Market Report: 3i receives bid warning over recent volatility

The future of 3i as a listed company was in focus yesterday, as City scribblers suggested the recent volatility around the private equity investor could leave it open to a takeover approach.

2011 has proved to be something of a rollercoaster year for the blue-chip group, with it currently trading more than 18 per cent lower than its recent peak in January. This volatility, according to Oriel Securities' Iain Scouller, "highlights a key issue with the listed private equity model", prompting him to examine whether an unlisted structure may be more suitable.

The analyst blamed its recent weakness on concerns following April's pre-close statement when, he said, 3i "took a somewhat confusing and frustrating approach... [which] appears to reflect understandable commercial sensitivities surrounding individual investee companies".

Mr Scouller added that one of the problems of being a listed private equity group was that "portfolio and other disclosures to the stock market and general public... are likely to be significantly more onerous than for a privately held limited-partnership fund".

The analyst also warned 3i, which edged down 2p to 277.5p, could find itself the target of a bid approach if it continues to "trade on a sizeable discount... for a period of time".

"Suitors may be interested in acquiring a block of private equity assets, teams of experienced investment professionals, together with a valuable network," he said.

Overall, the FTSE 100 plummeted 98.81 points to 5,984.07 ahead of today's interest rate announcements from both the Bank of England and European Central Bank, while investors' appetite for risk was dampened by poor US manufacturing and employment data.

A disappointing production report, plus the fact it went ex-dividend, meant Antofagasta was left in last place, with the Chilean miner dropping 120p to 1,212p. Also releasing an update was Xstrata, and it moved 37p lower to 1,448p as it revealed poor weather had led to a 6 per cent fall in its copper production over the first quarter.

With a rising dollar and continuing fears over China's future attempts to fight inflation, it was another tough session for the sector in general, and Fresnillo was pegged back 83p to 1,515p while Vedanta Resources dipped 83p to 2,220p.

Aquarius Platinum managed to buck the general trend on the mid-tier index, however, charging forwards 24.2p to 360p after announcing it was spending nearly £110m on assets in South Africa, a move which Panmure Gordon's Alison Turner described as "potentially company-changing".

ARM Holdings spent the day deep in the red as the market nervously awaited an announcement from Intel scheduled for after the bell, which ended up being the unveiling of a new design for its chip transistors. With investors worried the presentation by its US rival could signal a step up in competition, the Cambridge-based group was left 44p lower at 558p.

The retailers received some welcome news from Next after the clothing chain announced a rise in sales of more than 5 per cent for the first quarter. As a result it was pushed up 97p to 2,319p, leaving it top of the pile, and Marks & Spencer followed closely behind by climbing 14.5p to 398.9p.

Fears the Government may be turning away from the strategy of using the private sector to provide public services left the outsourcers weaker, including Serco, which declined 18p to 545.5p. Citing comments in leaked documents reported late on Tuesday, Evolution's Graham Brown cut his advice on the group to "neutral" and also reduced Capita's target price to 732p from 779p, prompting a shift down of 12.5p to 719p.

There was more optimism around private-sector outsourcing, however, after Logica said it was seeing an increase in demand. The IT services group beat expectations with its sales figures for the first quarter and was lifted 4p to 139.6p.

The owner of Grolsch, SABMiller, eased back 47p to 2,229p after announcing the forthcoming retirement of its chief financial officer, Malcolm Wyman. However, traders pointed to Belgium as the catalyst for the fall, where Anheuser-Busch InBev released its first-quarter results, revealing a fall in volumes for the first time in 18 months.

Elsewhere, SIG and Travis Perkins benefited on the read-across, powering up 4.6p to 145.6p and 18p to 1,090p respectively in the wake of figures from their peers in Ireland. Panmure Gordon highlighted updates yesterday from CRH and Grafton, which the broker said provides "further confidence that the worst has passed for many of the UK builders' merchants and infrastructure operators".

Its products range from gas masks to equipment used for milking cows, and yesterday Avon Rubber closed 19p stronger at 270p on the fledgling index following its half-year numbers. The engineering group saw its earnings and profits rise despite a 15 per cent drop in revenues thanks to delays over the US defence budget.