Market Report: Unilever climbs on talk of private-equity swoop

The private-equity market had a bumper 2005 and many industry insiders believe 2006 will be the year when Kohlberg Kravis Roberts's record for the largest leveraged buyout is finally beaten. It is now nearly 17 years since KKR bought the tobacco and food group RJR Nabisco for $25bn (£14bn), and traders are looking for a stock which could offer the private-equity industry an even bigger target.

Some traders are betting that Unilever, the Anglo-Dutch food and household products group, could be the target. "Something is going on with this company," one trader said. "Its free cash-flow yield of 9 per cent is high enough to support a buyout, the pension deficit is not big enough to scare anyone off and it trades on an undemanding 14 times earnings.

"The private-equity industry has the money to do it and the big players are doing more and more club deals. Unilever is a company that would be easy to divide up as well, as it trades in clearly defined units that would be easy to sell on as separate businesses. It would be a huge deal but it is not beyond the realms of possibility."

The global private-equity and venture-capital industry raised a record $262bn last year, according to the industry data provider Private Equity Intelligence, and this year it is expected to enjoy another strong year of fundraising and deal-making. Last year, the car rental company Hertz was bought by a consortium of private-equity bidders for $15.6bn, the second-largest private equity buyout after Nabisco. Unilever was up 4p yesterday to close at 591p, giving the company an enterprise value including debt and equity of £25.3bn.

News of a profits warning from Cable & Wireless left traders wondering how tough its peers must be finding the UK market. BT Group, the UK's national telecoms carrier, fell 2.25p to close at 205.5p, but the impact of Cable & Wireless's announcement was felt the hardest at its smaller rivals, Thus and Colt Telecom. Colt fell 3p to close at 59.75p as the broker Bridgewell Securities advised clients to sell, while Thus closed 0.5p lower at 15p.

Even the mobile telecoms giant Vodafone was not immune from the Cable & Wireless fallout, dropping 2.75p to 118p. Rumours were rife that the chief executive Arun Sarin might be the next to leave the company after it was confirmed that his deputy, Sir Julian Horn-Smith, would leave at the annual meeting in July.

Some market chatter also suggested that Vodafone might bid for the Dutch group KPN, although analysts dismissed the chances of a bid at a time when the company's growth-through-acquisition strategy is being questioned by senior investors. Cable & Wireless finished down 12.25p at 102.25p.

GlaxoSmithKline declined 10p to close at 1,438p after The Wall Street Journal reported it is in talks to buy the Swiss pharmaceutical company Serono for less than the $15bn the company had originally tried to auction itself for. The broker Panmure Gordon believes a tie-up with Serono will provide GSK with revenue while its own pipeline of new drugs matures. In a note to clients Panmure Gordon said: "With only modest restructuring and using debt to finance 85 per cent of the deal, we estimate the acquisition would increase earnings growth by 3 to 4.5 per cent per year. The deal should be positively regarded by the market."

In the mining sector an uninspiring update from Kazakhmys led to a bout of profit-taking, which for some traders is not coming soon enough. The broker Seymour Pierce advised clients to sell the stock, saying it is worth only 674p. It closed at 867p, down 18p.

Transport was in focus in the mid caps as the US broker Morgan Stanley downgraded Stagecoach and upgraded its rival First Group. It told clients it believes Stagecoach may be in danger of losing its rail franchise as First Group raised its dividend by 10 per cent. Morgan Stanley's worst-case scenario price target for Stagecoach is 79p. Its shares closed down a penny to 112p, while First Group rallied 4.25p to close at 404.75p.

In the small caps, traders were watching Circle Oil as rumours did the rounds that the company is about to sign a major deal in Iraq, although the price fell a penny to close at 35.25p. Some traders believe a deal in Iraq could add 40p to the company's value. One market maker said: "We aren't just seeing retail buyers get into this stock. There are quality institutional buyers looking to pick it up as well."

The AIM-listed Caspian Holdings, which saw heavy volume as 9.6 million shares changed hands, had traders excited after saying it had started to export oil from its facility in western Kazhakstan. The news sent its shares rocketing to close up 6.88p at 25.87p - the biggest riser on the UK market.