Standard Chartered climbed on talk of a market raid by its biggest shareholder, while hopes of job cuts put ICI in focus. But grim earnings news from Microsoft, an expensive-looking acquisition by Yell and pre-results jitters for BG all conspired to send London's top stocks sharply lower for a second day.
The FTSE 100 index lost 36.9 to 6023.1, its lowest close in a fortnight. All the broader indices were similarly negative, with the FTSE 250 off 46.9 at 9878.7. The mid-cap measure has dropped more than 1.2 per cent since reaching a record on Wednesday, while the FTSE 100 is down 1.8 per cent from the five-year high it reached last week.
However, while traders were blaming the City's hackneyed "sell in May, go away" mantra, average daily turnover suggested little actual sell-side pressure ahead of Europe's three-day weekend. Just over 3 billion shares had been booked by the close.
Across the Atlantic, the Dow Jones Industrial Average slid 10 at 113741 Microsoft's warning countered economic data that supported hopes the world's biggest economy is growing rather than overheating.
For an overview of world markets, click here.
US gross domestic product grew at a 4.8 per cent annual rate between January and March, more than twice the 1.7 per cent rate in the fourth quarter but slightly below the 4.9 per cent rate that Wall Street economists had forecast. That followed Ben Bernanke, the Federal Reserve chairman, yesterday hinting that central bank may pause its rate-tightening cycle.
But shares of Microsoft dropped as much as 13 per cent, the most in six years, after its quarterly earnings, sales and forward guidance all disappointed against Street estimates. The world's largest software company said late yesterday that profit rose 16 per cent to $2.98 billion, or 29 cents a share, versus market forecasts of 33 cents.
Microsoft also said earnings will be hurt by increased investments for its software services business, accelerated shipments of its Xbox 360 game console and higher costs to prepare for new versions of Windows and Office. For the broader marketplace, the group predicted personal computer and server computer sales growth would slow in its fiscal year starting July.
Track today's trading by industry sector here.
Back in London, Yellow Pages printer Yell dived 15.5p to 514p after it confirmed plans to buy Spanish peer TPI for £2.3 billion. That which looked expensive to some, priced 13.6 times 2006 underlying earnings compared with historic transaction multiples in the sector of between eight and ten times.
Assuming the deal completes in the summer, Spain will likely account for about a fifth of Yell's business. The advantage is that it will reduce reliance on the highly regulated UK market, which will reduce to about a third of turnover. The disadvantage is that it will reduce its exposure to the fast-growing US market to about 45 per cent, from 60 per cent currently.
Credit Suisse's team was not keen. "We question the strategic value of this acquisition while the group has still much development potential in the US and the UK especially on the Internet front, where we believe the group has not been fulfilling its full potential until now," it said.
The more immediate concern for traders was that Yell was raising £350 million via new shares, which equivalent to 9.7 per cent of its market capitalisation. They were punted at 510p each through Deutsche Bank, Goldman Sachs and Merrill Lynch.
For more on the Yell purchase, click here.
The heavyweight energy stocks traded lower even as oil found support after three days of declines, with New York's benchmark crude contract bouncing more than a dollar to trade above $72 a barrel. That followed Mohamed ElBaradei, head of the International Atomic Energy Authority, cliping on Iran to the United Nations Security Council for not complying with demands to stop enriching uranium.
BP lost 7p to 676.5p and Shell slid 32p to £19.61 ahead of first-quarter results next Thursday.
BG Group, which posts quarter numbers a day earlier, dropped 24p to 737p as it hosted what was, by most accounts, a fairly dull AGM.
One dealer pinned the day's sharp decline on a note out of the Goldman Sachs trading floor talking about North Sea tax phasing and describing the shares as "17 per cent overvalued" -- although in truth the content looked nothing new.
For a preview of BG's results and all the week's coming events, click here.
