Cadbury shares spurted 30p to a year's high of 527p. Neither Unilever, down 4p to pounds 12.52, nor Cadbury would comment on the rumours. More than 8 million Cadbury shares were traded.
Some analysts were deeply sceptical about the possibility of a bid from Unilever, mainly because more than 70 per cent of Cadbury's activities are now in soft drinks - a business that does not readily fit with Unilever's expertise in detergents, ice cream, margarine, and personal care products.
However, the analysts did not rule out a bid and said a predator would have to pay upwards of 770p a share, which would value Cadbury at more than pounds 7.5bn. With or without a bid for Cadbury, the record books for takeovers in any one year will undoubtedly be re-written by Christmas. "There are lots of deals in the pipeline," said one trader yesterday.
The bid activity, real or speculative, masked the underlying tone of the market. Yesterday's 16.2 point fall in the FT-SE 100 index to 3,510.6 would have been much greater without the rumour about Cadbury and the announcement that Lloyds Bank was holding merger talks with TSB.
Political and economic uncertainty, worries about interest rates and turbulence on the foreign exchange markets are sending the bulls running for cover.
There is a growing belief that the market, which has stormed ahead in recent months, is ripe for a correction.
Most of the undertow that pulled share prices down yesterday stemmed from the UK producer price data, showing a much higher than expected increase in raw material costs. The figures rekindled worries about inflation, and pushed hopes of another cut in interest rates further into the future.
London shares were also pulled under by the retreating tide on Wall Street. The Dow Jones index has struggled in recent weeks, and again fell sharply in early dealings yesterday. Within two hours of opening, the Dow had lost 50 points.
A clearer indication of the market's mood in London was amply reflected in the FT-SE 250 index which, after its recent run to an all-time high of 3,991.3, retreated 25.9 points to 3,953.1. Similarly, the diminishing hopes of a cut in interest rates was seen in the gilts index, which fell from 93.11 to 92.94.
The picture, some traders said, looks even more gloomy given the strong likelihood that billions of pounds of takeover bids will be rolled out in the next couple of months.
This week alone could see several billion pounds' worth, with Lloyds Bank, ahead 19p to 726p, and TSB, up 79p to 353p, believed to be on the verge of finalising their merger terms. The deal is expected to value TSB at between pounds 4.5bn and pounds 5bn.
There was also strong speculation towards the close of dealings that North West Water, steady at 601p, would today increase its pounds 1.8bn offer for Norweb, 10p firmer at pounds 10.93. Some dealers believe North West may significantly increase its offer to around pounds 11 a share in an attempt to kill the rival bid for Norweb from Texas Energy Partners.
Electricity shares were softer amid fears of a Monopolies and Mergers Com- mission inquiry into the takeover moves by the two power generators for Recs. Powergen, off 9.5p to 535.5p, is bidding for Midlands Electricity, up 1p to 968p, while National Power, down 7.5p to 476.5p, has Southern Electricity, unchanged at 960p, in its sights.
All was not gloom and doom yesterday, however. Grand Metropolitan, which tracked the market for most of the session, turned round towards the close and finished 1p up on 431p.
The turnaround came amid a rumour the international food and drinks group would bring forward its announcement about a successor to Lord Sheppard of Didgemere, who is due to retire as chairman in the new year. George Bull, chief executive, is widely tipped. John McGrath, head of the IDV drinks subsidiary, is emerging as the favourite to become chief executive.
Other gainers included Celltech, ahead 5p to a all-time high of 462p, after announcing a co-operative research deal on a anti-cancer drug with Zeneca, up 14p to pounds 11.77. Bluebird Toys rose 8p to 260p on press reports of a deal to make miniature toys for Disney.
FT-SE 100 3,510.3 -16.2
FT-SE 250 3,953.1 -25.9
FT-SE 350 1,754.5 -8.9
SEAQ VOLUME 744.9m shares, 33,483 bargains
Gilts Index 92.94 -0.17
r There were signs of concern ahead of today's annual results from Lloyds Chemists. The shares fell 5p to 242p and more than 200,000 were traded in the tightly held and thinly traded stock. Analysts at Kleinwort Benson were yesterday said to have turned negative on the shares in the company, despite the on-going speculation that Tesco may make a bid. The consensus of opinion is that profits will be flat at pounds 56m.
r Dalepak, the frozen food group, was forced to announce that it was in bid talks after its shares climbed 28p to 138p. Some dealers believe the suitor to be Campbell Soups; others suggest that Howard Sims, who joined the board as a non-executive a year ago, would reverse his Cavaghan & Gray business into Dalepak.