Market Report: Wolseley powered by cash-call prospects

Wolseley rallied last night, gaining 5.6 per cent, or 11.7p, to 218.75p as investors bought in on the prospect of an improvement in the building -supplies group's finances.

The gale-force headwinds in the housing market, coupled with a growing aversion to debt in the equity markets, have been hard on the company's share price, which is down about 43 per cent in the year to date.

But Citigroup reckons that a recovery maybe in sight if, as recent market rumours and a clutch of reports have indicated, it embarks on a rights issue large enough to stem the risk of covenants breaches and prepares itself for a improvement in trading.

"The rights issue needed is a minimum of £350m but ideally at least £600m," Citi analyst Clyde Lewis said, arguing that the alternatives – refinancing or asset sales – were likely to prove either too expensive or ineffective without cutting into the core business.

A large enough issue promises to strengthen the group's balance sheet and position it for a modest recovery in two years, Mr Lewis added, moving the stock to a speculative "buy".

Traders said the fact that talk of a rights issue was supporting the share price was typical of the current market environment, where investors increasingly are looking for reassurance on company finances as the macro picture darkens and the credit markets remain clogged up.

Recent cash calls in sectors as varied as commercial property and engineering have softened the ground already, they added, anticipating a positive reaction if Wolseley does tap its shareholders.

Overall, a round of negative corporate news sent the FTSE 100 sliding to 4,202.24, down 32.02 points.

The FTSE 250, on the other hand, managed to pare losses in the final hour of trading, gaining 5.6 points to close at 6,501.88.

BT, whose third-quarter results sent investors running for cover, was the weakest of the blue chips.

The figures were by hit by a one-off charge related to the telecoms group's troubled global services unit, prompting a sell-off which left the stock languishing at 97p, down 7.79 per cent, or 8.2p. Earlier, BT briefly slipped to a record intra-day low of 94.5p.

Diageo, which lost 3.31 per cent, or 30p, to 877.5p, also dampened the mood by cutting its profits target.

Citing the tougher economic situation, the drinks giant guided for 4 to 6 per cent operating profit growth for the full year to the end of June, down from the 7 to 9 per cent indicated in October.

Elsewhere, British Land gave way, easing more than 5 per cent, or 27p, to 456.25p after announcing a bigger-than-anticipated rights issue.

Rival Hammerson, which launched its cash call earlier this week, was 4.27 per cent, or 17.7p, down at 397.5p after UBS trimmed its target price for the stock to 475p from 780p, telling clients that "the issue gives the group protection from the impact of further net asset value declines on debt covenants, but at the expense of diluting some of the upside".

Speculation that a fully underwritten rights issue was on its way was mooted as one reason behind the surge in DSG International, the electricals retail group which saw its share price swing to 26p, up almost 12 per cent, or 2.75p.

UBS helped Persimmon, the housebuilder which rose to 329.5p, up 7.5p, after the broker up its target price for the stock to 370p from 348p, saying: "While we don't believe that a rights issue is required, we highlight, for example, that a £300m issue could still leave the [net asset value per share] at 376p, with debt of only £94m."

In other broker-driven news, Robert Walters fell to 126.5p, down 2.13 per cent, or 2.75p, after Goldman Sachs moved the stock – which has strengthened significantly in the past three months – to "sell" in a staffing sector review.

"We believe that [the company's] focus on permanent recruitment and its less flexible cost base will lead to greater decline in both earnings and cashflows than for the broader staffing sub-sector," the broker said, warning investors that the full-year results at the beginning of March were likely to show a "significant deterioration" in the fourth quarter and "a downbeat outlook statement".

"While other professional staffing stocks (eg Michael Page) have rallied through weak trading statements, they did so from lower levels," Goldman added.

Michael Page, whose target price was upped to 222p from 206p in the same review, was 1.33 per cent, or 3p, ahead at 229p.

Among smaller companies, GMO, the AIM-listed, Chinese-focused producer of wireless value-added services, slumped to 2.5p, down an eye-watering 44.4 per cent, or 2p, after reporting a fall in revenues and a sharp rise in losses in its preliminary results.

Eidos, on the other hand, soared 127 per cent, or 17.75p, to 31.75p after agreeing to be bought by Japan's Square Enix for £84.3m.

Square Enix will pay 32p per share in cash for the computer games group, which counts the successful Tomb Raider games as part of its portfolio.

Get midday market updates at independent.co.uk/sharewatch