Market Report: Bears claw into Jarvis on restructuring fears

Professional investors were busy taking bear positions in Jarvis yesterday before the troubled construction group's restructuring next month. A number of hedge funds in the City are convinced that even after yesterday's 0.39p drop in its share price to 7p, the stock is significantly overvalued given the terms of the upcoming debt-for-equity swap.

Under the terms of the swap, ownership of Jarvis will fall into the hands of its creditors. In fact, the group's current shareholders will be left with just 4.75 per cent of the company after the transaction, which aims to cancel the group's £350m debt burden. And the dilution facing shareholders does not end there. After the debt restructuring, Jarvis plans a further £50m fund raising via the issue of yet more new shares. Also, according to the debt-swap agreement, some of Jarvis's lenders will be granted warrants which, once they are exercised, will only add to the destruction of value for the group's present shareholders.

Bears of Jarvis believe that the company's shares are worth 3p to 4p at best before the restructuring. One hedge fund operator said: "Although Jarvis will be pretty much debt-free after the restructuring, the company is a far from enticing investment going forward. We calculate that it is unlikely to be start generating cash until well into next year and after that it will struggle to achieve much growth."

The operator also believes that most of the US investment companies which own Jarvis's debt will rush to exit the company once it is converted into equity. This is because many are allowed to invest only in debt securities and not shares. Such a factor will without doubt add to the pressure on Jarvis stock in the wake of the restructuring.

In the FTSE 100, Kingfisher dropped 5.5p to 250.5p as Wolseley played down rumours it might be interested in acquiring the DIY giant. After a trading statement from Wolseley, Steve Webster, its finance director, said the company was more interested in the professional tradesman end of the home improvement business rather then the DIY end that Kingfisher's B&Q division dominates. The FTSE 100 was down 16.6 at 5,214.2.

Elsewhere, Deutsche Bank was heard to be moving its clients into Smith & Nephew, off 0.5p to 527.5p, before second quarter results from the healthcare group due at the start of next month. The German broker slapped a 610p price target on the stock, telling its clients the company is on track to deliver solid figures and that it is benefiting from favourable trends in currency markets.

Unilever put on 3.5p to 555.5p as Cheuvreux upgraded its stance on the consumer goods giant to "outperform" from "underperform". The French broker is convinced that Unilever will show an improvement in sales growth from the third quarter onwards. This factor, combined with cost cuts, should see the group achieve earnings growth of 8 per cent in 2006, Cheuvreux says.

02 retreated 0.25p to 136.25p after JP Morgan warned that shares in the mobile operator could tumble should one of the many industry players linked with a possible bid for the company pour cold water on the speculation during the upcoming reporting season. 02 shares have soared 10 per cent since the start of the month on the back on takeover rumours. JP Morgan said: "We are concerned that potential suitors are not yet in a position to act, either due to legal constraints or because they first need to address pressing operational issue of their own." Several hedge funds were heard to be betting on ARM Holdings disappointing the City with its interim results today. Shares in the semiconductor designer fell 2p to 120.5p in heavy trading as professional investors took short positions in the stock. As it stands, ARM is forecast to report an 81 per cent rise in second quarter pre-tax profits to £18.8m and most analysts expect it to issue a positive outlook statement.

The steel maker Corus dropped 1.75p to 44.75p after a "sell" note from Oriel Securities. The broker warned investors that Corus is up against rapidly falling steel prices as global supply now easily exceeds demand. Oriel also fears that costs are set to rise by at the group as it comes up against environmental taxes. As for those investors hoping that Corus will be able to buy up low-cost producers in countries with high-growth emerging markets, the broker urges them not to hold their breath. It says every other player in the sector is trying to do the same.

Lower down the pecking order, Begbies Traynor ticked 1p higher to 112.5p on rumours the consulting group is eyeing an acquisition, while Planit Holdings retreated 1p to 26p despite posting solid annual results. Pre-tax profits at the manufacturing software group rose to £1.9m from £1.55m last year.