Mining issues were more resilient, with Antofagasta and Xstrata both holding steady. Bulks such as copper were narrowly positive on the London Metals Exchange, having spiked sharply lower mid-session yesterday in reaction to the news from Beijing.
UBS analysts today rebased its commodity price forecasts out to 2008, leading it to raise UK miners' earnings forecasts on average for the three years by 20 per cent, 41 per cent and 59 per cent respectively. While the Swiss broker expects prices of copper, nickel and coal to moderate from current levels, it still reckons market consensus expectations are too low by 64 per cent for 2007.
UBS named Xstrata, Rio Tinto (down 14p to £30.16) and Vedanta Resources (up 8p at £15.78) as its preferred sector picks. The broker also raised its rating on platinum specialist Lonmin to "buy" from "neutral", a move based on assumptions that platinum prices will climb 8 per cent and 24 per cent this year and next.
Lonmin closed up 28p to £27.30. UBS targeted £35 for the shares, and set goals for Rio, Xstrata and Vedanta of £42, £30 and £20 respectively.
For more on natural resources stocks, click here.
This being a Friday, the bid speculation doubled in quantity and halved in quality. Stories going round the City's less reliable e-mail groups included hotels operator InterContinental being a target for a private equity group at up to £12.50 a share, and Alliance & Leicester crossing the radar of a European lending peer.
InterContinental finished ahead 1p to 967p and A&L was up 11p to £11.23.
For detailed information on InterContinental, click here.
Meanwhile, Standard Chartered climbed 41p to £14.56 on talk that Temasek, the Singapore government-backed investment agency, had tasked its brokers to use recent weakness as an opportunity to buy more shares in the Asia-facing lender.
Temasek last month bought 11.55 per cent of Chartered from the estate of the Khoo Teck Puat, the late banking tycoon. That move was seen as dampening hopes that Chartered would be bought, as Temasek was viewed as a long-term holder rather than a strategic buyer.
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Friends Provident's move was off a firmer base, with shares up 0.5p to 196.75p. The insurer wrapped up reporting season among the blue-chip lifers by revealing quarterly sales ahead of expectations.
Group sales rose 26 per cent to £1.33 billion, compared with forecasts of £1.22 billion, as the insurer was boosted by pensions sales at home and stronger-than-expected growth abroad. Friends is the smallest of the big-four UK insurers, all of whom topped forecasts with their first-quarter reports.
Read Friends' statement here.
Back among the fallers, BSkyB (whose biggest shareholder is News Corporation, which owns Times Online) drifted 5p to 525.5p after the satellite broadcaster won all three Premiership football broadcasting rights packages in the first round of bidding. Shares had traded as low as 496.5p earlier.
The first theory on why related to the possibility that cable rival NTL may win the remaining three TV packages due for auction next week (no single broadcaster can hold more than five of the six avallable). But -- after it was widely noted that a three-nil lead is usually considered quite positive at half-time -- the concern soon switched to how much Sky may be paying.
Sky currently pays £341 million per season to maintain its monopoly on football rights. According to BNP Paribas, that may need to rise by 29 per cent to £440 million in order to render any rival bid by NTL uneconomic. But, even if NTL plays hardball with football, BNP saw the extra bidding cost to Sky as insignificant in the scheme of things: another £40 million on top would be equivalent to less than 1 per cent of annual sales and just 2.4 per cent of its annual programming budget, it noted.
"Winning the first three of six packages has cut the risk to BSkyB of losing a majority of the football rights (while) any excess increase in the amount paid for rights can be easily absorbed within the existing programming budget," BNP told clients. It repeated "outperform" advice on the shares.
For more on BSkyB and The Premiership, click here.
ICI finished down 0.75p to 375.5p, having climbed as high as 371p at the open after Deutsche Bank moved the stock onto its "buy" list. That move was in advance of the Dulux paint maker maker's first-quarter results, due March 4.
