Market Report: Investors strike a light for Imperial takeover

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City punters made a huge amount of money betting on a bid for Sainsbury's last week. When the news of private equity interest in the supermarkets group arrived yesterday morning, many cashed in their chips and then went hunting the market for the next most likely company to be taken over. They settled on Imperial Tobacco, 83p higher at 2,175p.

JP Morgan probably played a part in this. The US broker published a note in which it argued that M&A action is a distinct possibility in the tobacco sector in 2007 and named Imperial as the most vulnerable to takeover after Japan Tobacco's swoop on Gallaher.

"If acquired, Imperial would achieve at least a 10 to 20 per cent take-out premium to Gallaher on our estimates, equivalent to 2,600p to 2,800p," said the broker. It sees Altria, the world's biggest tobacco company, as the most likely buyer of Imperial. The American giant, which owns Philip Morris, would have little trouble swallowing the UK group behind the Lambert & Butler brand. In fact, its chief executive, Louis Camilleri, recently said there were no limits on Altria's capacity to do deals given its tiny debt burden.

The FTSE 100 registered yet more healthy gains. The blue-chip index rose 28 points to close at 6,310, leaving it within a whisker of a new high for the year. Dealers said sentiment towards equities had been very bullish since Wednesday's decision by the Federal Reserve to leave US rates on hold and its accompanying statement which reinforced confidence in the market that inflation is under control and growth solid in the world's biggest economy. The FTSE 250 jumped 121 points to 1,1343.

ABN Amro got behind Tate & Lyle, helping the sugar and sweeteners maker notch up a 7p rise to 600p. Upgrading its recommendation to "buy" from "hold", the Dutch broker argued that T&L had been oversold in the wake of its profit warning at the end of last month. ABN pointed out that demand for sucralose in the US remained strong and that Europe presented a major opportunity for the sales of the low-calorie sweetener.

Meanwhile, Tesco rose 15.5p to 435p and Morrison Supermarkets gained 16.75p to 300.75p after the news of private equity interest in Sainsbury's. Merrill Lynch argued that if Sainsbury's is desirable to a financial buyer at current levels, then Morrisons is too due to its significant property portfolio. The US broker also upgraded Tesco to "buy" from "neutral" and argued that under private equity ownership Sainsbury's would be a far less aggressive competitor for Tesco.

Oxford Biomedica gained 3p to 46p amid rumours of a 70p-a-share bid for the biotech group. Some suggested that GlaxoSmithKline might be interested in acquiring it. Another story doing the rounds of the Square Mile suggested that Oxford Biomedica might be close to securing a licensing deal with a major pharmaceutical player. After yesterday's rise, the stock is trading at its highest level since early 2001.

Tanfield soared 9.5p to 84p after signing a major supply agreement with Marks & Spencer which will see the group sell its Newton zero emission vehicles to the retailer. The electric vehicle maker said M&S will deploy the Newton cars in various city centre logistics centres with a view to replacing its diesel fleet.

Lower down the pecking order, Wren Homes rose 2.5p to 54p on the back of an upbeat trading statement from the small-cap retirement homes developer. The AIM-listed group said it expects to make a modest profit for the first half of its financial year and also told its shareholders to expect a maiden dividend. Dealers reported solid institutional demand for Wren stock in the wake of the update.

Internet technologies developer Z Group dropped 1.5p to 52p despite news of a deal with Yahoo. Brokers said investors were still reeling from the profit warning put out by Z Group earlier in the week. The company's shares now stand at their lowest level since its 2005 flotation.

Over on the lightly regulated Plus Markets exchange, Eyeconomy gained 0.25p to 20p as punters got excited about the group's copper and zinc site in Canada. Earlier in the week, Eyeconomy raised £135,000 by issuing new shares at 20p and will use the cash to fund development of the prospect. The group has become increasingly focused on the mining sector over the past year and has seen its shares rise from the 5p level.