Yell, the heavily endebted directories business, lost nearly 15% of its value after it said it was renegotiating its £4bn debt, just eight months after a change in the terms of its covenants.
Its shares dropped 4.5p to 26.25p as analysts warned a refinancing could leave very little for shareholders. Yell said it was in talks with its debt holders, to extend the maturity and change the terms of its borrowing facilities. It would also talk to its main shareholders "in due course."
On top of that, the company said it expected second quarter revenues to fall around 17%, after an 11% decline in the first quarter at constant exchange rates. Commenting on the refinancing, Lorna Tilbian at Numis Securities said:
"The group has started a process to restructure its debt and as such is seeking to change the maturity and terms of its debt facilities. The company will also have 'discussions with principal shareholders' suggesting that a refinancing may take place alongside a rights issue. Although the level of gearing makes a traditional rights issue difficult to structure, we think the group could raise [funds] through a combination of a firm placing and open offer.
"We remain of the view that Yell's balance sheet poses serious risk to equity shareholders and the risk's to the group's investment case are disproportionately to the downside, we therefore retain our sell recommendation."
Citigroup kept its hold rating on the company, but said:
"The capital restructuring process, given the unknowns, will create significant uncertainty over future earnings streams to equity holders. It is not inconceivable that the negotiations may result in some form of debt for equity swap. The fact that current trading shows no sign of inflection, even adjusting for seasonal variations in growth, won't help. We expect uncertainty to be matched by equity volatility."
Elsewhere Smith and Nephew, the medical equipment group, came under pressureon concerns about hospitals cutting back on its orthopaedic products.
Its shares fell 2.5p to 449.5p, and after the market closed the company suggested it would see a continung decline in hip and knee replacements due to the economic slowdown. Chief executive David Illingworth told Reuters: "Its going to take a while to work through some of the pain we're dealing with right now."
Overall the FTSE 100 fell 44.82 points to 4249.21, mainly due to a 100 point decline on Wall Street during the afternoon following a surprise drop in US consumer confidence data. This suggested an economy still in trouble despite all the government's attempts to fix the problems, and caused concern ahead of the key non-farm payroll data, due on Thurday because of the July 4 holiday.
News that chief executive Chip Hornsby had left building materials group Wolseley pushed its shares up 32p to £11.58p. Panmure Gordon said:
"After all the recent events at Wolseley, management change is not a major surprise. An external replacement is likely to be well received as it should ensure that no stones are left unturned."
BG slipped 19p to £10.18 despite a positive reaction from analysts to news that it was paying $1.3bn for a stake in a US gas field. Panmure Gordon's Peter Hitchens said:
"We believe that this is a very exciting move and gets the company involved in a significant market at the bottom of the cycle. The group is taking advantage of the very depressed gas price to acquire reserves cheaply.
"Shale gas is deemed an unconventional source of natural gas and involves the extraction of gas from difficult to produce low permeability reservoirs. This requires expensive wells that need to be drilled horizontally and need to be fracced. However, once these wells have been drilled, they tend to have very long production lives."
Collins Stewart issued a buy note with a £12.50 target, saying:
"In our view the deal has good strategic rationale in that it gives BG access to sizeable long-term resources; it retains Exco as operator of the joint venture, and hence harnesses the skills in shale gas that BG does not yet have; it has good synergies with BG's US LNG import and gas marketing businesses; and it creates a base for future growth in shale gas."
The company is paying the cash to Dallas based Exco Resources in return for a 50% shareholding in the Haynesville shale gas area in Texas and Louisiana.
Lower down the market IT group Micro Focus International added 2.25p to 374.5p despite shares in its US bid target Borland continuing to move higher. Micro Focus has offered $1.15 a share, while a rival bidder has come in with a $1.25 a share bid. Last night Borland shares closed at $1.29. George O'Connor of Panmure Gordon said:
"Micro Focus has the inclination and the cash to pay more – aroun $1.70 we feel, but should hold firm for now. We acknowledge as a name coupled with an acquisition price that on the surface looks cheap Borland was likely to attract other bidders. Yet Borland has been going wrong for a time - there is much work to do to make it fit for purpose. For now, until [rival bidder] company A does due diligence it does not know if it has raised enough funds to cover the inevitable restructuring."
