Vodafone inched higher after the UK telecoms watchdog proposed some surprisingly industry-friendly call charge limits, boosting hopes that the regulatory threat against European mobile operators has been exaggerated.
The wider market struggled to make progress. Forecast beating results from Next boosted the retail sector, Hanson gained on a well-worn takeover rumour, a profit alert from MyTravel hit holiday companies, and resources producers remained sidelined.
All that left the FTSE 100 to close easier by 3.3 at 5892.2, having peaked at 5913.2 at the open. Shares trading without rights to their latest dividends, such as Diageo and Scottish & Newcastle, pegged the index back by about 2.5 points.
Meanwhile, the Dow Jones Industrial Average added 12.9 to 11511.5, holding on to yesterday's 101-point advance as oil stabilised after seven straight days of declines.
A barrel of New York rallied off its lowest level since March, gaining 24 cents at $64.05 a barrel as US inventory data showed crude supplies towards the upper end of historic levels, showing a larger than expected increase in distillate stocks. Oil has been on offer recently as the rhetoric from Iran softened, and the International Energy Agency downgraded forecasts of global oil demand to factor in slower economic growth.
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Back in London, Vodafone inched up 0.5p to 118p after Ofcom, the telecoms watchdog, proposed cuts to wholesale call charges between mobile networks that were much more moderate than the City expected. Morgan Stanley said it set a high benchmark for other European regulators.
For Vodafone and O2 (now owned by Telefonica) Ofcom proposed to keep termination rates broadly flat when the current regime expires in March 2007, with a cut of just 5.8 per cent required by March 2011. Vodafone currently charges an average rate of 5.63p for connecting cross-network calls.
While other operators were harder hit, Ofcom's proposals were still considerably more moderate than those put forward by other European regulators. Orange (France Telecom) and T-Mobile (Deutsche Telekom) may be required to cut charges by 16 per cent out to March 2011, creating a level playing field between the UK's three main operators.
"The UK telecoms regulator has been at times in the past something of a leader in setting the thinking for the other European regulators, although this settlement in respect of termination rates would be somewhat at odds with more aggressive language recently from the European Commission," noted Goldman Sachs. Its team had been expecting a 10 per cent reduction in UK termination charges in each of the next three years.
Analysts said that, with connection rates kept relatively high, the biggest winners will be those with the largest market share. They have a greater proportion of same-network calls and can price more aggressively.
The biggest loser could be Hutchison Whampoa's 3UK network, which Ofcom said will have to cut its current 11.7p termination charge to 6p. This will cost the operator £130 million per annum in annual cashflow, "further calling into question its viability," said Morgan Stanley.
Vodafone has recently been mooted as a possible buyer of 3UK, assuming Hutchison decides to bail out.
Hedge fund manager Man Group was the among the sharpest blue chip fallers, down 10.75p to 432.75p, after its flagship fund reported a sharp drop in net asset value last week.
The AHL Diversified Futures fund, which invests in a raft of asset classes and provides about 13 per cent of Man's group profit, said late yesterday its net asset value slid 2.42 per cent in the seven days to September 11. The black box-controlled fund is up 11.5 per cent in the past 12 months -- beating the FTSE 100 gain of 8.9 per cent, but perhaps not by enough to justify its hefty administration charge of 1.2 per cent per annum.
On the opposite side of the blue chips, Next was ahead £1.29 to £18.34 as its Directory home shopping division beat expectations, more than compensating for weak trading at its high street stores. Britain's second-largest clothes retailer said six month earnings before interest and tax totalled £191.7 million, up 5.8 per cent and about £10 million better than expected.
Directory sales rose 15 per cent and earnings were up 44 per cent to £59.6 million as Next put more clearance stock through its catalogue and online business. This strategy was introduced at the interim last year, so the year-on-year comparison will likely moderate in the second half.
"Figures are ahead, trading is better than feared but the company is understandably cautious about the upcoming trading period. We think this is probably not a strong enough picture to spark a rerating in the shares, but we would continue to buy the value story," said Merrill Lynch, which repeated a target of £19.
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BAE Systems also breezed past expectations, with underlying interim earnings of £788 million compared with the City consensus of £638 million -- although BAE included a £63 million one-off benefit from a change in pensions accounting that was not baked into analyst forecasts. Shares erased early gains to fade 2.75p at 382.75p.
