Market Report: O<SUB>2</SUB> takeover talk revived by scale of tax losses

O ₂ shares were once again in heavy demand yesterday as a leading broker highlighted the significant value behind the mobile phone group's massive tax losses. Morgan Stanley believes they are worth at least a further 17p on O ₂'s share price, and as word of this got to the market, the group's stock rose 3.5p to 153.25p.

These tax losses have been racked up over the past five years as it has engaged in the expensive business of first acquiring third-generation telecom licences from various governments in Europe and then getting these networks up and running. If O ₂ remains an independent entity the group can use them to reduce its tax bill for some years.

But according to the broker, the tax losses will become more valuable if O ₂ is taken over. As long as the predator is in the same line of business, the combined company can get away with paying tiny amounts of tax for many years. As a result, a bidder might be willing to pay up to 192p a share for the company.

In 2004, KPN tabled an offer for the mobile phone group and last month it emerged that the Dutch firm had teamed up with Deutsche Telekom to make a joint offer. Although these negotiations have come to nothing, Morgan Stanley believes they can easily be revived. The US broker also argues that an offer for O ₂ from other interested parties, possibly Spain's Telefonica, cannot be ruled out.

Meanwhile, for the second day in a row the FTSE 100 ignored a weak performance by stocks on Wall Street and marched higher. London's blue-chip index rose 41 to close at 5,296.9, while the FTSE 250 gained 26 to close at 7,749. Scottish Power, 7p higher at 501.5p, was once again boosted by takeover rumours. Dealers also reported heavy demand for its fellow utility Scottish & Southern Energy, up 16p at 986p.

Mining companies had another great day. Anglo American rose 25p to 1,402p, Rio Tinto put on 16p to 1,959p, Antofagasta gained 12p to 1,462p, BHP Billiton added 7p to 824p and Xstrata firmed 5p to 1,301p. Morgan Stanley believes there is further upside in the sector. The US broker said: "We think commodity prices will continue to see upward revisions this year and we are convinced this will feed down into positive earnings momentum for the mining universe."

The banking sector did less well. Lloyds TSB fell 1p to 456p while Barclays added just 1p to 553p and HBOS improved 2.5p to 869.5p as Credit Suisse First Boston told its clients that August had been a tough month for the industry. The Swiss broker said: "It has been a fairly difficult month for retail banks and their share prices have fallen to reflect this. We expect things to get worse before they get better." CSFB advised investors to avoid UK retail banks.

Analysts returned in a bullish mood from a meeting with the management of Civica, 1p weaker at 225.5p. Among those present was Jonathan Imlah, an analyst at Altium Securities, who urged investors to buy into the IT services group. He said: "Overall, the impression was uniformly upbeat. It is clear that demand for Civica services and solutions remains robust not only across the different areas within local government and the police but also in the company's three territories: UK, Australia and US."

Among smaller companies, Accuma, the personal debt adviser, rose 6.5p to 174p after unveiling the acquisition of Wilson Phillips Limited, a rival, for £3.3m. To fund the purchase, Accuma raised £3m via a placing of new shares at 155p.

Pursuit Dynamics added 7.5p to 228p on hopes that the group will soon unveil a deal with the fire safety specialist Kidde. Pursuit has a product which is said to be able to put out fires more effectively than alternatives and by using less water.

There was yet more director share buying at Matrix Communications, 3p higher at 155.5p. Peter Drinkwater, the head of the IT group's Fujin Technology division, bought 12,500 shares at 155p and took his total holding to 1.6 million, or 4.3 per cent.

Sondex put on 4.5p to 256.75p after the oil services player boasted that its order intake continues to increase. The company's order book now stands at an all-time high.

Finally, Hichens Harrison, the oldest broker in the City, soared 10.5p to 116.5p on news of a £1m fund raising. The company placed 1 million shares at 93p with institutional investors who include Artemis, Unicorn Asset Management and Gartmore. Hichens Harrison, which was founded by Robert Hichens in 1803, floated on AIM in May at 50p and has since seen its shares soar ever since.