CITY WATCH

August is a thin month in the markets as traders consider little more than the relative prices of sun-tan oil. It follows that any rumour is likely to have a unduly febrile effect on those unlucky enough to remain at their desks.

Over the past couple of weeks, it has been Pearson that has been the subject of rumour and counter-rumour, culminating in speculation that the group was about to be the target of a bid from Reed Elsevier. Reuters was said to be the alternative prey. These three groups – Pearson, Reed and Reuters – consequently became the sole focus of attention in the sector in the latter part of last week.

The Pearson story has recently been one of recovery from gloom. Talk in the City had been of interim figures that would do no better than break even and the prospect of a dividend cut. In the event, pre-tax profits were down at Pearson, from 50.5m to 30.2m, on improved turnover as a result of provisions and operating losses at the Mindscape multimedia subsidiary, but performance was otherwise robust.

Mindscape made an operating loss of 14.5m, partly exaggerated by a change in the way it treats royalty advances and development costs. Pearson also took an 11.2m charge to cover abandoned products, restructuring costs were 5.7m, and there was a 7.4m write-down against last year’s balance sheet. But there has been no further deterioration in Mindscape since May and optimism is fuelled by chairman Lord Blakenham’s assurances that Mindscape’s management are solving the problems.

Notwithstanding Mindscape and other exceptional items – such as Channel 5 start-up costs and reduced BSkyB income as a result of the sale of Pearson’s stake – underlying profits would have risen from 71.7m to 87.9m.

Pearson also managed to sell its Westminster Press newspaper business to Newsquest Media Group, a venture backed by those kings of the leveraged bid of yesteryear, Kohlberg Kravis Roberts, for 305m.

The combination of results were thus far from the cataclysm that was expected, and the sale of Westminster pushed the shares forward some 20p to 630p.

Then there were the rumours of a bid from Reed, which supported the share price at that level. Analysts largely laughed off the bid theory, but Pearson’s shares are likely to remain solid – Kleinwort Benson has switched its recommendation from “hold” to “buy” and Henderson Crosthwaite values the company at 890p a share.

As for the supposed predator, Reed International, the UK arm of Reed Elsevier, put on some 21p to 1150p a share, after continued speculation that it might be eyeing on-line information service Bloomberg. It is odd that Reed’s shares should be buoyant on rumours of acquisition expenditure, but the market clearly believes that economies of scale can be brought to bear.

The other rumoured Reed target was Reuters. The information and news service’s shares have been in the doldrums recently, but suddenly last week Reuters became the FT-SE 100’s second best performer, gaining 22p to 729p, the first sign of strength since disappointing results last month. Analysts have been returning to support Reuters – in particular, Panmure Gordon.