Market Report: Body Shop lifted by management buyout talk

The retail industry has long been a staple part of the private-equity diet, despite well-publicised concerns over high street spending. The beauty products retailer The Body Shop was the star performer in the FTSE 250 yesterday as rumours circulated the market that management is about to launch a bid with private-equity backing.

That sent the shares soaring to a high of 257p, up 33.5p, although profit-taking and a late denial from the company saw the shares drop back to 247p, up 23.5p. There was also talk that the founders Anita and Gordon Roddick may finally have found a buyer for their 18.2 per cent stake in the business, worth just under £97m at yesterday's closing price.

The stock has seen a remarkable turnaround since January 2003, when the shares were languishing at little more than 60p, after potential deals with buyout firms collapsed. If those same companies were to bid now, traders said they would be looking at the best part of 300p - 200 per cent higher than when they last looked.

There was also talk that an unnamed European private-equity rival was circling 3i, Europe's largest quoted private equity and venture capital business. The group was rumoured to have already rejected a bid worth £6bn.

3i shares rocketed to close 55.5p higher at 970.5p, having traded as high as 1,013.5p earlier in the session. But most analysts seemed to think the chances of a bid for 3i were remote, pointing out that with a market capitalisation of £6bn there aren't any European rivals big enough to bid for the company on their own.

The struggling telecommunications group Cable & Wireless remains many traders' favourite to be the target of a leveraged buyout, and news that the company may sell its 20 per cent stake in Bahrain Telecom underlined that opinion. Selling the stake, worth about £350m, would plug a large part of the hole in C&W's pension deficit, making a takeover far more tempting. The shares closed a penny firmer at 107.5p.

After a dismal start to 2006, when its shares have declined about 8 per cent against a rising market, the world's largest drinks can maker Rexam pleased the market with solid results and an upbeat trading statement. The company reported a 6.8 per cent rise in pre-tax profits to £307m despite a tough underlying aluminium price, as well as the €146m purchase of the Dutch foam pump manufacturer Hairspray. The brokers JP Morgan and Seymour Pierce both urged their clients to buy the stock, up 22.5p to 525p.

London shares were in negative territory for most of the day as BP, down 12p to 651p, Rio Tinto, down 54p to 2,875p and Scottish & Southern Energy, off 5.5p at 1151.5p, all went ex-dividend, dragging the index down. Index heavyweight Vodafone also fell 1.75p to 118.75p as 535 million shares changed hands. A strong start to the day in New York led to a late buying surge as the FTSE 100 closed 14.7 higher at 5872.4.

London Stock Exchange shares came in for another bout of profit-taking after Reto Francioni, the chief executive of Deutsche Börse, told reporters that Euronext would be his preferred choice for consolidation in European stock markets. Many traders now feel the LSE is looking overvalued, with another bid now less likely. The shares slipped 10p to close at 809p.

William Morrison has had a tough time since the company bought its rival Safeway. Some analysts think its trouble could be behind it, with UBS and Oriel Securities publishing "buy" notes yesterday. Oriel said it is increasingly convinced that the company has turned the corner and that the shares are due a run. UBS upped its price target on the stock to 240p, and the shares rose 13.5p to 210.5p, the best performer in the FTSE 100.

After a somewhat underwhelming response to results yesterday, Barclays rallied 18.5p to 664p as a raft of positive analyst notes were released. Deutsche Bank, Lehman Brothers and Merrill Lynch all waxed lyrical about Barclays, with Merrill increasing its fair value for the shares to 819p.

The AIM-listed engineer Aero Inventory rallied 13p to 405p as rumours circulated among traders that the company is about to announce it has won a "massive" contract from Airbus.

Elsewhere on AIM, the investment banking boutique Daniel Stewart Securities gained a penny to 20.5p on talk the company has hit its internal budgets several months ahead of expectations due to the boom in corporate activity. The company has profited from the boom in AIM listings and traders expect it to continue its excellent start to the year.

But the news was not all good for AIM stocks: Endace, a supplier of network security and analysis applications, admitted that industry component shortages had created longer lead times, which will dent profits. The stock plummeted 41p to close at 125.5p.