Market Report: Woolworths buoyed by talk of WH Smith bid

The retail sector has been one to avoid in the past few months, with numerous bearish reports on high-street spending and little to cheer investors. Analysts are still downbeat on the sector, but the market's unquenchable thirst for corporate activity fuelled speculative buying at two UK retailers yesterday.

It is almost one year to the day that Woolworths received a bid from the private-equity firm Apax Partners, and the stock was in focus again yesterday as traders hoped for another offer, this time from its rivalWH Smith.

The Apax bid was initially rejected by Woolworths, after being pitched at a wide 50 to 55p range. The buyout firm then came back to shareholders offering 58.5p, only for the deal to collapse in May as Apax pulled out citing unspecified concerns.

Proving that a year can make little difference to a valuation, Smiths is rumoured to be preparing a bid for Woolworths pitched at about 50p a share, and traders said this time around there would be little opposition to a bid. Woolworths shares were heavily traded, with 119.5 million changing hands, and the retailer's shares ended the session as the biggest riser in the FTSE 250, closing at 34.5p, up 2p, while Smiths also rallied to close at 408.75p, up 10.75p.

Matalan, another struggling retail stock, was the subject of rumours concerning a possible management buyout, this time at about 250p a share. Once the darling of the sector, its shares traded at more than 550p in mid-2001, but a succession of profits warnings and management squabbles have seen Matalan shares languishing at less than 200p for most of the past three years. Like Woolworths, its shares were heavily traded yesterday, with volume hitting almost 34 million to close at 180.5p, a rise of 7.5p.

The broader market had an off day, with the FTSE 100 of leading shares falling 25.6 points to close at 5,746.8. The oil giant BP was the main reason for the fall, after disappointing investors with fourth-quarter profits well below expectations, despite coming in at a whopping $4.9bn. Consensus forecasts had been looking for $5.6bn, and the stock plummeted 18p to 647.5p, a fall of 3 per cent.

Royal Dutch Shell and Cairn Energy fell in sympathy with BP, and with the large weighting oil has within the index it was always going to be hard for other stocks to buck the trend. Shell dropped 26p to close at 1913p and Cairn, still feeling the effects of downgrades from Merrill Lynch and Citigroup yesterday, dived another 72p to close at 1832p, the biggest decliner in the index.

Amvescap, the fund management group including the AIM and Invesco Perpetual fund brands, was the star performer in the FTSE 100 as traders warmed to its final year figures despite a fall in operating profits. Funds under management increased by $4.1bn on the same period last year, and the strong equity markets offset an outflow of $16.2bn. However, it was the $120m in forecast cost-cutting, well ahead of expectations, that cheered the market, propelling Amvescap shares up to 534.5p, a rise of 27p or 5.3 per cent.

After traders wrongly took JP Morgan's suspension of UK banking coverage last week as a sign that a bid was coming for Lloyds TSB, the US investment bank reinstated coverage with a bearish note to investors. The respected analyst Carla Antunes da Silva has moved from covering Spanish banks to the UK, and feels that the effects of the Basel II European banking regime will be good news for customers but not so good for investors. She started by recommending an "underweight" stance on Alliance & Leicester, down 3p at 1,026.5p, Bradford & Bingley, down 3.75p to 426.5p, HBOS, down 6.5p to 979p and Lloyds, which fell 1.5p to 524p.

Shares in the London Stock Exchange again had a topsy-turvy day, with traders noting that the hedge fund Eton Park had shorted more than 214,000 shares through contracts for difference. Eton Park is run by Erich Mindich who runs more than $3bn of capital at Eton Park. Its shares were traded down to 756.5p, down 21.5p, but recovered to close at 770p, a fall of 8p.

Amongsmaller companies, shares in Sanctuary rocketed in what traders refer to as a "bear squeeze", when too many traders with short positions in a stock close at the same time. This week the music group launched a rescue rights issue and placing priced at 0.25p a share. Volume was massive, with 228 million shares changing hands; Sanctuary shares rallied 1.23p to 1.9p.

No trading day in London would be complete without an emerging market mining story, and yesterday it was provided by the AIM-listed TanzaniteOne. The company said its site in Merlani, Tanzania, has greater deposits of the eponymous gemstone, and its shares rallied 20.5p to 191.5p.