Market Report: Punch surges on talk of Spirit Group pubs coup

The Dutch broker is convinced that Spirit's private-equity owners, led by Texas Pacific and CVC Capital Partners, are keen to exit the group, which at the latest count controlled 2,030 pubs. It calculates they will get the best price for their shareholding by selling the company to existing operators and suggests Merrill Lynch has been hired by Spirit to conduct an auction.

ABN is also convinced the sale of a majority of the business to Punch makes great sense, especially for Punch. The broker said: "We expect Punch to acquire 50 to 70 per cent of Spirit's pubs. Such a deal would in our view make both strategic and financial sense for Punch and we attach a high probability to it occurring." After such a move, the pubs group is likely to find its shares trading at about 9 times forecast earnings for 2006. This would be a big discount to its rival, Enterprise, and according to ABN, should cause a major re-rating of the stock, possibly pushing it up to the 1,040p level.

Elsewhere Pilkington, which saw its stock boosted by takeover rumours last week, dropped 4.75p to 137.25p after Deutsche Bank played down the speculation. The German broker said: "We believe that an offer for the group is unlikely and that, even in the event of a takeover, the upside in the stock is limited." It noted that trading at Pilkington remains tough and that its balance sheet is stretched.

Nippon Sheet Glass, which controls 20 per cent of the group, has been repeatedly linked with a possible offer for the company. However, the German broker ruled out such an event taking place outright. It believes Nippon simply does not have the firepower for such a move. Firstly, the Japanese company is only two-thirds the size of Pilkington and secondly it already has substantial borrowings, leaving it with no room for acquisitions.

Among the blue chips, O2 put on 0.75p to 155.25p amid whispers that Deutsche Telekom has lined up a private-equity buyer for its German unit. A major obstacle to Deutsche acquiring the mobile phone group is the threat that German regulators will oppose the deal on the grounds that the combined company would have too dominant a position in the local market. However, if Deutsche can secure a quick sale of the business after an acquisition it should get the green light from regulators, analysts said. This week, César Alierta, the chairman of the Spanish telecoms giant Telefonica, ruled out tabling an offer for O2. This leaves Deutsche in pole position to win it.

Antofagasta lost 33p to 1,460p on the back of a downgrade from UBS. The Swiss broker cut its rating on the copper miner to "neutral" from "buy" and said its shares now trade at levels expected if the company were about to be bought. UBS said: "We believe Antofagasta shares will drift lower as the copper price declines."

Dealers reported a rush by hedge funds to close bear positions in Dixons before the retailer's trading statement. This sent the stock 3.75p higher to 154p. Monday's late news that E.ON is considering an offer for ScottishPower led to heavy demand for some of the utility's London-listed peers amid hopes it could spark wider consolidation of the industry. ScottishPower rose 12.25p to 558.75p while National Grid put on 12p to 561p, International Power rose 5.75p to 239.5p, Centrica added 9.25p to 263p and Viridian improved 16.5p to 785.5p.

Meanwhile, theFTSE 100, which climbed 21.4 to 5,359.2, was supported by a strong start to trading in the US. Traders on Wall Street returned from Monday's Labor Day holiday in a bullish mood and drove the Dow Jones and the tech-laden Nasdaq higher. Group 4 Securicor rose 0.75p to 152.75p as investors ignored the advice of Dresdner Kleinwort Wasserstein urging them to avoid buying into the company beforeits interim results on Monday.

In the world of smaller companies, word has it United Clearing, 2p better at 133p, will soon be in a position to unveil an important extension of its agreement with Orange. The group provides outsourcing support services for the global mobile phone industry and at present acts only for Orange's UK division. Brokers say that such a development would be very positive for United Clearing.