Kelda retreats from high on broker’s ‘virtual offer’ note

KELDA, the owner of Yorkshire Water, retreated from yesterday’s record high as Citigroup said the shares were already discounting a takeover approach, even though peer Severn Trent looks a more likely bid candidate.

“We believe investors should take profits in Kelda now and, in effect, accept what amounts to a virtual offer at an attractive valuation,” Peter Bisztyga, analyst, told clients in a note that cut the broker’s recommendation to “sell” from “hold”.

Takeover hopes have pushed Kelda shares higher by 22 per cent this year, with speculators targeting the group because it has relatively little debt and will be a pure-play water and sewerage company once it completes the disposal of Aquarion, its US arm.

The management team under John Napier, chairman, also has a strong reputation in the City.

However, Mr Bisztyga thought that financial buyers were more likely to target cheaper companies whose managment teams would be more open to the idea of selling up.

“This favours Severn Trent: it is cheaper and its management could see a sale as being the logical conclusion to its recent restructuring process,” the Citigroup analyst wrote. Kelda dropped 21½p to 916p, the sharpest blue-chip faller, while Severn Trent ended the day down 4p at £14.51.

The wider London market went into retreat for a third straight session, with the FTSE 100 closing down 20.30 at 6,140.00 to set its lowest reading this month. Wall Street’s holiday kept trading volumes light, with daily turnover down about a third on recent levels.

Cairn Energy beat the weak trend, adding 52p to £19.70 on news that it had sold 10 per cent of shares in Cairn India to Petronas, the Malaysian oil business, as part of a placement ahead of the unit’s flotation next month. The sale implies Cairn’s stake in the India business could be valued at £3.3 billion — 15 per cent more than initial expectations, and about £200 million more than Cairn’s market capitalisation. But the price was only indicative, so Petronas and other pre-IPO buyers may end up paying less if the float disappoints.

Dealers also noted that Petronas had committed not to raise its stake and intends to remain on good terms with Cairn management. Taken at face value, that could limit the chances that Cairn India will be bought following the flotation.

On the leaderboard, Imperial Tobacco added 33p to £18.55 and Gallaher was ahead 7½p at 935p after the European Court of Justice ruled that British consumers who order alcohol and tobacco online from the European Union should not be allowed to dodge paying UK duties. The EU had been expected to rule the other way after the Advocate General had recommended liberalisation.

As well as reducing British smokers’ incentive to buy cigarettes from abroad, the decision bolstered hopes that the European Commission’s proposals to reform the tobacco tax system, currently being drafted, will retain the status quo. Adam Spielman, a Citigroup analyst, told clients: “Had internet trading been allowed, it would have created more incentives for real compromises. Now there is less pressure to agree reform.”

Enterprise Inns was the top blue-chip performer, up 38p to £12.05 as brokers warmed to its annual results and increased share buyback on Wednesday. There were also suggestions that a buyout fund could make an approach aimed at splitting the company’s property portfolio from its pub operations, an option that Enterprise management has not favoured. Meanwhile, ICI was ahead 12p at 435p on hopes that it will become a more digestible takeover target after its £1.2 billion sale of the Quest flavours and fragrances division.

British Land slid 33p to £15.52 after Sir John Ritblat, outgoing chairman, sold the majority of his holding for £56.5 million. The shares were further hindered by a broker downgrade, with HSBC moving to “neutral” on worries that its new developments are too concentrated in the volatile City of London office market.