Market Report: British Steel surges as pounds 600m cash deal nears

BRITISH STEEL forged a solid performance as investors rushed to the shares amid talk of an imminent pounds 600m-plus cash payment.

The steel giant bucked a soggy market to surge a stainless 5.5p to 154.75p in good volume of nearly 12m shares as both institutions and arbitrageurs piled into the stock.

The near-4 per cent increase was driven by shareholders' desire not to miss a special 35p-per-share cashback.

The one-off payment - which should total around pounds 694m - was promised by BS in June when it announced its pounds 2.9bn takeover of Dutch rival Hoogovens.

At the time, the British company said that its long-suffering investors would receive the gift shortly after the completion of the Hoogovens deal. Rumour has it that the takeover will receive final approval from shareholders and regulators in a couple of weeks. Some dealers were even more precise and pointed to 5 or 6 October as the most likely dates for the completion of the deal and the opening of the cash floodgates.

These rumours did not go unnoticed by the arbitrageurs. So far, the cunning arbs have been shorting BS and buying Hoogovens as a cheap way into the new company. However, the arrival of the pounds 600m cash injection has prompted them to reverse their arbitrage play and buy BS in order to be on its shareholder register by 5 October. Institutional investors, who had been dumping the stock during the recent rally in sterling, also returned to the buying fray attracted by the 35p-per-share carrot.

Braver dealers ignored the steady but dull BS and focused on the out- of-favour Marks & Spencer. The fallen hero of the British high street rose 2p to 317.5p a day after its second profits warning.

Excitable minds said that, with the shares at a near seven-year low, M&S is primed for a merger with the likes of Kingfisher, down 9p to 639p, or the equally-troubled Sainsbury's, 1.5p lower at 385.25p. Talk of a takeover by Tesco - 3p higher to 188.75p - after a meeting on its international plans and a price target of 250p from Salomon Smith Barney - or an overseas player was also heard.

However, sceptics said that the real reason for the rise was sustained buying by US value investors which had been attracted by the fall in M&S share price.

Remaining blue chips had a terrible day as an opening tumble in Wall Street and weakness in the all-important banking sector halved Monday's 141-point gain. The FTSE 100 lost 71.4 to 6,007.2 and looks once again in danger of falling below the key 6,000 barrier.

Turnover - at just over pounds 1bn - was lower than usual. Some market watchers believe that the much-feared pre-millennial liquidity squeeze is beginning. Many big fund managers are closing their books for the third quarter and there are growing concerns that they might do little in the last part of the year.

The second liners were also unwanted, with the FTSE 250 closing 27 down at 5,672.9 and the Small Cap falling 2.7 to 2,681.1.

Profit-taking in the financials sector following the recent bid-inspired rally was a major drag on the FTSE 100. Bank of Scotland, interims today, plunged 50p to 745.5p, amid wild rumours of an increase in its pounds 21bn bid for NatWest, 25p lower at 1451p. Mooted counterbidder Royal Bank of Scotland fell 72p to 1,319p while rumoured white knight HSBC dropped 29p to 697p.

Scottish Power played gooseberry to the banks in the FTSE 100 fallers' list with a 24p fall to 534.5p after joint house broker HSBC lowered its forecast. The HSBC analysts blamed the high cost of chopping trees that obstruct electricity pylons and a lower contribution from Scottish Telecom as the reasons for the downgrade.

British Airways nosedived 17.75p to 325.25p on concerns over rising fuel prices and next week's passenger numbers. The chemist Boots was down a sickly 20.5p to 671.5p on fears of poor trading and concerns over Asda's cost-cutting drive in toiletries and medicines. National Power fell 11.75p to 473p despite continued bid rumours.

Among the risers, gas group BG flared 14p higher to 355.25p after a push from Deutsche Bank and Commerzbank. Revived rumours of a strike from Shell, 9p lower to 447p, also did the rounds. Oils were depressed despite Commerzbank's decision to increase its 2000 Brent price forecast to $17.5 per barrel from $15. Explorer Lasmo fell 4.75p to 130.25p despite on-going rumours of a strike from Italian giant ENI.

Drinks group Allied Domecq frothed 5.5p higher to 353.75p even though French rival Pernod denied having talked to private equity groups Hicks, Muse Furst and CVC about a bid.

Chip designer ARM Holdings beamed 47.5p higher to 937.5p after deals with 3M and Ericsonn.

Trafficmaster, 24p to 525p, was given the green light after a tip on Channel 4's "Show Me The Money" programme. Whispers of a bid from a larger rival pushed telecom operator Kingston Communications 8.5p higher to 107.5p. Engineer Cookson firmed another 8p to 190p on continued management buyout talk and a Deutsche "strong buy" advice.

Electronic company Racal buzzed 9.5p to 417.5p on whispers that the sale of its telecom division to Energis,12p better at 1,399p, is near.

Talk of buoyant interims lifted clothes chain Next 14p higher to 630p. The shock withdrawal of a secondary share offering sent property developer Canary Wharf 21.5p lower to 362.5p.

Among the minnows, steak-and-frites restaurant operator Groupe Chez Gerard sizzled 10.5p higher to 199p on talk of bid, possibly from Whitbread, 9p higher to 744.5p.

Defence engineer Chemring shot 9.5p higher to 196p on revived whispers of a bid or management buyout.

Health care tiddler Medical Solutions firmed 1p to a record 13p on talk of two licensing deals, while airport group Wiggins lost 02.5p to 23.5p despite rumours that today's AGM may bring news of the purchase of an airfield in Florida. Telecom minnow Telspec shed 13p to 61p after poor interims.

SEAQ VOLUME: 1.02BN

SEAQ TRADES: 70,041

GILTS INDEX: 102.77 -0.19

VOYAGER 2000 is travelling towards some good news. The cash shell, set up by entrepreneur Stephen Dean, is rumoured to be close to the acquisition of a private IT company in the UK or Ireland. The mooted purchase would re-start trading in Voyager's AIM-listed shares. The stock, floated in May, was suspended at 9.5p in July after the acquisition talks were announced. Mr Dean has a reputation as a tough deal-maker and many are betting the shares will rise.

TINY MINERAL explorer Ennex International may be about to unearth a positive announcement.

The Ireland-based penny stock drilled a 12.5 per cent, 0.75p, rise to 6.75p yesterday amid rumours of a large alliance. Well-informed dealers believe that a major partner is poised to join Ennex's zinc exploration project in Kazakhstan. The economic recovery in the former Soviet republic is also lending support to Ennex's shares.