BAE Systems retreated on concerns that Saudi Arabia might pull out support for its £76 billion Eurofighter deal. That added to weakness among the exporters as the dollar hit a two-year low against sterling, sending London’s top stocks into negative territory for a fifth straight day.
The FTSE 100 index lost 72.0 to 6050.1, its weakest close since early October. The FTSE 250 was no more resilient, losing 96.6 at 10493.0 even after First Choice and Wilson Bowden revealed takeover interest.
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BAE Systems dropped 12.5p to 391p on speculation that the Saudi government could tear up its agreement with Britain for 72 Eurofighter Typhoon aircraft if the Serious Fraud Office opens up Swiss bank accounts allegedly linked to members of the Saudi royal family. The Eurofighters are being built by a European consortium including BAE Systems.
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According to reports, the Saudis could switch the Eurofighter contract to Rafale jets, made by Dassault of France if the Serious Fraud Office opens the accounts as part of its investigation into whether BAE bribed Saudi defence procurement officials under an original defence contract, Al-Yamamah.
“Clearly the Saudis are and have long been very sensitive to the SFO investigation into Al Yamamah-related payments and activities, and cancellation of the Eurofighter contract is not unthinkable,” said JP Morgan. “However, we believe that cancellation would be a last resort for the Saudis, given the security and diplomatic relationship between the countries, and that it does not hurt BAE’s interests that the risk thereof is highlighted by such stories.”
“There appears to be a potential impasse,” added Merrill Lynch. “The Saudi government would not want to be embarrassed, but the UK government cannot interfere with the SFO investigation.” It said the deal was worth about £2 billion for BAE’s net present value, equivalent to 65p per share.
Other dollar earners to fall back included Hanson, down 21.5p to 719.5p, and Rolls-Royce, off 10p to 428.75p.
The euro today hit a fresh 20-month high of $1.3172, then slipped back after Thierry Breton, the French finance minister, said that vigilance would be needed on the dollar, and that the issue would be discussed with EU finance ministers later in the day. The greenback has tumbled following last week’s strong German business confidence survey and comments from the Chinese central bank deputy governor that it may not be wise to hold the greenback as a reserve currency.
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Sage Group fell 6p to 240.25p ahead of annual results due Wednesday. SocGen was recommending a “sell”, arguing that the accountancy software maker may have to spend more on sales, marketing and research next year to compete with Microsoft.
“We believe risks are increasing for Sage as competitive pressures appear to be intensifying, especially for the company’s US business. We believe this could lead to weaker-than-expected growth, pricing pressure and potentially lower margins,” the SocGen team, led by Stefan Slowinsk, told clients. “We believe this may create concerns about the sustainability of margins across the whole business.”
Package holiday firm First Choice was among the mid-cap risers, up 29.5p to 257p after confirming it is in talks with a number of parties over the future of its mainstream tours division, which accounts for 45 per cent of profits. MyTravel, up 14.25p to 214p, admitted it has made one of the approaches. Tui and Thomas Cook are other possible preators, according to analysts.
That follows months of intense speculation about industry consolidation: First Choice was in talks with Kuoni about a merger earlier this year, to no end, while Lufthansa has said it is likely to dispose of its 50 per cent stake in Thomas Cook, with Karstadt the likely buyer. There is also reported to be interest from private equity.
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“We think there are too many external pressures for the large players to remain independent, and that the significant synergies available in combining tour operators make large deals inevitable,” Morgan Stanley said. The broker’s team was positive on First Choice’s possible disposal, saying it would allow management to focus on higher quality and higher growth markets such as activity holidays and specialist business. For MyTravel it would provide a profitable bedrock for the turnaround of its own lossmaking UK mainstream business.
House builders also beat the weak trend after Wilson Bowden , up £2.67 to £20.98, confirmed it had received bid approaches and was in preliminary discussions with a number of parties. That followed the Sunday Times reporting that rivals George Wimpey, Redrow, and Bellway have all made enquiries.
United Business Media was ahead 13p to 710p on talk that Apax, the buyout group, was considering making a £500 million bid for its PR Newswire unit. Meanwhile, Trinity Mirror was ahead 8p to 500p on a report that private equity firms Candover and Apax are considering bids for all or part of the newspaper publisher
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