Market Report: Utilities takeover talk switches to Severn Trent
Thursday 26 May 2011
The utilities have been awash with bid speculation recently, and yesterday Severn Trent became the latest in the sector to find itself back in the takeover spotlight.
As vague rumours spread that a European company was mulling over a possible approach worth between 2,400p and 2,500p a share, the water group spurted up, briefly touching 1,501p. However, with traders playing down the talk, the plug was quickly removed and it ended up falling back to 1,488p, just 7p ahead.
It is not the first time such chitter-chatter has surrounded Severn, while United Utilities – up 2.5p to 617p – and Northumbrian Water – up 2p to 358.2p – are among its peers which have seen bid talk resurface in the past few months as well.
Market gossips also returned to the idea that Invensys could be a target as they got excited over vague speculation that a possible aggressor is waiting in the shadows. The engineering and industrial controls company is seen as potentially attractive after dropping around 20 per cent since February and – with a price being discussed of 450p a pop – it increased 5.1p to 298.2p on its first session since being replaced in the top-tier index by Glencore.
Further assistance to the talk was given by Collins Stewart, which said a buyout of Invensys's pension liabilities – often cited as a reason it would not be a bid target – could come "sooner than the market thinks". The broker's analyst Mark Wilson said the removal of the pension issue would "more easily allow a break-up of the two main businesses", adding that a separate valuation of its units would give investors a major upside.
Less keen on Invensys, however, was Citigroup, which cut its advice to "hold". Saying speculation about a bid "has been ongoing for nearly a decade", the broker conceded that hopes of an approach might underpin the stock at lower levels, but "given the lack of certainty, we do not believe this in its own right is a reason to be a buyer".
Soco International was another whose bid chances were in focus, and the explorer powered up 15.6p to 382.7p as rumours of potential interest from a state-owned oil group were reheated once again.
Despite the latest GDP figures showing a major slump in household spending, the FTSE 100 managed to recover from an early low of 5,810.46 points and finish 11.73 points ahead at 5,870.14.
Support came from the banks, which were seeing a rebound after fears over the eurozone and a warning from Moody's that it was considering cutting their ratings had knocked them back earlier in the week. They were hardly seeing huge signs of confidence, but Barclays did advance 6.2p to 271.8p while Royal Bank of Scotland ticked up 0.85p to 41.29p.
The miners were generally positive, with Antofagasta pushed forwards 20p to 1,216p after Morgan Stanley decided to upgrade its advice to "equal-weight". However, Glencore's woes continued as the commodity trader dipped 2.8p to 522.2p on its second day of unconditional trading, leaving it yet further below its 530p issue price.
Its fall came despite RBC Capital Markets initiating coverage with a 600p target price and a "sector perform" rating, though the broker's analyst Timothy Huff did warn that "for the stock to trade significantly above its current price we think the sector will... need to rerate". The company also made its market debut in Hong Kong, where the reaction was similarly unenthusiastic, with its shares closing HK$1.63 lower at HK$64.9.
At the other end, Diageo was suffering a hangover on fears it is developing a taste for tequila. The Guinness-owner slipped back 8p to 1,256p following reports it is talking to Jose Cuervo about a number of issues, including a potential bid for the brand of more than $2bn and an extension of their current distribution arrangement.
Also behind was Vodafone – 1.15p worse off at 168.6p – after Nomura announced it was hanging up on the mobile phone giant, changing its advice to "neutral" from "buy". Saying that "European mobile momentum is heading south", its analysts added that – with Vodafone having the highest exposure to the continent – the likelihood of the company's revenue growth missing its forecasts was growing stronger.
On the FTSE 250, Cable & Wireless Communications lost nearly 12 per cent after the telecommunications company's comments on its Caribbean operations were more cautious than had been expected. Following its full-year results, in which it said its revenue had risen 4 per cent, the group slid back 5.59p to 42.41p as Investec's analysts said the region showed "no signs of the required recovery".
Down on the Alternative Investment Market, Cupid was working its magic as investors attracted to the online dating group helped it to power up 34p to 162.5p. The owner of such sites as benaughty.com and flirt.com said it was trading ahead of the market's forecasts and that it now pulled in more than £4m of revenues each month.
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