Market Report: Hanson feels heat over acquisition worries

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Worries that Hanson is considering a major acquisition led investors to abandon the building-materials giant yesterday.

The concern was prompted by comments from Dresdner Kleinwort Wasserstein, after a meeting between the German broker and Hanson's management, and left shares in the group down 5p at 589p.

Dresdner believes that Hanson is looking to make a big acquisition in the near term, and predicts this will negatively impact its shares, which have recently been boosted by hopes the building-materials group will soon be taken over. The broker said: "We believe Hanson is well aware of the takeover risk and will seek to lower this risk by gearing up the balance sheet and increasing its scale."

The past 12 months have seen significant consolidation in the building-materials industry, as Aggregate Industries and RMC have been bought at high valuations. This has led to the hope that Hanson could be next, and this belief has driven the strong performance of its stock this year.

Dresdner, which downgraded its recommendation on Hanson yesterday to "reduce" from "buy", also suggests the company's new chairman, Mike Welton, is keen to step up sales growth. But, it warns, this is likely to see the group scale back its share buy-back programme.

Meanwhile, positive broker comment boosted demand for Kingfisher, helping it close 4.25p higher at 225.75p. Merrill Lynch reckons that as most analysts in the City are bearish on the DIY retailer, it is time to turn bullish on the stock. The fact that so many market professionals have abandoned Kingfisher limits the downside in the shares, according to the US broker. But it is convinced that on a long-term view the stock offers great value to investors, and therefore upgraded its rating to "buy" from "neutral". Merrill said: "We believe Kingfisher shares are not only oversold but offer value on a 12-month view."

Elsewhere in the retail sector, Marks & Spencer gained 6.5p to 368.5p as Deutsche Bank tipped the company's trading statement on 11 October to be an upbeat affair. The broker noted that five M&S directors have spent a total £1.1m on buying shares in the past month at between 344p and 357p. This shows that the executives see the tide turning at the company, according to Deutsche.

At next month's trading statement, Deutsche hopes to see M&S boast that the pricing and desirability of its clothes are improving. The broker forecasts second-quarter sales will be down just 2 per cent, compared with the 10 per cent slide seen in the first half.

The FTSE 100 roared 39.5 points higher to 5,453.1, a new four-year high, amid relief that Hurricane Rita did not wreak the damage feared to US oil assets. The mining sector led blue chips again as the latest data out of China showed that the country's economy continues to grow at break-neck speed. China said its gross domestic product is likely to increase 9.2 per cent this year. As a result, Rio Tinto gained 97p to 2,266p, BHP Billiton put on 30.5p to 891p and Xstrata jumped 34p to 1,442p.

BAT was not so lucky, falling 12p to 1,205p, beforea key court ruling in Canada this week. On Thursday, the country's Supreme Court will make a final decision on BAT's challenge to a British Columbia law which allows the provincial government to sue for damages relating to diseases caused by smoking. If the law is declared constitutional it could lead to a resumption of litigation against the tobacco group in the region.

O2 had another volatile session. First thing in the morning the stock soared to 162p on reports that a bid for the mobile phone group, from Deutsche Telekom, might be imminent. However, O2 shares dropped back to close at 153p, down 2.25p on the day, after Karl-Gerhard Eick, the German group's chief financial officer, denied his company was in bid talks with O2. Dr Eick also said Deutsche Telekom has no interest in the UK mobile phone operator.

Given these comments, market professionals suggested that O2 shares would have dropped further had it not been for a "buy" note from ABN Amro. The Dutch broker argued that O2 offers significant upside to investors even without it being taken over.

Lower down the pecking order, Game dropped 2p to 86.5p as Bridgewell Securities urged its clients to abandon the computer games retailer before today's interim results. The broker worries that a profits warning could be on the cards at the retailer as the industry enters the toughest period of the console cycle.

Sanctuary slumped 1.3p to a fresh low of 6.63p after the collapse of takeover talks at the media group. One seller dumped 17.5 million shares on the market, a 4.7 per cent stake in Sanctuary, at just 5.5p. Analysts fear the company's bankers could pull the plug on the group.