Market Report: Broker urges Reed Elsevier to gear itself up

At first glance, there was nothing particularly exciting about Collins Stewart's latest "buy" note on the publishing group Reed Elsevier with a 667p target. However, the broker predicts that a private equity bid could value the shares at 85 per cent higher than yesterday's closing price of 619p, half a penny better.

The broker believes the market has not fully appreciated Reed's attractions to a bidder, and highlighted a free cash flow yield of 7.2 per cent, stable revenue growth and margins as well as its leading market position. Collins Stewart adds that, with a current debt weighting of just 1.4 times earnings, Reed is under-leveraged and if it does not gear up its balance sheet "maybe private equity will do the job instead". The broker estimates at a debt multiple of 8 times earnings the shares could be worth up to 1,147p.

Shares in Marks & Spencer surged to the top of the blue-chip leaderboard as fresh rumours about a private equity-backed bid did the rounds. However, most traders were reluctant to believe the stories. One said: "M&S retail investors like to see the company performing well, but making a quick buck isn't the primary objective. Given the company's recent performance, it would have to be a blockbuster bid to tempt management into selling." Even so, M&S closed 20p better at 715p.

Tobacco stocks were also in focus following Altadis's rejection of an improved €47.7-per-share bid from Imperial Tobacco. The market is not anticipating another bid from Imperial and shares in the UK cigarette maker advanced 11p to close at 2,287p, despite a sharp rally from 2,050p when details of its bid for Altadis first emerged.

Among the banks, rumours of stake building boosted Standard Chartered, 12p better at 1,492p, and HSBC, 1.5p firmer at 905.5p. Almost 64 million HSBC shares changed hands, significantly more than the average daily volume. There was also talk HSBC is mulling a move for Prudential, 3p firmer at 752p, but that rumour has been around for so long that most traders ignored it.

London trade had little in the way of direction despite fresh attempts to drum up interest in private equity buyouts in the retail sector. New York opened mildly weaker and London shares followed suit, the FTSE 100 closing 4.5 worse at 6,413.3.

The word in the market is that Goldman Sachs is still sitting on a significant number of shares in Abbot Group, the oil services provider, 1.25p better at 260p. The broker began placing 28.5 million shares at just over 286p, on 21 March on behalf of Arne Blystad, a Norwegian investor and formerly the largest shareholder in Songa Offshore. Traders remain bullish on the sector, but expect Abbot to remain unloved until the stock overhang is cleared. Meanwhile, the rivalHunting climbed 20.5p to 780p, a new all-time high.

Also hitting new highs was Aggreko, the temporary power supply group. The shares firmed 4p to529.75p and have enjoyed a storming six months, adding more than 50 per cent.

In the small-caps, a bullish outlook statement from the only listed architecture practice, SMC Group, sent the shares into orbit, closing 33.5p better at 88.5p. Although pre-tax profits fell to £1.6m from £2.6m, investors were braced for bad news following March's warning. However, the company told the market that by the end of the first quarter it has already booked 65 per cent of expected full-year 2007 revenues.

Small-cap traders are excited about the prospects for St James' Energy following a successful reverse takeover by the high-definition acoustics speaker manufacturer Immersion Technologies, the name under which the shares will begin trading this morning. The group's objective capital report indicates that it expects the business to have a value of close to £50m following the transaction, almost 10 times its current market capitalisation. The shares closed 0.17p better at 1.42p.

Steve Evans, the chief executive of Accident Exchange, topped up his holding in the firm following Tuesday's profit warning by buying 135,000 shares at just over 111p each. The shares tanked on the back of the warning, with investors spooked by the prospect of a further issue of equity. However, market makers said any issue of equity is now unlikely to be priced at a premium to the price paid by Mr Evans, despite yesterday's 5.25p fall to 101.75p.

The online retailer of wireless technology eXpansys had a solid debut on AIM. The broker Cenkos Securities placed the shares at 58p, raising £10m gross of new capital. They closed at 73p.

Interesting? Click here to explore further