FTSE 100 falters ahead of Scottish vote and Federal Reserve, while Smiths slides

Ahead of the latest update from the US Federal Reserve later and the Scottish referendum on Thursday, markets were struggling for direction.

But investors in engineer Smiths Group must have been envying the relative calm. The company's shares dropped 81p or 6% to £12.68 after it said full year operating profits had dropped by 10%, hit by falling margins at its detection unit and the effects of the recent strong pound. There was also disappointment when the company ruled out selling its ailing medical business, after two previous failed attempts.

Overall the FTSE 100 finished down 11.34 points at the day's low of 6780.90, having earlier traded as high as 6816. On the positive side came reports of China's central bank injecting liquidity into the system to boost its flagging economy. In the UK there was a fall in unemployment, and in the US lower than expected inflation figures. But the nervousness around the Scottish independence vote, with the outcome too close to call despite recent polls showing the No side slightly ahead, meant few risks were being taken. Added to that was the Fed statement, keenly watched for signs of when US interest rates may start rising.

Technology shares were in demand, ahead of the appearance of the Apple iPhone 6 in the shops at the end of this week. Chip designer Arm, an Apple supplier, added 20.5p to 940.5p. Smaller rival Imagination Technologies jumped 10.5p to 199.5p after an upbeat trading statement.

Elsewhere housebuilders were in demand, with Barratt Developments 11.7p better at 392p and Persimmon up 20p to £13.52.

Among the mid-caps JD Sports Fashion added 17.1p to 425.1p after it said it would report full year results at the top end of expectations, following a doubling of half year profits to £20m. First half sales in the core sports business rose by 13%, with the outdoor retail chains including Millets and Blacks seeing sales up 12% and breaking even.

Packaging group DS Smith rose 13.9p to 286.9p after an upbeat trading statement and positive outlook for the rest of the year, and despite a shareholder revolt against its remuneration policy at its annual meeting..

But IG dipped 5.5p to 598p after the online trading group said first quarter revenue had fallen 9%, hit by lower client numbers amid quiet market trading conditions.

Finally exhibitions group UBM, down 0.5p at 601.5p, was reported by Reuters on Tuesday to be close to buying trade events business Advanstar for $900m. Analysts at Liberum said any such deal might spur a sale of UBM's PR Newswire business to raise the necessary funds. In a buy note on UBM with an 840p price target, Liberum said:

According to a Moody's report, [Advanstar'] 2012 revenues were $293m, so assuming some growth, it would seem a relatively high multiple on enterprise value/sales. On one level, the report would be credible as new chief executive Tim Cobbold has said he wants to increase UBM's North American trade exposure (Advanstar mainly operates in the US and is in sectors such as fashion, pharma, autos and motorcycles etc.): on a pro-forma basis, it would mean that close to half (we estimate around 47%-48%) of events revenues would come from North America, thus weighting UBM away from Asia. Given UBM is levered, it would have to do a significant capital increase to buy this: assuming around $90m of EBITDA (so 10 times EBITDA), to keep the same leverage number would mean a capital raise of around £440m, or around 30% of the market cap.
However, UBM may not want to raise such an amount via a capital raise. Therefore the other implication is that UBM could be close to selling PR Newswire, which we value at £506m ($815m) i.e. close to the $900m quoted. With the contribution of Advanstar's EBITDA, there would be no need to raise capital (in fact, leverage would fall to 1.9 times at the end of 2014). We have commented before that PR Newswire fits best with an agency group. It may be a coincidence but Publicis announced [on Wednesday] that it would invest in digital assets. PR Newswire could be seen to fit within that context. If UBM did do a double transaction (buy Advanstar, sell PR Newswire), that would be seen as a plus for three reasons: (1) earnings accretion; (2) probable re-rating as UBM would be a pure-play events business and (3) it reduces the risk to Chinese exposure that has weighed on the shares recently.