Market Report: DSG and Kesa shares hit by HSBC downgrade

HSBC unsettled DSG International and Kesa Electricals yesterday, pouring scorn on the notion of a possible bid from Best Buy.

The broker said the speculation was "fanciful", and said the recent strength in DSG and Kesa shares looked like "madness".

"Why buy a problem?" said HSBC, adding: "We think Best Buy, of all consumer electronics retailers, is best placed to judge that the industry has moved on. It doesn't need to acquire extensive, underperforming store chains when an increasing amount of demand is moving online."

Viewing the recent rally as an "excellent" selling opportunity, the broker went on to downgrade the two stocks. Kesa, which closed down 2.75p at 161p, was cut to "neutral" with a reduced 165p target price while DSG, which was down 0.5p at 47.5p, was cut to "underweight" with a reduced 42p target.

Overall, the FTSE 100 was down 34.9 points at 5,470.7 and the FTSE 250 was down 49.1 points at 9,133.6. The senior index was saved from heavier looses by early strength on Wall Street, where invest-ors cheered better than expected consumer confidence and new home sales figures. Manoj Ladwa, senior trader at the City spread-better TradIndex, said the overall bias was "still down".

"From a technical analysis perspective, in the short-term I think the FTSE will trade in the 5,300-5,500 range," he said.

On the FTSE 100, Liberty International remained at the top of the leaderboard, up 5.34 per cent, or 50.5p, at 995.5p. The stock was buoyed after Simon Property Group, the American real estate group, said it had increased its stake to 4.2 per cent and Australia's Westfield confirmed a 2.96 per cent holding.

Traders said the news had lifted the spirits of those who suggested Liberty was a bid target last week, and, crucially, convinced a number of sceptics who had played down significance of Simon's entry on the register of share holders. "It looks like it's in play," said one market source, citing rumours that the new investors may team up to launch a bid for Liberty.

WPP, up 15p at 506.5p, was just behind, in second place on the FTSE 100, after the Adage.com website reported that the London-based advertising giant had reopened talks with Microsoft, and may acquire the software group's Avenue A Razorfish digital ad agency. In return, WPP is reportedly interested in off-loading Open AdStream, the ad serving business.

On the FTSE 250, Taylor Wimpey was strong after a report in Building magazine said the housebuilder was about to announce a relaxation of its lending covenants without the need for fresh equity. The news took Taylor Wimpey up 14.3 per cent to 52p, mitigating the impact of results from Bovis Homes, which revealed a slump in first half profits. At the close, Bovis was up 13.25p at 441.25p. Bellway gained 20p to 602.5p and Berkeley advanced 8p to 852.5p.

Elsewhere, easyJet, down 10p at 323.5p, met some turbulence after Deutsche Bank downgraded the stock to "sell" from "hold" on valuation. "After the recent share price rally, the stock is trading well above our reduced target price of 212p, thus we reduce our rating to sell," the broker said, adding: "The key risk to our view remains fuel."

Also on the downside, Imperial Energy eased 25p to 1,215p after unveiling a recommended pre-conditional 1,250p-per-share offer from ONGC Videsh, the international arm of India's state-backed Oil & Natural Gas Corporation. Cazenove said the share price weakness was reflected in the market's belief in a counter-bid from China's Sinopec and the fact that the bid is conditional upon certain regulatory approvals from the Russian government.

"We believe that, given good relations between the Indian and Russian governments, any necessary approvals ought to be granted," the broker said, advising investors to hold a position in Imperial "given the possibility of ONGC coming to the market to acquire Imperial shares and the possibility of a counter-bid from Sinopec, which could potentially see ONGC increase its offer to 1,500p.

Among smaller companies, the software group Axon was strong after revealing a recommended 600p-per-share offer from Infosys Technologies, the Indian IT group. The proposal soon sparked talk of a counter-bid, sending Axon shares higher by more than 20 per cent to 606p.

"Axon has taken pleasure in giving many of its larger global competitors such as IBM, Accenture and Deloitte bloody noses over the past couple of years," said Altium Securities. "We would therefore not be surprised to see a counter-bid from one of the above, or indeed from any number of global IT services vendors, in order to prevent Axon getting into the hands of another relative upstart like Infosys.... [we] see something approaching 700p or above as a better reflection of Axon's strategic worth."