Political uncertainty in the eurozone persists despite EU budget deal, with doubts over Rajoy and Berlusconi
As leading shares suffered their worst week for nearly three months, Imperial Tobacco was one of the main fallers despite continuing takeover speculation.
Analyst Martin Deboo at Investec cut his rating on the cigarette maker from buy to hold, and reduced his price target from £25.80 to £24.50. But he said there was still the prospect of the company being taken over by British American Tobacco and Japan Tobacco, even if not immediately.
We continue to think that the attraction of a take-out by a joint BAT/Japan Tobacco consortium will eventually become irresistible, given the synergies that we think are available, the increasingly constrained organic growth outlook for the industry and the low costs of debt finance. If anything we think the probability is increasing, as Imperial's challenges mount and its valuation sinks.
However he said such a deal would be complex and time-consuming, and depended on a restructuring at Japan Tobacco first. As for Imperial's prospects he said tough trading conditions in Europe would constrain its growth, with profits expected to be lower in the first half:
The response is to seek fresh cost savings. Back of a fag packet, we think that £150m-£200m of annual savings will be needed to narrow the growth gap to BAT. While there might be some low-hanging fruit in the supply chain, the big picture is that savings need to be achieved relative to a starting point of high margins by peer standards.
Imperial closed 47p lower at £23 on Friday, the biggest faller in the leading index. Overall the FTSE 100 closed at 6263.93, a 35.51 rise on the day. But since Monday the index has dropped 84 points, its biggest weekly points fall since 16 November last year. as investors cashed in some of their new year gains amid renewed political uncertainty in the eurozone and despite ministers agreeing a new EU budget.
A corruption scandal in Spain threatened prime minster Mariano Rajoy, while in Italy there were concerns as Silvio Berlusconi gained ground in pre-election polls. Any return of the former Italian prime minister to power risked undoing many of the reforms put in place by the technocratic Mario Monti, said analysts.
On top of that there were downbeat comments on the prospects for the eurozone economy from ECB president Mario Draghi, which unsettled the euro.
But positive Chinese trade data on Friday pushed mining shares higher. Antofagasta added 8p to £11.32, helped by HSBC raising its recommendation from underweight to neutral. The bank was also positive on Anglo American, up 35.5p to 1972.5p. The data from China - now a key consumer of commodities - showed a 25% jump in exports in January, better than expectations of a 17% rise. Imports climbed 28.8%. Analysts said the figures were distorted by a new year holiday, but still showed the economy was strengthening.
Eurasian Natural Resources Corporation rose 6.7p to 377.7p. Its shares benefited from a positive production update earlier in the week, and revived bid speculation. Bank of America Merrill Lynch said:
Due to FTSE 100 free float rules introduced last year, companies must have at least 25% free float by the end of this year. ENRC currently has an 18.5% free float. An equity placement appears to be the obvious solution. An alternative end-game however, is in the opposite direction, i.e. minorities are bought out in a takeover. Recent press reports have suggested both founding shareholder Alijan Ibragimov, and current largest shareholder Kazakhmys as interested in making a bid for the whole company, mooted to be in the region of 600p per share.
Elsewhere GKN, the automotive and aerospace group, accelerated 9.6p to 255.5p after buoyant Chinese car sales figures.
Pump maker Weir climbed 45p to £21.23 on hopes of increased business from fracking operations and also supported by an upgrade from UBS. The bank issued a buy note and raised its price target from £20 to £23. The bank said:
Weir's peer group of Metso and Outotec surprised on both orders and profits. There is no doubt mining capital expenditure is coming down but the processing market seems better insulated so far. Metso, a competitor in slurry pumps delivered an upbeat assessment of the mining services market, describing it as "excellent".
UBS also helped credit information company Experian climb 13p to £10.96 after the bank moved from neutral to buy.
Royal Bank of Scotland ended up 6.2p at 339.1p. The bank was the latest to settle over the libor scandal, paying £390m to UK and US authorities for its part in rigging the inter-bank lending rate.
