Market Report: Royal & SunAlliance shines on buyout chatter

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The Independent Online

As usual, much of the speculation centred on the private-equity industry as Royal & SunAlliance became the latest company to benefit from rumours of a leveraged buyout. Its stock has rallied strongly in the past 12 months, and trades 85 per cent higher than its 2005 low of 73.5p. It added 6.25p at136p yesterday, the best performer in the FTSE 100 index.

Recent private-equity experience in the quoted insurance market has not been totally happy, as Kohlberg Kravis Roberts will confirm. The buyout giant's investment in the Bermuda-based Alea Group Holdings has been little short of a disaster, losing almost three-quarters of its value since listing the shares in London in late 2003. KKR owns 40 per cent of Alea shares.

Royal & Sun is a much bigger fish and, with a market capitalisation of £3.8bn, traders said a bid would need to be at pitched at the 160p level to tempt shareholders. Given the strong equity markets and rumours of consolidation among the large-cap insurers, a knockout bid could value the company at substantially more than that.

Another rumour doing the rounds focused on Lonmin, the gold and precious metals miner recently subject to possibly the world's shortest confirmed bid. Three weeks ago the company revealed an unnamed suitor had made a preliminary approach, only to confirm the talks were over less than five days later. This time the talk was that Lonmin's rival Polyus Gold, the gold-mining subsidiary of the Russian nickel and palladium giant Norlisk, could be preparing to bid up to 3,000p per share.

Not surprisingly, sceptical traders pointed the finger of blame at hedge funds that had bought into the previous takeover story only to find themselves out of pocket by the end of the week. Charles Kernot, at the broker Seymour Pierce, remains bearish. He said: "My view has not changed - this is the same story with different players and I would be very surprised if a bid came from this source. There would be numerous antitrust issues due to their combined share of the palladium market and there are lots of far cheaper gold assets in Russia." Shares in Lonmin rallied strongly, closing up 195p at 2,454p.

There was little surprise when the rest of the mining sector did not buy the rumours either, as most slid after the normal weakening of commodity prices at the start of the week. Antofagasta, the Chilean copper miner, has results out today and some analysts are concerned there could be a sharp rise in its costs. Antofagasta was 38p worse at 1,982p;Xstrata gave up 13p at 1,690p.

The FTSE 100 closed 44.9 higher at 5,952.8, a four-year high and edging closer to 6,000. New York was better, with the Dowrising 16 points by the close of trade in London.

The second-line banking sector enjoyed another strong day, with Alliance & Leicester and Bradford & Bingley once again in focus as traders said the French bank Crédit Agricole was eyeing up foreign acquisitions. A&L closed 35.5p better at 1,105p and B&B gained 19.75p at 505.5p.

Elsewhere, Bovis Homes announced results bang in line with market expectations, but an encouraging 2006 outlook saw its shares add 14p to 843.5p. After a disappointing trading update in December there had been some nerves about yesterday's results, and many traders think the company will take part in more consolidation. The relief helped the sector: all house builders finished in positive territory, although late news the chief executive of George Wimpey, Peter Johnson, sold 181,023 shares may take some of the gloss off in today's session. He retains a stake of more than 296,000 shares. George Wimpey rose 8p to 541p.

The star performer among small caps was Ceres Power, up 66p, or 31.1 per cent, to 278p, as the renewable energy research group announced it has designed and built a compact, lightweight fuel-cell stack for use in combined heating and power for domestic homes. The broker Collins Stewart said the company has made "excellent progress towards commercialisation of their fuel cell technology", and expects the company to make further commercial announcements.

Among the other smaller companies, Chariot, the lottery company, gained 6.5p to close at 138p as traders said early marketing for its new lottery was going better than expected. Meanwhile, the AIM-listed Bond International Software was well bid after it reported excellent debut figures and a bullish outlook for 2006. The company said pre-tax profits rose 42 per cent as sales increased 45 per cent. Shares in the human resources software provider rallied 15.8 per cent to close at 114p.

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