Market Report: Tobacco stocks rise on whiff of consolidation

In the tobacco sector, Gallaher was sharply higher on rumours of a 1,150p per share bid from Japan Tobacco. The rumours have done the rounds several times in the past but with almost 10 million shares changing hands, double the average volume, it looks as if some traders are inclined to believe them this time.

The talk pushed all tobacco stocks higher, with BAT closing 21p better at 1,442p and Imperial Tobacco adding 6p to close at 1,867p. With a $9bn (£4.7bn) cash pile and little in the way of international exposure, Japan Tobacco has long been favoured by traders as a contender to lead a bout of consolidation in the sector. Gallaher closed at 906.5p, 10.5p firmer.

The household goods and food manufacturer Unilever, up 12p to 1,366p by the close, was among the top performers after completing the sale of its frozen foods business to the private equity group Permira for €1.7bn (£1.2bn), a deal that was confirmed back in August. The brokers Goldman Sachs and JP Morgan both published bullish notes on the company, with Goldman giving the shares a target of 1,500p and retaining the shares on its "conviction buy" list.

A bearish note on Smith & Nephew from the broker Collins Stewart fell on deaf ears as the stock powered on, 17.75p better at 505.5p, in the wake of merger discussions with US rival Biomet. The broker reiterated its "sell" advice with a 385p price target, warning clients that the company is facing pricing and margin pressures.

London shares were subdued again, with traders finding little direction from US markets. Oil stocks ticked higher, with Shell 14p better at 1,860p and BG Group, supported by a bullish note from the broker UBS and Thursday's results, 8p firmer at 684.5p. However, gains were pared back by a weak banking sector ahead of next week's interest rate decision. The FTSE 100 closed 1.25 worse at 6148.1.

The South African investment banking and fund management group Investec, up 13p at 552p, found plenty of buying support after reporting a strong first half and an encouraging outlook. Perhaps not surprisingly there is also a bit of bid speculation doing the rounds, with a number of rivals thought to be running the rule over the company. Profit for the first six months of the year will be between 34 and 40 per cent better than the corresponding period last year. Broker Bridgewell Securities reiterated its "buy" advice on the shares.

Bridgewell was less kind to the virtual telecom network operator Vanco Group, as it initiated coverage with a "sell" rating and 350p price target. In a note to clients, the broker said: "There is still no evidence that Vanco's business model generates returns above the cost of capital and we do not expect material cash flow before 2009 ... its current valuation is predicated on an earnings figure that does not fully reflect the investment required to sustain growth". The shares plummeted, closing 48.5p worse at 418.5p.

News late on Thursday afternoon that Enodis rejected a merger proposal from fellow oven maker AGA Foodservice saw both stocks sharply lower yesterday. The word among traders is that Enodis rejected the offer because it did not feel that merging with a smaller company would represent the best value for shareholders. According to one trader, a merger would make given the synergies that could be extracted. He said: "The restaurant industry is facing a significant increase in capital investment over the next few years due to tightening food regulations. A combined group could have created a dominant force in the industry, but Enodis looks keener on selling itself to an American bidder". AGA fell 16p to 390p, while Enodis shed 10.5p to 188.25p.

Talk that Commoditrade has put itself up for sale has done the rounds on a handful of occasions in the past couple of months. There is speculation that a bidder is doing due diligence on the company but that management do not want to sell out for under 60p per share. Market makers reported strong demand for the shares yesterday, as over 2.4 million changed hands, although by the close the stock was unchanged at 29.75p.

The information technology and software group Brady has found plenty of backers since the shares hit a low of 16p back in March. The company confirmed a contract to supply its Trinity Version 600 trading software to a major London bank on Thursday, and traders reported good institutional demand for the shares yesterday as the shares rallied half a penny to close at 38p.