Sell note weighs down Wm Morrison

Wm Morrison, the supermarket chain struggling to integrate Safeway, hit an eight-month low in a weak London market yesterday. However, it was not merely fears that the company will issue a warning on first quarter profits at its annual meeting on May 26 that was behind the fall.

City traders said a 52-page "sell" note from heavyweight broker Merrill Lynch had done most of the damage.

In the report, analyst Andrew Fowler said it was impossible to rationalise the apparent optimism of Morrisons management with regards to Safeway.

"Management hope strong sales showings from refits in years two and three will now rectify things. Yet there is no modern industry precedent to suggest this will happen, there is not even a promising trend developing in these refitted stores during their first year in their new guise," Mr Fowler commented.

With free cashflow minimal and Morrisons therefore likely to remain in debt for many years, Mr Fowler ended the note by stating that there could only be one recommendation for the shares, which based on 2006 earnings forecasts trade on a higher rating than industry leader Tesco, which was up 2.5p to 311.5p.

In the wider market, leading shares closed lower, weighed down by a weak overnight performance from Wall Street, which continued yesterday. Three of London's biggest stocks weakened. BP was 9.5p lighter at 537p, Glaxo SmithKline 7p cheaper at £13.28 and Shell 6.5p down at 471p; this did not help matters.

The final scores showed the FTSE 100 down 17 points at 4875.4, with mining company Antofagasta, off 53p at £11.02, the biggest faller as it traded ex-dividend as well.

The FTSE 250 eased a mere 1.5 points to 6743.4. Bovis Homes, down 8p at 619.5p, had warned of a fall in first half profits, but this was offset by a huge gain for online travel group Lastminute.com. Its shares surged 47.75p, or 45%, to 153p, on news of a bid approach.

Meanwhile, the FTSE Small Cap index dropped 20.8 points to close at 2760.5. Market volume was reasonable with 3bn shares changing hands. In the bond market, the benchmark 10-year gilt was trading at around 102.58, yielding 4.435% as the stock market closed for business.

Back among the blue chips logistics group Exel improved 1p to 837.5p after US rival United Parcel Service said it would consider acquisitions if they were in "attractive markets and offer compelling synergies that leverage our strengths". Traders also noted that Exel has not bought back any shares since it purchased 490,000 on May 3. This, they claimed, could be a sign that the company has received an approach.

Corus, off 1.25p to 43.25p, lost ground for a second consecutive session as the City continued to fret about high European steel inventories.

Lower down the market, Paragon, the specialist mortgage lender, was the biggest faller in the FTSE 250 index. Its shares slipped 23.25p, or 6.1%, to 358p on news that the government had launched a crackdown on large buy-to-let property schemes.

Marconi was also under pressure, falling 13p to 257p as the City was forced to reconsider the likelihood of a bid emerging for the troubled telecoms equipment maker, following a report which claimed there is a £300m liability in the company's UK pension fund.

Meanwhile, Marshalls, the block paving specialist, fell 12.5p to 280p on concerns that it has witnessed a slowdown in demand for its products. Isof t, the healthcare software provider, was marked 1.5p higher at 366.5p ahead of today's year-end trading update.

Elsewhere, building materials group SIG rose 11p to 577p after Numis Securities advised clients to take advantage of recent weakness to buy. SIG shares were trading above 600p a month ago.

Durex condom-maker SSL International eased 1p to 262p on rumours that Bailey Coates, the London hedge fund which has been the subject of several negative press reports in recent weeks, had liquidated its position.

Among the small caps, QXL Ricardo, the on-line auctioneer, gained a further 300p to £28.50 in response to the Lastminute bid approach and news that Izaki, a group of Israeli investors, had increased their holding in the company to 26.2%. Rumours that a positive trading update will be published in the next few weeks helped ASOS, the online fashion retailer, improve 1.75p to 46p

Elsewhere, RAB Capital, the hedge fund manager, gained 1p to 44.75p despite talk that the roadshow for its new £100m Aim-listed investment vehicle, which will give investors access to its highly successful Special Situations Fund, had got off to a slow start.

Market professionals reckon broker Collins Stewart has so far raised about £30m for the new vehicle, which is due to start trading on May 23.

Finally keep an eye on Foseco today. Shares in the company, which supplies kit to the steelmaking industry, are to make their debut this morning following a sale of shares at 100p by its private equity backer Cinven. A solid start is expected.

Lumpy bed for Homestyle

Homestyle shares sank to a fresh low after the heavily indebted owner of Bensons Beds, the UK's largest independent retailer in the sector, finally confessed to what the City had suspected for a while - that it is exploring a significant fundraising.

The good news for shareholders is that the company is rumoured to have found a backer to support the cash call.

Traders believe Steinhoff International Holdings, a £1.3bn South African furniture company, has been lined up to underwrite a rights issue, which is likely to be significantly in excess of the £40m-£50m expected by City analysts.

Steinhoff has a sizeable presence in Europe. It owns Relyon, an upmarket bed maker, Pritex, an industrial foam and fibres business, and Norma, a leading mattress manufacturer in Holland.

By backing the fundraising, Steinhoff will be able to increase its holding in Homestyle and forge closer links with Bensons Beds. Steinhoff is believed to be the ultimate owner of Formal Property Management Services, which amassed a 14% stake in Homestyle last autumn. Homestyle shares closed 4.5p lower at 59p.