Clarke's tax surprise knocks cash-rich utilities

MARKET REPORT

The last Tory Party conference before the election was always going to be good for a few market-moving stories.

What dealers had not anticipated was the Chancellor of the Exchequer Ken Clarke's surprise announcement that tax credits on share buyback and special dividend schemes will be abolished, a move that could swell the Treasury's coffers by pounds 400m a year.

The Chancellor's decision to withdraw the tax credits initially pulled the Footsie below the 4000 level, but it later rallied to end 4.1 points firmer at 4035.6 and record its fifth record closing high in six trading days. Volume was a healthy 758 million shares.

News of the tax changes clobbered shares in cash-rich utilities and banks. Thames Water fell 12.5p to 554p, London Electricity weakened 24p to 605p and Yorkshire Electricity was off 19.5p at 749p. PowerGen declined 9p to 480.5p, BT dipped 2.5p to 356p and Schroders shed 20p to 1435p.

But the biggest impact was felt at Reuters where uncertainty over what it might do with its surplus cash pile pushed its shares, down 20p to 757p, to bottom of the Footsie index.

Reuters has adjourned consideration of plans which were to be put to shareholders at today's extraordinary general meeting to pay a pounds 613m special dividend. The scheme would have paid net dividends totalling 750p per share over a period of three years. Reuters had also proposed a capital consolidation, reducing the number of shares by 5 per cent.

Intriguingly, there was talk of institutions switching funds away from buyback and special dividend candidates to high-yielding stocks. British Gas was the most obvious beneficiary, reversing a recent lousy run to close 5.5p higher at 186.5p, making it the best performing blue chip of the day. Income funds were also said to be attracted to United Biscuits, whose shares topped the FTSE 250 list with a 13.5p gain to 216.5p, and Hillsdown, 7p better at 188p.

Partly-paid shares in Railtrack, another high-yielder, rose 3p to 287p after the company announced plans to spend an extra pounds 150m on upgrading the decrepit intercity West Coast Mainline route out of London Euston. The move will allow the successful bidder for the West Coast franchise to run tilting trains and dramatically reduce journey times to Birmingham, Manchester, Liverpool and Glasgow from 2002. Railtrack's shares have come under selling pressure in recent sessions ahead of a report into the Watford rail crash which is due to be published later this week.

Shares in Blenheim leapt 28.5p to 464p after NatWest mounted a "dawn raid" to pick up a 14.9 per cent stake in the exhibitions group at 500p for VNU, the Dutch publisher

VNU said it had no plans to bid for Blenheim, which has been in and out of takeover talks for the last five months, though it would bid for the company if someone else made an offer. Rival Anglo-Dutch publisher Reed Elsevier and Lord Hollick's United News & Media are also interested in Blenheim, while a fourth party, possibly US publishing and exhibitions group Ziff Davis, is said to be waiting in the wings.

Eurotunnel returned from suspension the day after the troubled Channel Tunnel operator unveiled a debt restructuring plan that gives the banks at least 45.5 per cent of the company. Hopes that the shares would hit 130p - the price at which the first tranche of the banks' pounds 4.7bn debt will be swapped into equity - proved too optimistic. After touching 124p, they fell back to close 10p lower at 115p.

Rolls-Royce fell 4p to 254p as Lehman Brothers downgraded the stock to underperform from outperform. Analyst Guy Kekwick believes many investors have been drawn into aerospace stocks expecting far-reaching European and global consolidation of the industry.

Rolls-Royce has often been mentioned as a likely partner for Pratt and Whitney in the US, but the latter recently signed a co-operation deal with General Electric to supply engines for a new generation of super- jumbo jets which could lead to even closer links. Lehman also thinks Rolls-Royce's diversification into power engineering has been largely unsuccessful and advises selling the shares to as low as 205p.

A buy recommendation in NatWest's monthly review of the pharmaceuticals sector was enough to lift British Biotech 4p to 202p.

Laura Ashley added 8p to 189.5p. The chintzy clothing and home furnishings group is bringing its distribution and logistics operations, based in mid-Wales and previously run by Federal Express, under its direct control.

TAKING STOCK

Shares in British Taxpayers Association Self Assessment began trading yesterday on Ofex on a matched-bargain basis. Some 650,000 shares, or 35.1 per cent of the company, were issued at 18p, raising pounds 100,000. Professional Enterprise Group, another Ofex-quoted company, quickly picked up a 10.3 per cent stake. BTASA expects huge demand for tax preparation services with the advent of self-assessment. It aims to complete 15,000 self-assessment tax-returns for 1997.

Dublin-based minerals exploration group Glencar dipped a penny to 55.5p. It has placed 12.6 million shares with institutional investors, mainly in London, at Ir53p. The placing, and a 2-for-7 open offer at the same price, raised Irpounds 12m to increase its stake in the Wassa gold project in Ghana to 61 per cent.