Market Report: BAT slumps as broker stubs out tie-up talk

What a difference a day makes. On Wednesday, BAT shares featured as one of the best performers in the blue-chip index amid suggestions the company has the capacity for either a mammoth return of capital to shareholders or could acquireJapan Tobacco, a deal that would make it the world's biggest cigarette maker.

What a difference a day makes. On Wednesday, BAT shares featured as one of the best performers in the blue-chip index amid suggestions the company has the capacity for either a mammoth return of capital to shareholders or could acquireJapan Tobacco, a deal that would make it the world's biggest cigarette maker.

BAT shares stood out as the worst performer in the FTSE 100 index yesterday, down 24.5p to 1,074.5p, as Dresdner Kleinwort Wasserstein poured cold water on both theories. The German broker said it was very sceptical that BAT could find itself in a position where, as suggested earlier in the week, it could free-up enough cash from its balance sheet to buy back more than 30 per cent of its shares by 2008. As for the issue of a possible tie-up with Japan Tobacco, Dresdner admits that such a move would be a good idea in theory but in practice it would face considerable obstacles.

The biggest of these is Japanese law, which states that the Asian country's government cannot own less than 50 per cent of Japan Tobacco. And, if the company were to issue new shares, local law says the government cannot be left with a shareholding of less than 33 per cent. So, baring a change in the law, there is no way for BAT to buy Japanese Tobacco.

Also weighing on BAT, and its rivals Gallaher, down 9.5p to 849p, and Imperial Tobacco, off 24p to 1,507p, was Credit Suisse First Boston. Having had a "buy" stance on the sector for the past four years, the Swiss broker scaled back its rating to "neutral", taking the view that the industry is now fully valued by the stock market.

Meanwhile, the FTSE 100 rose 25 points to 5,045. while the FTSE 250 jumped 59 points to 7,317. Mining stocks did particularly well, thanks to fresh evidence that the Chinese economy continues to perform strongly. A surge in the price of copper, to a record high, also did its bit to support the sector. Rio Tinto gained 65p to 1,765p, Antofagasta added 43p to 1,225p and Anglo American put on 34p to 1,345p.

BHP Billiton, 29p stronger to 716p, was given a boost by ABN Amro, which upped its rating on the commodities giant to "buy" from "add". The Dutch broker predicts bulk commodity prices will drive profits growth at the company over the next 18 months to two years and highlighted the positive impact of the group's exposure the still-high crude price. Although, BHP is viewed as a miner, it gets about one-third of its earnings from oil exploration.

Merrill Lynch stirred up interest in Whitbread, which pushed shares in the leisure conglomerate 27p higher to 945.5p. Upgrading its recommendation on the stock to "buy" from "neutral", the US broker said: "Rather than any immediate prospect of an improvement in operating performance, our change of heart is based on our view that pressure is building on the company to release the material value trapped within its current financial structure."

Merrill calculates that Whitbread could return up to £800m, or 310p a share, to shareholders. This is in addition to the £400m, or 135p a share, it has already promised to return. Although the broker does not believe a full-scale break-up of the group is immediately on the cards, it is convinced that Whitbread's management is determined to find ways of returning value to investors.

In the retail sector, rumours that a major shareholding will soon change hands at J Sainsbury circled dealing rooms for most of the session. Shares in the UK's No 3 grocer rose 2.5p to 286.75p on the talk.

Elsewhere in the retail sector, Matalan rose 3.5p to 176p as takeover speculation once again resurfaced. The fact that WH Smith, 6.25p strong at 370.5p, managed to notch up a third consecutive day of gains prompted talk that a private equity player may once again be eyeing the group.

Among smaller companies, BTG rose 1p to 164p on hopes that the US Food and Drug Administration will soon give the technology group the green light to start Phase II trials of its Varisolve treatment for varicose veins. The product has regulatory approval in Europe, and bulls of BTG reckon the go-ahead from US authorities is likely to pave the way for the group to conclude a major licensing deal for Varisolve.

The property company Mapeley boasted that it raised £128m from its IPO at 2,300p. The stock soared to 2,572.5p valuing the company at more than £550m. Mapeley will use the money for acquisitions.

Finally, Centrom enjoyed a strong debut on AIM. The IT solutions company provides services to healthcare organisations, the police and the criminal justices system. It raised £1.6m through a placing of new shares at 5p and saw its stock finish the day at 6.75p.