Market Report: Experts pour cold water on bid talk

Traders have spent this year trying to flush out takeover deals for water groups including Pennon and United Utilities. But yesterday experts at HSBC washed out any hope of M&A, blaming regulatory uncertainty as the cause.

The shares in the water groups have trickled upwards on hope of consolidation and HSBC points out that both United Utilities and Severn Trent are trading on a 12 and 13 per cent premium to March 2014. But it thinks the "exuberance of the market for M&A should be tempered" ahead of a review of capital structures set by the water and sewerage provider regulator Ofwat.

Instead, HSBC advises any would-be suitors to "wait for visibility on Ofwat's approach to high leverage and to acquiring assets at the beginning of the next year period in 2015, giving four years benefit of the cost of capital differential."

Pouring cold water on bid talk was followed by a 10.5p dip in Pennon to 675p, but United Utilities dribbled up 5p to 745.5p

HSBC's note came as the energy regulator Ofgem launched an investigation into six suppliers over failing to meet all the targets on providing consumers with efficiency measures.

Ofgem said energy providers had achieved 99 per cent of the targets but Centrica's British Gas, Drax, Scottish Power and SSE had missed targets.

The blue-chip index started the day with a good run. Most of the European markets were closed for May Day, but after the US opened the benchmark index followed it down. The FTSE 100 closed up just 21.17 points to 6,451.29.

Taking the wooden spoon was the troubled Kazakh miner ENRC, which is the subject of a Serious Fraud Office investigation. It emerged that the Russian billionaire Suleiman Kerimov has bought close to a 3 per cent stake and it dug down 11.6p to 262.8p.

Shares going ex-dividend joined it, with Admiral down 40p to 1,241p.

The publishers Pearson and Reed Elsevier were in focus. Analysts at UBS are concerned for future growth at Reed and downgraded it to neutral, and it retreated 23p to 729p.

Analysts at Liberum Capital laid out the problems facing the Financial Times publisher Pearson, highlighting issues in its education business, and rated it a sell. But the shares managed to add 12p to 1,183p.

The long-awaited mega-deal of the commodities giant Glencore and miner Xstrata will complete today. Xstrata ceased trading on Tuesday night. Glencore was 2.65p worse off at 314.3p.

Over on the mid-cap index it was Ophir Energy's time to shine. Nearly a year after making a gas discovery off the coast of southern Tanzania, yesterday the African-focused explorer reported better than expected results. Ophir's partner BG Group, which has been investing in the region, will also benefit.

The news also reassured those who were concerned that Ophir had passed its best – its shares declined this year from highs of 650p last year.

In February Britain's richest man, the Indian steel tycoon and Queens Park Rangers part-owner Lakshmi Mittal, sold half of his stake at 475p. The shares slumped following the news, but yesterday Bank of America Merrill Lynch rated the shares a buy, and upped its price target on news of the well to 575p, from 498p. Ophir was 1.6p better off at 408.5p and BG added 5p to 1,089.5p.

Analysts said the news that Cineworld's acquisition of the Picturehouse cinema chain had been referred to the Competition Commission was not bad news for the stock and Peel Hunt rated it a buy. The shares showed a 7.75p rise to 297.25p.

The small-cap rubber engineer Avon Rubber reported solid half-year results. The group makes rubber products including respiratory devices, rubber tubes for dairy milking and gas masks for the defence sector, and it bounced 6p to 426p.

Oxford Biomedica was 0.35p healthier at 2p after announcing a deal with the Swiss pharmaceutical group Novartis to work on a treatment of cancer cells.

The drug-testing group Cyprotex has won a long-awaited contract from the US Environmental Protection Agency and the shares advanced 0.5p to 3.88p.

The AIM tiddler Nostra Terra has bought more land at its Chisholm Trail oil prospect in the US to create a further 16 wells, adding to its four producing wells, and it jetted 0.04p to 0.5p.

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