their exposure to the debt pile also receded, boosting the likes of Lloyds, which gained 1.93p to 58.47p, and the Royal Bank of Scotland, which added 2.02p to 42.57p. Barclays at 351.85p, up 8.1p, and Standard Chartered at 1,734.5p, up 10p, were also firm, but HSBC remained under pressure, losing 10.6p to 684p as Fitch placed Geneva based HSBC Private Banking Holdings individual rating on negative watch.

Further afield, the engineering group Cookson firmed up by 2.5p to 508.5p following some words of support from Goldman Sachs. Reiterating its "conviction buy" view, the broker revised its target price 760p, terming the stock a "source of opportunity".

"We believe Cookson should continue to benefit from [a] recovery in steel production in 2010, and view guidance for flat volume outlook for the foundry segment as conservative, given likely production improvements at premium German auto manufacturers and production increases at truck manufacturers as a result of an end to destocking," the broker said, forecasting 51p in underlying earnings per share in 2010.

Goldman was also positive on sector peer Bodycote, which gained 8.3p to 198.5p. "Restructuring actions have left Bodycote well-positioned to deliver earnings growth as and when volumes recover," the broker said, reiterating its "buy" stance and 274p target price. IMI, which is also rated "buy" by the broker, was 4.5p ahead at 644p, with Goldman anticipating further margin expansion over 2010 as the company takes actions to increase the proportion of production in low-cost countries.

On the downside, the office rental group Regus was under pressure, falling by 1.6p to 87.4p, after Credit Suisse trimmed its target price for the stock to 100p from 120p. "We believe occupancy will continue to fall into the first half of 2010," the broker said, sticking to its "neutral" view. "In a highly operationally geared business this leads to a 13 per cent cut in our 2010 operating profit estimates from £52.1m to £45.2m. Regus is attractive on longer-term multiples and cashflow analysis but ... faces further near-term earnings pressure."

In the housing sector, Persimmon continued to attract speculators. The story earlier this week was that it was considering a bid for Barratt Developments. When that theory was shot down by analysts, the rumour-mongers began scouting in the wider sector and last night came up with Bovis Homes, which was said to be a more likely target for Persimmon. But despite their best efforts, the tale failed to gain any traction with traders, and at the close all three were higher, with Barratt adding 2.4p to 126.9p, Persimmon rising to 444.7p, up 8p, and Bovis climbing by 12.8p to 405.5p.