Market Report: Yell falls on fears over its banking covenants

Yellow Pages publisher Yell was the focus of concern yesterday, with early rumours suggesting that the company, which has often been highlighted for its high levels of debt, either had or was close to breaching its banking covenants. There was no comment from the company and, in reaction to the chatter, Yell stock slumped to an intra-day low of 135p, down by 7.7 per cent on Tuesday's closing price.

The speculation failed to persuade Edward Hill-Wood, an analyst at Morgan Stanley: "The probability that Yell has already breached a banking cov-enant is extremely low and, given that covenants are set on a rolling 12-month basis, it would imply a catastrophic fourth-quarter performance. In that case, the company would have already been forced to issue a profits warning – it hasn't done that."

Mr Hill-Wood added: "We believe the current gap between profits and undisclosed covenant levels is around 15 per cent."

Unsurprisingly, the effect of the rumour had mostly worn off by the time the market closed. Yell ended the day down 2.50p, at 143.90p.

Overall, the FTSE 100, after a buoyant day on Tuesday, returned to form yesterday, closing 60.20 points down at 5,545.60. Banking rumours attracted the attention of the UK's Financial Services Authority, which confirmed that it was investigating trading in UK financial shares in recent days. Sally Dewar, the FSA's managing director for wholesale and institutional markets, said the regulator "will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them."

The FTSE 250 was down, too, shedding 50.30 points to 9,551.20.

HBOS, which strongly denied speculation concerning its financial position, was down by 7.08 per cent or 34p to 446.25, at the bottom of the FTSE 100. Miners Lonmin, which lost 6.89 per cent or 223p to 3,014p, and Vedanta Resources, which lost 6.03 per cent or 129p to 2,010p, were at second and third place on the loser board.

On the FTSE 250, property company Shaftesbury was up by 0.98 per cent or 5.50p to 566p. Following weekend news reports that activist investor Laxey Partners, acting for its AIM-listed Terra Catalyst Fund, had assumed control of an almost 12 per cent stake in the company, market speculation suggested that a bid was in offing.

The talk held that Laxey, which reportedly assumed its stake via complex contracts for difference, was preparing an £8-per-share offer for Shaftesbury. It was suggested that an approach was likely to be made within the next two weeks.

One market source, pointing to the company's statement on its first day of dealings at the end of February, said that Terra Catalyst was floated to invest in listed property businesses such as Shaftesbury, and that it would be "no surprise" if an offer was forthcoming. Terra said that its strategy "may also involve it making takeover offers for portfolio companies and taking management control of such companies".

Terra Catalyst Fund's share price was up by 0.24 per cent or 0.25p at 102.50p.

Mitchells & Butlers, the pub company which is the subject of a takeover approach from Punch Taverns, suffered some deep bruises in early-morning trades yesterday. A sell-off was sparked by a note from Lehman Brothers headed: "Capital injection needed."

"Mitchells & Butlers is conducting a strategic review with results to be announced on 20 May," Lehman said. "We believe this will conclude that capital investment needs to be cut to retain the dividend payment and that the company could require a capital injection."

A statement from MAB said: " Mitchells & Butlers categorically refutes these suggestions," adding: "The group has borrowing facilities to meet all of its financial requirements. The company has no requirement for any capital injection to meet its existing funding needs."

The statement, while keeping the stock clear of an intra-day low of 284p, failed to rescue the share price from the red. MAB closed at 340p, down by 3.55 per cent or 12.50p.

On AIM, shares in Faroe Petroleum climbed by 2.65 per cent or 3.75p to 145.25p as news emerged that Dana Petroleum had lifted its stake in the company to 27.53 per cent. Dana's chairman, Colin Robert Goodall, also chairs Parkmead, the London-based merchant bank which holds a 2.78 per cent stake in Faroe.

While under the Take-over Panel rules there is no automatic presumption that two companies are acting in concert merely because they share a director, or directors, if they were acting in concert, Dana and Parkmead's combined holding would take them over the mandatory takeover threshold of 30 per cent.

Dana's shares closed up 10p at 1205p. Parkmead gained 0.25p to 4p.