Copyright 2001 www.tombraiderchronicles.com

[ November 8th 2001 ]

If there was ever any doubt it now seems certain that the demerger on November 19 of BT's mobile phone arm, the ludicrously named mm02, will be a very damp squib. While most commentators have been drawing attention to the poor performance of its core UK business and the uphill struggle it faces to turn around its loss-making German venture, market professionals have found another reason to be bearish about the spin-off. The impact it will have on the MSCI indices.

Although largely invisible to UK investors, the MSCI benchmarks, created by investment bank Morgan Stanley, have a massive following across the world. Over $3 trillion (2.05 trillion) of assets are measured against its indices, compared with the estimated $700bn which follow FTSE.

Owing to over-representa tion in the telecoms sector, MSCI has decided mm0<->2 will be excluded from all its various European indices. This means those funds which track the composition of such indices will be forced to sell any mm0<->2 shares they receive.

According to Deutsche Bank analyst Nizam Hamid, that could be as many as 360m shares. Although that will be offset by demand from other index trackers, dealers still expect 250m shares to hit the market. Institutions can start dumping mm0<->2 shares on Monday, when trading on a "when issued" basis commences, but Mr Hamid expects most of the selling to occur at the close of business on November 19, as this is the benchmark price in the index for deletion.

He also expects Future BT to come under pressure. As a result of the demerger, BT's weighting in the Dow Jones Stoxx 50 index will fall, and investors will need to rebalance their holdings by offloading around 40m shares, he says. BT, which publishes first-half results today, closed down 5p at 338p, while on the grey market CityIndex was offering a spread of 72-77p for mm0<->2.

In the wider market, meanwhile, leading shares closed higher for a sixth consecutive session, thanks to a recovery on Wall Street after an early markdown and strength in Vodafone, up 3.75p to 175.25p, as buyers emerged ahead of next week's interims.

However, London left it late, and the advance was unspectacular. The FTSE 100 settled 2.2 points higher at 5,216.3, with investors taking the view that the Federal Reserve's overnight interest rate cut had already been priced into the market.

Logica, the IT services and software group, was the main talking point among the blue chips, falling 49p to 768p on rumours that a leading broking house - said to be CSFB - was advising clients to sell ahead of today's trading update.

However, dealers said that while such tittle-tattle was justified by the recent profits warning from competitor CMG, off 3.25p to 225p, it flew in the face of recent comments made by Logica's finance director, Andrew Given. On October 24, he told reporters that Logica had not been "particularly hit by September 11", and saw no reason to change its earnings guidance.

There was also speculative interest in mining group Anglo American, down 3p to 880p, after UBS Warburg placed 10m shares at 872p on behalf of South Africa's super-rich Oppenheimer family, having bought the stock at 863p just 30 minutes before the close.

The Oppenheimer's gained a holding of 60m Anglo shares through a complex 13bn deal that saw diamond producer De Beers taken private earlier this year. According to market sources, the Oppenheimers have agreed not to sell any more stock this year.

On the eve of its third-quarter figures, insurer Royal & Sun Alliance dipped 4p to 382p as dealers noted talk that the company is working on a plan to free up capital by reinsuring its life assurance division's book of policies. Royal Sun needs to raise extra cash to expand its core general insurance division.

Elsewhere, Pearson, the owner of the Financial Times, slipped 37.5p to 838.5p after UBS Warburg surprised the market by lowering its recommendation to "hold" and cutting its pretax profits forecasts for the next two years by 11% and 7% respectively.

Following Pearson's profits warning three weeks ago, which it blamed on a slowdown in ad revenue, traders thought they had heard the back of earnings downgrades for the media group. But UBS is worried that the economic downturn could hurt its core education business - the one area of its operations that has performed strongly this year.

Sage slipped 5p to 2229p as ABN Amro adopted a more cautious stance on the stock. Advising clients to "reduce" their holdings, ABN said it ex pected Sage's position as the dominant supplier of accountancy software to small and medium-sized business to come under pressure in the next few years. As such, the Dutch broker reckons the current premium rating of Sage can no longer be justified.

Electronics distributor Premier Farnell topped the FTSE 250 leaderboard, boosted by interim results from blue chip peer Electrocomponents, up 42p to 494p. Not only did Electro's numbers meet expectations, it also said trading at its US businesses had recovered to pre-September 11 levels. That news saw Premier advance 23p to 241.5p.

Eidos, the computer games publisher, was marked 3p higher at 235p in the wake of strong first-quarter figures from French rival and former suitor Infogrames. Discount retailer Matalan improved 28p to 360p after a large line of stock was cleared. Talk that house broker UBS Warburg is working on a bullish research note also helped. The FTSE 250 rose 27.5 to 5,526.9.

Among the small caps, Entertainment Rights jumped 3.5p to 14.5p as investors warmed to the 5.1m acquisition of Postman Pat.

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