Market update - 13 July

The markets remained range bound this morning, with the FTSE 100 easing slightly to 4133.88, down 6.71 points, and the FTSE 250 retreating to 7172.07, down 12.36 points amid thin volumes at around 11.45am today.

Friends Provident was the strongest of the blue chips, rising to 65.1p, up 7.8 per cent or 4.7p, after rejecting a takeover proposal from Resolution, financial services tycoon Clive Cowdery’s investment vehicle. Peter Eliot, insurance analyst at Man Securities, said the approach “will not come as a huge surprise to anybody”, as Resolution has attempted to acquire the group before. “It is also not a surprise that Friends has rejected the initial proposal, but we believe that it should be possible to find common ground,” he said,

“There is a large overlap in the shareholder base and we believe it should be safe to assume that most of the major investors are on board with the proposal. Friends will be aware of this, and with Resolution likely to want to retain most of the existing top management, we believe there will be pressure on Friends to eventually recommend a revised offer.”

The offer is likely to be in shares, with a small cash element, Mr Eliot added, saying: “While headlines may well highlight the low implied price to embedded value of any offer, we believe that, with shareholders continuing to participate in the upside, they will not see it this way. Friends shareholders will primarily be swapping their shares for shares in Resolution with exposure to the same assets, but will also benefit from Resolution’s management, the cash element, better dividend prospects and possible upside from future consolidation by Resolution.”

Barrie Cornes at Panmure Gordon also highlighted the overlapping base, saying that “common shareholders within Resolution and Friends Provident are likely to be key to the outcome of the approach”. “Retail shareholders used to constitute a very significant proportion of the shareholder register, but we understand that they now account for less than 20 per cent and, so, are unlikely to prove pivotal,” he said.

Moving up

ITV was 3 per cent or 1p stronger at 33p, thanks to UBS, which moved the stock to “buy”, highlighting the “strategic upside” for shareholders. “While we believe the shares are fully discounting regulatory benefits and a cyclical recovery, we see strategic upside from a subscription model, the value of which could be enhanced by Ofcom’s pay TV market review,” the broker said,

“The extension of debt maturities has reduced financial risks while management change and contract rights renewal newsflow could provide catalysts.”

Moving

UBS was less keen on IMI, the engineering group which fell to 278.75p, down 3.8 per cent or 11p after the broker switched its stance to “neutral” from “buy”. “We think consensus has under estimated the weakness of second quarter trading for many of the UK engineers, including IMI. In the past few weeks, Charter, Bodycote and Sandvik have delivered profit warnings and sceptic ism [regarding] the green shoots recovery [story] has grown,” the broker said,

“Pricing pressure is a phenomenon that will grow in strength through the downturn and we doubt IMI will be immune to this either.”

Also on the downside, weaker metals prices undermined sentiment in parts of the mining sector, with Xstrata falling to 571.2p, down 25.8p, and Lonmin declining to 975.5p, down 23.5p.