Market Report: Scottish & Southern heads north on bid talk

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Talk of a bid for the utility group Scottish & Southern Energy is about the worst-kept secret in the market. If rumours are to be believed, the company has been in the cross hairs of a major European competitor for most of the past 12 months, and may attract a price tag of up to 1,750p per share if a bid is launched.

However, if a bid comes, some traders are not expecting a hefty premium to the current price after the shares closed 34p better at 1,560p against an otherwise much weaker market. The shares are valued at almost 17.5 times forecast 2007 earnings, a hefty multiple by most standards, but for a utility stock at almost unheard-of heights. A bid at 1,750p would send that multiple to almost 20 times forecasts, and any buyer would have work to do to justify a bid at that level. The German utilities E.ON and RWE, which recently sold Thames Water, are the most likely bidders.

After an excellent year in 2006, things have got off to a less sweet start in 2007 for the sugar producers Tate & Lyle and Associated British Foods. Tate topped the list of blue-chip fallers, 26.5p worse at 712.5p, as the brokers Merrill Lynch and Credit Suisse cut their forecasts. Credit Suisse cited lower US growth and the poor launches of Diet Coke and Pepsi One using Splenda, while UBS cut its price target for AB Foods to 980p, although it maintained its "buy" recommendation as the shares ended the session 9p weaker at 818p.

There seems to be little sign of a sustained rebound in the mining sector despite blockbuster third-quarter numbers from Vedanta Resources on Monday. Goldman Sachs followed those numbers up by upping its price target for Vedanta to 1,530p, but further weakness in metal futures sent the stock 32p lower to 1,100p. Copper rivals Antofagasta and Kazakhmys were also short of buyers, closing 17p worse at 449p and 28p off at 1,014p respectively.

Home Retail Group, formerly part of GUS and the operator of the Argos and Homebase retail brands, was 11.75p weaker at 408.25p following a poor trading statement from Debenhams. Home Retail is due to update the market on Christmas trading this morning, and although Argos is thought to have had a good festive season a handful of traders are thought to be shorting the stock ahead of the announcement.

Monday's big deal between Smiths Industries and GE, continued to excite the aerospace sector, as Meggitt added another 2p to 341.75p, an eight-month high. Rolls-Royce, GE's main competitor in the jet engine market, ticked 4.75p firmer to 491p, tantalisingly close to breaking through 500p for the first time in its history. The broker Merrill Lynch told clients that it does not believe the rest of the sector is in play despite the GE deal, but rather it endorses the entire aerospace industry. Meanwhile, analysts at Goldman Sachs removed Smiths from their "conviction sell" list as the shares soared again, closing 18p better at 1,112.5p.

Worse-than-expected inflation data dampened traders' enthusiasm for the market, with fears over more interest rate rises sending the FTSE 100 47.8 worse at 6,215.7, despite a flat opening on Wall Street.

AGA Foodservice bounced back after a grim day on Monday following an uninspiring trading statement and confirming further deterioration of its American homewares operation. Shares in AGA firmed 11p to 404p as investors speculated the strategic review of the US homeware division is likely to end up on the chopping block.

The bluetooth chip developer CSR topped the list of mid-cap gainers with a 42p rise to 695.5p. The word among traders is that US investors and hedge funds have been buying the shares aggressively since Apple launched its new iPhone and on the back of Monday's acquisition. However, Wolfson Microelectronics found few friends despite its own potential to contribute to the iPhone and a reiterated "buy" recommendation from the broker Canaccord Adams, falling 5.5p to 322p.

A couple of small-cap stocks were significantly better following a "bear squeeze", when short sellers rush to cover positions in illiquid stocks forcing the price higher. ResponseTV surged 13.5p to 41.5p, a gain of 48.2 per cent, while PSG Solutions gained 9p to 76p.

XG Technology, an AIM-listed US group traded in dollars, climbed for a second session running. It has devised a way of compressing radio waves to such an extent they can carry more information than the equivalent 3G bandwidth. After floating at $4.50 in November, the shares closed another $3.72 better at $11.25.

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