Market Report: A&L buoyed by talk of Santander bid interest

The last time any serious bid rumours did the rounds at Alliance & Leicester, the suitor was Crdit Agricole and the alleged takeout price was 1,500p per share. Barring a miracle of epic proportions, investors are not going to get anything like that if rumours are true about a bid coming from Santander, the Spanish banking giant.

The banking sector was all set for another good day following the decent trading statement from Barclays on Tuesday, but the rumours about A&L put the sector into overdrive. The word is Santander is looking at A&L with a view to buying the company and merging it with Abbey, the UK's second largest mortgage provider which Santander has owned since November 2004.

Although some traders believe a bid at this stage in the credit crunch is unlikely, with some believing that the sub-prime mortgage crisis has more bad news to deliver, the talk gave the sector added momentum. A&L firmed 38.5p to 635.5p, while Barclays continued to attract support and closed 30p better at 554p.

Even a grim update from the plumbing and building supplies giant Wolseley was not bad enough for the shares to close lower. After a run of negative news flow, mainly on the company's US operations, Wolseley expects things to get even worse before they get better. Brokers were overwhelmingly bearish, but the shares were saved by the buoyant wider market, closing 7p firmer at 648p.

In contrast, the accounting software provider Sage Group produced a sparkling set of first-half numbers and a confident outlook, with Merrill Lynch and Panmure Gordon both reiterating their "buy" advice on the shares. The stock topped the blue-chip leaderboard, 19.3p better at 213p, reversing a slump that has seen the shares lose around a quarter of their value so far this year.

The strong banking sector and bullish overnight trading in Asian markets helped London shares to stage an impressive rally boosted by a strong opening on Wall Street. By the close, the FTSE 100 was up 165.5 at 6,306.2, with no stock ending lower.

Broker comment boosted shares in the struggling buy-to-let mortgage group Paragon. Credit Suisse upgraded its stance on the shares to "outperform" from "neutral", telling clients even a rights issue could add 8 per cent to the shares, while a refinancing with its bankers would add 34 per cent to the company's value. UBS slashed its price target to 160p from 490p, but also told clients there could be "significant upside potential" if embedded value is protected. The shares rallied 14.25p to 138.25p, the best performer in the mid caps.

Another perennial struggler, Rank Group, was also in focus as more takeover rumours did the rounds. The word is that the US group Harrah's Entertainment could be prepared to make a cash offer for the company following reports last week that it had made a preliminary all-share offer for Rank which the group rejected. Enough punters took the rumours seriously, helping the stock to climb 8.75p to 92.25p.

Mid-cap metals stocks were out of favour as Randgold announced a plan to raise money by issuing 6 million new shares, increasing its share capital by 10 per cent. Randgold led the mid-cap fallers on the news, shedding 62p to 1,742p, while other miners also fell to a bout of profit- taking after recent gains. Hochschild Mining fell 14.5p to 469p, with Ferrexpo also giving up some of its recent outperformance with a 4.5p fall to 240p.

Down in the small caps, Pursuit Dynamics fell again despite a bullish statement along with full-year results on Tuesday. However, there are several short-sellers of the stock in the market who do not believe it will turn its technology into positive cash flow before it runs out of money, and the shares have struggled despite management's confidence. The shares fell another 15.5p to 177p.

The specialist magazine publishing group Future bounced after posting encouraging results. The shares had been heavily sold in the run-up to the results, but the broker Numis Securities told investors it remains upbeat on prospects. It told clients: "There is considerable medium-term upside potential from recent deals to publish titles for Nintendo and Sony." The shares nudged half a penny better to 35p.

Finally, the AIM market had two new entries, both achieving small premiums to their placing prices. Despite some shocking performances from AIM's Chinese contingent over the past 12 months, investors backed Vision Opportunity China Fund to the tune of $100m (48m). The investment company will target companies primarily within China, and its shares rose 5 per cent to $1.05, having been placed at $1 by Fairfax. E-Therapeutics climbed just half a penny to 67.5p, following a placing that raised 1.3m, giving the company a capitalisation of just over 37m.