Market Report: Wellstream suffers as takeover hopes fade

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The Independent Online

The oilfield services provider Wellstream was under pressure last night, declining against a firming market after Citigroup played down the prospects of a bid.

The stock, which fell by 17.3p to 499.7p, often features in market rumours, with recent chatter linking the group, which specialises in flexible pipes, with Saipem. Citi poured scorn on the theories, saying that deal activity involving competitors was "unlikely for multiple reasons". The broker said customers such as Brazil's Petrobras would be reluctant to see consolidation in the thinly supplied flexible pipes market, and "would likely discourage a purchase of Wellstream by its key competitors". Moreover, bid negotiations would distract competitors, who, given the uncertain business backdrop, could instead focus on their own organic potential.

"Further, we believe a satisfactory price level would not be easily achieved between a buyer and seller," the broker said, adding that some players – including Saipem – "have publicly stated they are not interested in acquiring flexible pipe manufacturers". "Finally, our meeting with the company did not give us reasons to believe that there are or have been any M&A discussions."

Switching its stance to "sell", Citi also weighed in on the outlook for Wellstream's earnings, which it said were exposed to uncertainties surrounding demand outside Brazil. As for margins, they may be vulnerable to dilution. "To grow its sales and respond to client needs, we believe Wellstream has to offer more installation and logistics services," the broker explained. "We estimate more installation is and will be diluting Wellstream's margins."

Overall, both the FTSE 100 and the FTSE 250 gained ground, rising by 40.48 points to 5244.37 and 39.11 points to 8958.6 respectively. Traders welcomed the Bank of England's decision to keep both interest rates and the parameters of its quantitative easing programme unchanged. Unconfirmed reports suggesting that British banks had struck a deal to reschedule Dubai World's debts also boosted sentiment, with Royal Bank of Scotland rallying to 31.34p, up 3.4 per cent or 1.0.15p, and Standard Chartered supplementing earlier gains with a 3.3 per cent or 48p rise to 1510p.

Lloyds Banking Group, the strongest of the lot, advanced by 6.5 per cent or 3.53p to 58.22p as investors rushed to get in before its rights issue offer closes today and RBS weighed in with some words of support.

"We see Lloyds as a powerful restructuring opportunity, underpinned by margin expansion, cost synergies and lower bad debt charges," RBS analysts said, adding: "Weakness in non-UK asset quality remains problematic, but should remain manageable in the group context. Much more powerful for overall group impairments is the stabilisation of UK property prices."

The rising appetite for risk was also evident in the wider financials space, with Standard Life rising by 4.1 per cent or 8.1p to 207.5p. Man, the hedge fund group which had been under pressure amid disappointment at its weekly net asset values update, also bounced back, gaining 3.8 per cent or 11.6p to 315.9p.

Elsewhere, BT gained 2.5p to 142.7p after Morgan Stanley raised its target price for the stock to 190p. "BT's cash flow generation is improving, driven by improved control of Global Services and capex [capital expenditure] in particular," the broker said, reiterating its "overweight" stance. Broker support also boosted sentiment around BSkyB, which rose by 3.8 per cent or 20.5p to 564.5p after Cazenove moved its view to "outperform" from "in line". The broker said that, despite three sets of positive results, Sky had struggled to perform owing to the threat of increased regulation and the investment in volume growth, adding: "Going forward, we expect reduced concerns over regulation and accelerating profit growth to lead to a re- rating of the shares."

Retailers were in focus once again, this time thanks to Deutsche Bank, which said the outlook for the year ahead was "not as bad as feared". "We are more optimistic than consensus about the UK consumer in 2010," the broker said, adding: "Our sub-sector analysis indicates DIY to be the most attractive sector, whereas entertainment is the least."

In keeping with its assessment, Deutsche named Kingfisher, which gained 3.6p to 234p, as its top pick. Kesa Electricals, which was upped to "buy" in the same review, added 3.7p to 158.5p. Marks & Spencer, which was cut to "hold", failed to make any headway, easing by 0.1p to 400p.

Further afield, Numis dampened the mood around PZ Cussons, which fell by 4 per cent or 10.7p to 255.5 after the broker, weighing in on the recent trading update, moved its rating to "reduce". Numis said that while the update was "solid overall", with Europe and Asia performing strongly, Nigeria had experienced a slowdown.

"We believe that the underlying long-term opportunities in Nigeria remain attractive but would take some money off the table given the pricey valuation and the fading momentum in the main growth driver of the group," the broker added.