Rumours fly in flimsy market

WHEN markets dramatically retreat the way the local market has done in the past three months and share trading volumes dry up, talk often turns to takeovers. Sometimes it is a case of hedge funds, brokers and investment banks trying to generate interest in a stock to make some money, and at other times it is because the share price has fallen so low that it becomes an obvious target.

In the local equities market, volume yesterday was a woeful $3 billion, which is well below the typical daily average of $4.5 billion. To put it into some context, at $3 billion it is 45 per cent lower than last year's average and more than half the daily average of the peak in June 2007 which was $6.6 billion a day. Such low average value trades per day coupled with a falling equity market down 7 per cent in the past three months is not only hurting the stockbroking industry, with some players struggling to meet their overheads, but it has turned the spotlight on stocks that have either had a sudden share price surge or above-average turnover.

Yesterday morning Perpetual became the focus when it was queried by the ASX over a share-price spike following rumours that an unnamed private equity fund was looking at making a bid. It prompted the ASX to issue a query, to which Perpetual responded with a stock standard answer that it was unaware of any explanation for the price rise other than the market reaction to media speculation about an interested buyer. Nevertheless, the stock closed almost 10 per cent higher at $23.79.

The other stock in focus yesterday was Fairfax Media, when 42 million shares were put through at 12.28pm by Southern Cross Equities at 60? a share. At the close of trade, another 36 million shares had changed hands.

The share bulge naturally raised speculation that the company's biggest shareholder Gina Rinehart was increasing her stake beyond 13 per cent with the aim to go towards 19.9 per cent, which is just below the takeover threshhold, to improve her chances of getting a seat on the Fairfax board. (Fairfax is owner of The Age).

But Fairfax and Perpetual are not alone. Other companies that have been the subject of market speculation include Qantas, Echo and Pacific Brands. In some cases a bid will emerge. In others, though, it will be an attempt to spread the rumours to generate business or inflate the share price. There is no doubt that investment banks, stock brokers and hedge funds are doing it tough. It would not surprise if some investment banks were flying kites in the form of speculation to gauge industry interest in certain companies, while in other cases the rumours are being spread by hedge funds trying to game the market. In other cases, the share price has fallen so low that it becomes affordable for private equity and other trade buyers to make a tilt.

For instance, CSR's shares fell to a 25-year low yesterday, putting it on a market capitalisation of $766 million. It will be interesting to see if rumours emerge of a takeover offer for CSR. In the case of Qantas, its shares fell below $1 last Friday, making it an attractive takeover target. And in the case of Echo, the recent emergence of James Packer's Crown and Genting on the register has inflated the share price by at least $1. Whether the rumours translate into something more concrete, time will tell. But what is certain is that over the next few months there will be more rumours as investment banks and stockbroking firms try to keep their heads above water as markets continue their wild volatility until Europe sorts itself out.

The hope is that the Greek elections on Sunday will produce a stable government that will help settle investor fears. But that is a big hope. For starters, there is still the issue of Spain, which wasn't helped by Moody's decision overnight to downgrade its rating on Spanish government debt by three notches to Baa3 from A3.

Moody's is concerned that the newly approved eurozone plan to help Spain's banks will increase the country's debt burden. But there are bigger problems bubbling away.

Spain has said there will be minimal conditions but only Spain knows what they are and is expected to unveil them after the Greek elections. This has led some market watchers to believe that the bailout was announced to encourage Greeks to vote sensibly at the weekend. As one observer said: "The bailout announcement would no doubt encourage Greek voters to elect candidates this weekend who would keep Greece in its austerity program. That is, look how bad things are even Spain needs a bailout."

The upshot is the Greeks will learn about the Spanish rescue conditions after they have voted. If the conditions are not to their liking, watch out Europe.