Market Report: Talk of German swoop puts Pennon in spotlight

It seems that foreign buyers just cannot get enough of UK companies, even boring old utilities. Yesterday it was the turn of Pennon to come under the spotlight, as traders talked late in the day about a bid from the German water and electricity giant RWE.

Shares in Pennon, formerly known as South West Water, ended the session 11p higher at 1,414p, as traders said the owners of Thames Water and npower were looking at expanding their UK portfolio.

Thames Water is already up for sale, meaning that regulatory approval for a Pennon bid should not be an issue. Traders also said Pennon would be a good strategic fit for RWE because of its Viridor Waste subsidiary, in which RWE has extensive operations.

Rumours of a buyout also continued to attract investors to BT Group. Shares in the former state telecoms monopoly climbed 11.25p to 231.75p, just short of a three-year high and the best performer in the FTSE 100.

One senior partner at a European buyout house said he did not believe any private-equity firm was about to launch a bid for BT. He said: "You can pick almost any stock in the FTSE 100 and apply a handful of names to a bid and make a story, but that does not mean a bid is going to happen. Big buyout firms are looking for deals, and telecoms is a hot sector, but most of the big-sector specialists are tied up with the TDC buyout."

Traders rarely let reality get in the way of a good story, and a bullish telecoms sector helped the market rise to more than5,900 for the first time since June 2001, although it was unable to hold on to that level. The FTSE 100 closed the session 39.1 higher at 5,897.8, continuing an extraordinary bull run that has seen the index rise dramatically since March 2003.

It has also been a long time since shares in Vodafone outperformed the market for more than two sessions on the trot. Pressure to succeed remains firmly on its chief executive, Arun Sarin, but many traders feel he has at least bought himself some time, and a potential £5bn special dividend is likely to support the stock in the short term. Vodafone remained well bid - its shares leapt 3.5p to 125p, with 1.2 billion shares changing hands.

Meanwhile, asset managers continued to benefit from the strong market.Schroders climbed 32p to 1,172.0p as rumours circulated that it is about to use the cash on its balance sheet to buy Gartmore. Schroders' rivalsAmvescap ended the day 8p better at 525p, whileMan Group added 32p at 2,314p. Banks were also in demand as HSBC, 14.5p better at 989.5p, revealed numbers at the top end of expectations. The last of the major UK banks to report 2005 numbers said pre-tax profits last year were $21bn (£12bn) and, in line with its peers, it will also enhance its capital-management programme.

Alliance & Leicester was 16.5p better at 1,085.5p, whileNorthern Rock gained 19p to 1,134.5p, buoyed by confirmation of a merger between their smaller rivals Portman Building Society and Lambeth Building Society. Stand-out blue-chip losers includedReuters, down 7.5p to 379.5p, and Cairn Energy, off 35p at 1,962p, as traders locked in recent gains afterbid rumours. Among second-line stocks, N Brown, the ladies fashion retailer, gained 16.5p, or 8.4 per cent, to 214p. Traders were at a loss to explain the rise, with some pointing to a poorly executed buying order and others talking about takeover speculation.

The retail sector has been hot in recent sessions, with many sector watchers on the lookout for the next target. Matalan, which rose 7.25p to 198p, continues to attract speculative buying in the hope that an offer may come in at about 220p a share. The discount retailer is in the middle of a share buy-back programme, leading some traders to question the ethics of soliciting offers at the same time. One said: "A company is not best serving the interests of its shareholders by buying back stock in the market while at the same time trying to find a buyer for the whole business at perhaps a 20 per cent premium."

The multiple-strategy hedge-fund group Absolute Capital Management enjoyed another spectacular day - its shares were placed on AIM on Friday at 141p and have almost doubled to 280p, adding 70p yesterday. Fantastic returns, but perhaps investors will begin to question the management's market-beating ability when the company appears to have been priced so lowly.

Finally, the private-equity house HG Capital sold out of its position in the maritime technology group Raymarine, with the broker Collins Stewart placing the firm's 7.3 million shares on the market at 300p. Sources confirmed the placing had been oversubscribed, but Raymarine shares were unable to stay in positive territory, closing 1.25p lower at 312.5p.