Market Report: O2 rises as traders bet on private equity swoop

The telecoms sector was flavour of the day in City dealing rooms yesterday, and O2, which this week unveiled top of the range full-year figures, was the favourite among traders, rising 3.75p to 124.5p.

The telecoms sector was flavour of the day in City dealing rooms yesterday, and O2, which this week unveiled top of the range full-year figures, was the favourite among traders, rising 3.75p to 124.5p.

In the wake of the group's results a raft of positive broker notes has followed, but punters are most excited about the possibility of a private equity bid for the operator.

When takeover speculation has circled O2 in the past, the name of a large telecoms operator has always been touted as the most likely buyer. Given KPN made an offer for the mobile group last year this is of little surprise, but now market professionals reckon O2 is vulnerable to attack from a financial buyer.

The talk has sparked trading in the group's credit default swaps (CDS). These are derivatives which offer investors insurance against O2 defaulting on its debt, and since March their price has soared.

Traders note that M&S's CDS registered a similar rise before Philip Green launched his highly leveraged offer for the retailer. Any private equity bid for O2 would be debt financed, which would add substantially to the company's small borrowings and hence make its CDS more valuable.

Private equity players have certainly developed an appetite for buying into the telecoms sector over the past year. They have tabled multibillion-pound bids for Spain's Auna and Italy's Wind and, as O2's results have shown, the group without doubt generates enough cash to support a leveraged buyout and is therefore a possible target.

Elsewhere, Vodafone gained 4.25p to 145p on hopes that next week's full-year results will see the mobile phone giant unveil the next phase of its share buy-back programme. Last year, Vodafone bought £4bn worth of its own stock, and most analysts expect the company to set aside at least as much for repurchases.

In fact, some believe the group has the capacity to devote more than £5bn to buy-backs. As for dividends, the group is tipped to double its annual payout from the 1.07p seen last year.

Cable & Wireless added 1.5p to 130.5p on rumours of a possible bid for the alternative carrier from France Telecom. Similar talk surrounded its rival Thus, 1.25p better at 14.5p. Such speculation has circled Thus since a US investment firm, Colombia, disclosed a stake in the company. At the latest count it controlled 10 per cent of the group.

Meanwhile, banks had a disappointing session. Barclays dropped 4.5p to 543p as Morgan Stanley was heard to be trying to place 12 million shares at 545p each in the group with institutional investors. Northern Rock retreated 5p to 749p as Credit Suisse First Boston warned its clients that life is getting tougher for UK retail banks and tipped the shares to underperform the market over the coming months.

Royal Bank of Scotland gave up 10p to 1,640p after ABN Amro slashed its rating on the stock to "reduce" from "buy". The Dutch broker worries that the UK economy is slowing and as a result earnings at RBS could be negatively impacted.

The FTSE 100 recorded its fourth successive day of gains putting on 9 points to 4,971. The FTSE 250 rose 3 points to 6,934. SABMiller leapt 16.5p to 844.5p as Investec Securities argued that shares in the brewing giant are deeply undervalued. News that Pillar Properties, up 50p to 845p, had received a takeover approach sent stocks across the property sector higher. Land Securities gained 18p to 1,415p, Slough Estates improved 8p to 497p, Liberty International rose 8.5p to 958.5p and Hammerson added 16p to 886p.

Construction stocks were hit by reports that accounting moves by the Government could lead to fewer deals for them under the private finance initiative (PFI). Carillion fell 6.25p to 236.75p, Mowlem lost 1.25p to 180.75p and Balfour Beatty lost 3.5p to 311.5p amid concerns that a classification change of capital expenditure by the Office for National Statistics will cut out the accounting advantage to public sector managers of procuring big projects through the PFI.

Finally, spread-betting companies predicted that While Nile shares will plummet when they return from suspension on Monday. Finspreads forecasts shares in the oil explorer to resume trading at between 60p to 70p, while IG Index was more bearish, expecting the stock to return at somewhere between 58p and 68p.

White Nile stock was suspended in February at 138.5p after soaring from an issue price of just 10p. Since then the company has completed the purchase of a 60 per cent interest in the 65,000 square km Block Ba through a deal with the recently formed government of South Sudan and its national oil company Nile Petroleum.