Market Report: Gossip logs Freeserve on takeover trail

INVESTORS ARE logging into Freeserve amid growing rumours that the Internet services provider is about to hit the acquisition trail.

The stock yesterday shed 10p to 201p as technology stocks were dragged down by another three-figure tumble in the market, but well-connected dealers are sticking with Freeserve.

They believe that, since its recent spin-off from Dixons, the free Internet supplier has been looking for ways to fill its web pages and generate some extra revenue.

In the fickle web market, customers can only be made to "stick" to one supplier if the content of the sites is interesting. More importantly, advertisers will pay to place their virtual banners if they are sure they will be seen by a growing band of loyal users.

Analysts are convinced that if Freeserve is to extend its soaraway success, it will have to add content fast to its free Internet connection. Their prayers may be about to be answered: according to dealing room whispers, Freeserve has got its eye on acquisitions.

One name in the frame is the online yellow pages Scoot.com, down 1.25p to 48.75p in line with the sector. Proponents of the link said Scoot's directory of businesses and databases would be an ideal filler for Freeserve's web realm.

Scoot's exposure to European markets such as Holland and Belgium could be a useful springboard for Freeserve's ambitions. As for financial issues, Freeserve's shares have had a great run since floating at 150p and they could be easily used to pay a hefty premium for Scoot, although some cash is also an option.

Other possible target is the AIM-listed Sports Internet - up 2.5p to 330p after winning the contract to supply statistics to the Football League - although chairman Chris Akers holds over 20 per cent. Teamtalk.com - the sport website owned by IMS Group, down 7.5p to 336p - is also a possible target.

The other story that grabbed the market involved Gallaher. The cigarette maker puffed 15.5p higher to 378p on talk of a strike from US tobacco giant Philip Morris.

Gallaher has recently hit a 12-month nadir of 352.75p and is certainly cheap. At these levels, a bid from a larger rival keen to get away from the legally-fraught US market is not impossible.

The bear point of the Morris/Gallaher story was that volume in Gallaher was relatively thin and that a few experts poured cold water on the whispers.

The rest of the market was stubbed out by interest-rate worries and a heavy dose of summer jitters. The FTSE 100 closed 133.8 down to 6,101.6, its lowest since late March.

Dealers said that the market was paralysed by fears of a hike in US interest rates if today's employment numbers are strong. One broker summed up the gloomy mood with the terse comment: "I haven't seen one buyer." The decision by the Bank of England to keep UK rates on hold did little to improve sentiment as many believe that the next move will be upwards.

A programme trade of around pounds 100m containing a number of sell orders for FTSE 100 stocks - rumoured to come from Goldman Sachs - helped depress sentiment.

The smaller indices did slightly better, with the FTSE 250 sliding 38.4 to 5,976 and the Small Cap closing 6.9 down to 2,722.5.

Telecoms stocks got absolutely hammered and contributed 44 points to the blue-chip index's overall decline. In these volatile markets, dealers are scared of piling into growth stocks with high valuations and the tide for the highly-rated phone stocks appeared to be turning. Colt was the worst of the lot, shedding 123p to 1,283p. Vodafone AirTouch, down 70p to 1,168p, was close by, while Orange, 47.5p lower to 934.5p, and Energis, down 76p to 1,563p, were also hit.

Poor results did not help cable group Telewest, down 16.75p to 253.25p, and accident-prone publisher Reed, 41.25p worse at 424p.

Drug group Glaxo fell another 70p to 1,534p on disappointing recent figures. The stock is now close to the 12-month low and a merger with SmithKline Beecham, down 25p to 735p, could be back on the agenda.

Shell was one of only 14 blue chips to close higher. The oil giant ended 15p better to 508.75p after forecast-busting figures. The good numbers reignited talk of a bid for BG, 7.25p higher at 383p. Positive interims also pushed Barclays 16p higher to 1,768p. Brewer Scottish & Newcastle frothed 8p higher to 665p in good volume amid talk of a strike at Greenalls, flat at 363.5p, and a sale of its holiday business.

Insurer LIMIT was the day's best midcapper, rising 7p to 160.5p on talk of a bid from the US. Advertising agency Cordiant flashed 7.5p higher to 172.5p on whispers that next week's results will be good, while plant hirer Hewden-Stuart climbed 5.5p to 127.5p on talk of acquisitions. DIY retailer Wickes brushed 2p higher to 410.5p on strong like-for-like sales growth and plans for a pounds 65m store renewal programme to accommodate its extended home decorating ranges.

Returning takeover talk kicked Manchester United 8p higher to 226.5p, while computer gamemaker Eidos beamed 90p higher to 3,167.5p after Merrill Lynch started coverage with a "buy"advice and a 3,650p target.

Techie stocks suffered from Nasdaq weakness. ARM Holdings plummeted 57.5p to 910p, Psion lost 57p to 910p, while minnow Gresham Computing crashed 56p to 44p after a profit warning.

The sector malaise is not encouraging for the online financial information group, eXchange, which floats today. The grey market is predicting a price of 208p to 215p compared with around 230p to 237p earlier this week. Netvest.com - an investor in small web companies - should buck the downward trend; today's AIM float is expected to price it at 50p to 60p compared with a 25p placing price.

SEAQ VOLUME: 1.12bn

SEAQ TRADES: 82,355

GILTS INDEX: 106.46 -0.29

THE IT minnow Sanderson Group survived yesterday's carnage of technology stocks and rose 1.5p to a record 181.5p on whispers of a major contract win. Insiders believe that Sanderson is close to a lucrative deal to provide a leading bank with a brand new IT systems. The contract could involve the provision of a new computer kit to assess the bank's credit risks. The deal could provide another boost to the shares, which have rallied from a low of 98p in October.

THE TROUBLED food producer Albert Fisher, down 0.25p to 12.5p, is believed to be close to another round of debt-reducing disposals. Dealers are convinced that the company could annnounce the first of eight sell- offs of low-margin business within the next month or so. An imminent bullish note by a leading broker should also boost sentiment. The research is believed to say that the disposals will reduce debt by pounds 100m - more than Fisher's pounds 91m market capitalisation.