Deutsche was looking longer term. The broker told clients that cost cutting, stronger-then-expected pricing power and an operation recovery as Quest, ICI's flavours unit, has the potential to provide a "step-change improvement" in earnings and free cashflow. Shares, at just over 11 times 2007 earnings forecasts, do not reflect this, it argued.
"ICI is effectively a collection of independently run businesses with significant duplication of operating costs," said Deutsche. " As management pursues its strategy of greater integration there should be significant cost-cutting potential. We estimate that ICI can cut at least £160 million of costs (30 per cent of 2005 operating earnings) over the next four years."
For detailed information on ICI, click here.
Microsoft numbers put its UK equivalents on the back foot. Accountancy software maker Sage Group slid 7p to 250p and Autonomy, which does data processing packages, reduced 12.25p to 450.25p.
Fellow software maker ISoft dropped 23.25p to 117.5p, a record low, after its second profit warning of the year. The health care systems specialist cautioned that current-year earnings would be below market expectations because of contract delays -- which it blamed in part on bad publicity from the first warning.
The firm said it expected to report revenues for the year to April 30 in the range of £210 million to £215m, against current market forecasts of between £231m and £256m. Profit before tax was seen at £17m and £22m, having been expected at as much as £42m.
Back in January, iSoft warned that it had failed to deliver product as a sub-contractor a £6.2 billion re-fit of the NHS’s IT system, led by Accenture. Analysts have also noted that the company has a history of pre-booking revenue, meaning each product delay makes it vulnerable to historic restatements that could potentially breach credit agreements and force an emergency cash call.
However, iSoft said today that the revised figures put it within its debt covenants, adding that it believed the speculation was "unfounded".
Track iSoft shares here.
BBA lost 8.5p to 262.5p after the aerospace engineer scrapped talks to dispose of Fiberweb, its unwoven textiles business, so it could concentrate on a demerger. While disappointing to some, the news only crystallised a statement last month that the BBA was prioritising a spinoff over a sale.
The bigger negative was that poor trading at Fiberweb had continued into 2006 because of rising materials and energy costs, along with weaker demand from the US hygene market. This downbeat tone led analysts to cut around 10 per cent off their Fiberweb current-year earnings forecasts, which translated to about 4 per cent off the bottom line at a group level.
Dresdner said that, while BBA's shares should be underpinned by consolidation of the aerospace sector, one further disappointment still could put BBA's dividend on the line. "The costs associated with the Fibreweb business may increase further before management has de-mergered this business," said the German broker. "Without the de-merger of the Fibreweb business, we believe that there will be little change in the share price in the coming months."
Track BBA shares here.
Shares of power generators rallied after a week of sharp declines, which came after prices of European carbon emission credits halved to around 15 euros per tonne. This collapse, which was in reaction to annual data from The Netherlands, France and others showing a surplus of credits, triggered wholesale energy prices to retreat. (The EU is due to publish its 2005 emissions report in its entirety on May 15.)
British Energy and Drax have been star stock market performers so far this year, lifted both by higher electricity prices and rising gas costs, which increased the attractiveness of alternatives to gas-fired generation such as coal and nuclear. Falling CO2 prices, and the read-through for the wholesale market, unwound some of those gains.
But analysts saw was nothing to worry about over the short term, given most companies have already locked their electricity selling prices with forward contracts and will therefore show a net benefit from cheaper CO2 credit costs.
Drax was among the FTSE 250 risers, up 23p to 790p, while British Energy (which is nuclear, so does not trade CO2 credits) took on 4.5p to 662p.
On broker watch:
Morgan Stanley cut Smith & Nephew to "equal-weight" from "overweight" and started Go-Ahead with an "equal-weight" rating.
Numis raised Cattles to "add" from "hold" and cut Mitchells & Butlers to "hold" from "add". The broker also lifted VT Group to "buy" from "add".
Credit Agricole cut Tesco to "underperform" from "outperform".
Altium downgraded Raymarine to "add" from "buy".
And Goldman Sachs boosted Matalan to "in-line" from "underperform".
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