US defence spending drove much of BAE's first half growth, but management indicated not to assume a similar performance in 2007. Spending on Land Systems (tanks, artillery) could plateau this year, while likely US budget restrictions will hold back its Electronics & Integrated Solutions business (missile targeting systems, radar jammers, spy equipment).
Pacifists need not celebrate yet, argued Morgan Stanley. "We continue to believe the risk is to the upside as spending could remain stronger for longer, particularly in land systems, given the need to replace and upgrade equipment worn out in conflict," it said.
For more on BAE, click here.
On a more speculative tack, Hanson added £1.29 to 677.5p as familiar rumours were given another airing that the aggregates maker could be a target for Mexican peer Cemex. Usually, Hanson takeover talk flounders on worries about its asbestos exposure and its reliance on a weakening US construction market.
In the resources sector, BP moved higher by 7p 589p with the help of JP Morgan, which raised its recommendation to "overweight". Gordon Gray, analyst, told clients that the stock's weak performance in recent days has adequately discounted its recent troubles, and presents a good buying opportunity.
"Even with further delays to Thunder Horse and Atlantis in the Gulf of Mexico, BP has one of the best combinations of growth and value creation in the sector on our estimates," he said. The shares' valuation, on par with Shell and at a 20 per cent discount to Exxon Mobil, is "highly attractive for what remains a premium company with excellent assets and prospects."
Other commodity stocks showed narrow losses as trade dried up on the London Metals Exchange, which has been battered over recent days by a stronger dollar and spillover from the oil market. Copper, down 9 per cent in less than a week and well below its 100-day moving average, faded a further $120 to around $7,440 a tonne by London's third rings.
Xstrata was down 27p to £22.21 and Rio Tinto eased 27p to £25.11.
Generic drug maker Hikma Pharma -- perhaps the FTSE 350's least discussed company * -- led the mid-caps with a gain of 34.75p to 400p. Its operating profit was ahead 3 per cent to $42 million, in line with expectations as weak US trading offset growth in the Middle East and for its injectables business. Nearly 30 per cent of Hikma's sales come from a contract with the US Veteran's Department to supply blood pressure and heart treatment Lisinopril.
Analysts said that new product launches in the US over the second half should stabilise sales there, while the other businesses provide a growth base. Merrill Lynch -- one of only two sell-side brokers to cover the stock -- kept a "buy" stance and 480p target.
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MyTravel dived 12.75p to 188p after warning that after a difficult summer it expected annual profit to miss market expectations. The package holiday operator said its operating profit will be between £55 million to £60 million, some 32 per cent below the City consensus of £85 million, despite it exceeding cost savings targets.
MyTravel said an already difficult season had been further affected by terrorist incidents in Turkey and Jordan. The UK business, where winter charter bookings are down 11 per cent, is not now expected to return to profitability this year as was originally planned.
Credit Suisse cut its rating on MyTravel to "neutral" from "outperform" and set a 190p share price target. It also cut earnings forecasts by 53 per cent this year and 20 per cent next.
Rival operator First Choice followed in MyTravel's slipstream, falling 8.5p to 208.25p. First Choice competes with MyTravel in the UK short haul, selling about 1 million packages, but has more exposure than its peer to the more flexible specialist market, which provides about half of group profit.
For more on the warning, click here.
Punter's favourite Victoria Oil & Gas climbed after the energy prospector said it had agreed to supply gas to a Moscow power station, assuming it finds any.
The stock -- moved from less than 40p to more than 260p in the four months to March, then dropped back to below 80p in the four months that followed -- today rallied by 14.5p to 108p before closing at 96p. Victoria's future value depends entirely on results from its West Medvezhye gas field in Siberia, with a report the key 103 test well due soon. While there was an obvious temptation to jump to conclusions, traders warned that today's deal could not be seen as an indicator to the test results.
On broker watch:
Dresdner Kleinwort lifted Paypoint to "buy" from " hold" and raised BSS to "buy" from "add".
Cazenove upgraded Pinewood Shepperton to "outperform" from "neutral".
And UBS lifted Misys to "neutral" from "reduce".
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