Market Report: Chinese whispers brew up a bid story for M&B

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August tends to be one of the more quiet months for market traders but yesterday second line stocks were set alight by a series of takeover stories.

Pubs group Mitchells & Butlers was probably the most talked about company in the FTSE 250 as rumours that its larger rival Enterprise Inns is about to pounce got punters clambering over one another to get their hands on its shares. At one point during the session, the stock traded as high as 570p as Merrill Lynch was said to be amassing a stake in M&B on behalf of Enterprise Inns.

However, as the day wore on, it became apparent that a tie-up between the owner of the O'Neills pub chain and Enterprise Inns is not going to happen. In fact, the bid rumours seem to have been nothing more than a classic case of Chinese whispers. The management of M&B are believed to have attended a dinner at Merrill Lynch on Thursday night where they made a presentation to analysts at the US broker about the group's future prospects. Merrill liked what they heard and yesterday morning piled into the stock on their own account.

As this version of events leaked into the market, M&B shares dropped back and closed at 544p, up just 19.5p. Enterprise Inns gained 8p to 975p. M&B is presently carrying out a revaluation of its extensive property assets. The results of this will be published later this year and will almost certainly see the group upgrade the value of its freehold estate.

Spirent, 2.25p better at 37.75p, was also set alight by whispers that a takeover is being lined up for the telecoms equipment group. Over 56 million shares were traded, many times the volume on an average day, as talk of a move on the company from US rival Agilent circled dealing rooms. Prior to the speculation, Spirent shares traded at three-year lows after a series of profit warnings. Spirent is expected to unveil interim results next week, probably on Thursday. Analysts expect it to post earnings before interest, tax, depreciation and amortisation of around £5.2m.

Cable & Wireless, 4p stronger at 119p, was also talked of as vulnerable to a bid. Private equity has long been seen as the most likely buyer of the company. Gossips reckon a buyout giant such as Blackstone or Kohlberg Kravis Roberts could easily fund a move on C&W, which at yesterday close was valued at just £2.6bln.

In the FTSE 100 index, which closed 51 points better at 5,889.4, William Morrison Supermarkets gained 6.5p to 219.5p as a number of hedge funds with long-term bear positions in the stock rushed to close them. Anyone who has had a short position in the stock over the past three weeks will have suffered significant financial pain. Since 17 July, William Morrison has risen 13 per cent as retail sector analysts have been busy raising their forecasts for the supermarkets operator following a bullish trading statement. These have been the first set of upgrades to Morrison estimates since its £3.5bln takeover of Safeway in March 2004.

PartyGaming added 10p to 120p as Panmure Gordon slapped a "buy" rating on the online gaming group and set a 225p price target on its stock. The broker applauded the recent purchase Gamebookers, an Antigua-based, Bulgarian run sportsbetting firm. Panmure said: "What PartyGaming has acquired is the mechanism to extract higher value from its existing and future customers by offering a wider range of entertainment". Elsewhere in the sector, 888 Holdings gained 20.25p to 162.75p, Sportingbet added 28.75p to 281.75p and Empire Online went 2.5p better to 75.5p.

Premier Farnell ticked 0.5p better to 173.75p after Sir Peter Gershon, the chairman of the components distributor, bought 2,000 shares at 176p. Meanwhile, there was director buying on a larger scale at Tomkins, 2.25p higher at 274p. James Nicol, the engineering company's chief executive, and David Newlands, its chairman, picked up 20,000 and 10,000 shares respectively at 272.75p.

At the smaller companies end of the market, Gulf Keystone Petroleum finally gave its investors something to smile about. Shares in the explorer jumped 21 per cent, or 12p, to 69p, after the company unveiled a strategic partnership with BG Group. The tie-up covers Gulf Keystone's Hassi Ba Hamou block in Algeria and will see BG help fund the gas project in return for a 37 per cent stake.

This is BG's first step into Algeria and is the first deal of its kind in the North African country for more than two years.