Vodafone climbed further after Thursday's results, up 2.05p to 173.9p. Analysts continued to speculate on the future of Verizon Wireless, the joint venture between Vodafone and US group Verizon. Bank of America Merrill Lynch, which moved its recommendation from neutral to buy, listed four possibilities:
First, the current status quo may remain in place (likely over the near-term). In this case, Vodafone's US dividends would rise very sharply, by more than 50%
Second, Vodafone could consider a partial US stake sale – this would highlight US value, non-US value and the value of tax credits. Our reading of the current telecoms environment is that Vodafone may be more open to selling some of its US stake. A full stake sale is very unlikely, in our view.
Third, Vodafone and Verizon could merge over time – we believe Vodafone would receive a decent premium into any merger, given the PE multiple differential.
Lastly, Vodafone Group could be acquired outright, and subsequently split up.
Smith and Nephew slipped 1p to 709.5p as Societe Generale issued a sell note on the medical equipment group. It said research spending would take time to come through to earnings, and it was uncertain about the company's acquisition plans:
[Its] track record on M&A is mixed - the chief executive reiterated his interest in bolt-on deals, with a particular interest in emerging markets (where many of the targets are privately owned and may have poor financial disclosure).
Marks and Spencer added 4p to 382p after it took analysts and investors to Istanbul to showcase its international strategy in the region. Analyst Nick Bubb said:
By working with powerful local partners, M&S can get the best pitches in the new shopping centres and the recently revamped Bagdat flagship store in Istanbul would certainly put many of M&S's UK stores to shame in terms of visual merchandising. So, the visit to Istanbul succeeded in convincing the City that M&S have decent growth plans in the key region of the Middle East. But if you took the profits that M&S generate from their Middle East region out of their International Division total profits there wouldn't be much left…as M&S is still bedevilled by the problems of its "legacy" operations in Ireland and Greece and the growing pains in newer regions like China. There is some way to go before the M&S International Division is firing on all cylinders.
Ocado rose another 3.4p to 118.4p after Thursday's inline trading update, and renewed talk it could be a bid target for Marks or Morrisons as they played catch up with their online offerings.
Lloyd's of London insurer Catlin closed 20.5p lower at 518p after full year profits of $339m fell short of the $384m expected by analysts. Part of the shortfall came as Catlin raised its projected loss from superstorm Sandy from the $200m it forecast in December to $225m.
But Bwin.party digital, the world's largest listed online gaming group, jumped 19.1p to 135.8p, a 16% rise which made it the best performer in the FTSE 250, on hopes it could get a licence in New Jersey.
It has a joint venture with Boyd Gaming in the state, and on Thursday its governor indicated that he would sign a law allowing the licensing of internet casinos and poker, subject to some amendments. Governor Christie vetoed a gaming bill in its current form but left the way open to backing a compromise bill by saying:
Now is the time for the state to move forward, leading the way for the nation, by becoming one of the first states to permit internet gaming.
Analysts at Numis said:
The successful start of licensed online gambling in the state is likely in our view to have two positive effects. First, to encourage some other states to license online gambling. Second, to encourage Federal legislators, even those who oppose gambling, to pass Federal legislation in an attempt to control the development of the US market.
The New Jersey news gave a lift to other companies involved in online gaming. Playtech put on 42.3p to 532p while 888 was up 19.25p at 135p, Betfair was 14p better at 693.5p, Sportech added 4.25p to 80p and William Hill rose 4.7p to 399.6p.
Finally, ahead of Valentine's Day, the City fell out of love with online dating group Cupid. The owner of Uniform Dating and other websites lost more than a quarter of its value over the week, including a 21.25p fall on Friday to 135.25p despite the company issuing a statement intended to calm nerves. Following an online blog questioning its prospects, Cupid said trading was in line with expectations but admitted it was part of a radio investigation into the online dating industry. The Radio 5 programme is due to be broadcast on Sunday.
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