MARKET REPORT : Merchant bankers back in the rumour mill

Financials were drawn back into the takeover arena amid swirling speculation that such eminent houses as Kleinwort Benson and SG Warburg were in the firing line.

Kleinwort surged 29p to 576p and Warburg 41p to 737p.

A wide array of bidders, with German and US groups to the fore, was put forward, but a much less exciting story had it that one market maker had become overloaded with Warburg shares and had decided a few bid rumours would help to relieve his embarrassment.

But in the main the stock market preferred to dwell on the bid possibilities that will be a recurring feature of the sector since Warburg admitted it was in talks with the US group, Morgan Stanley, last month.

The discussions were abandoned, largely on the inability to decide on a price for Mercury Asset Management, Warburg's 75 per cent owned offshoot.

With Warburg back in the bid spotlight, MS was again in the frame with suggestions that the two had agreed a deal over Mercury.

But with the Warburg/MS talks collapsing in acrimony the thrust of speculative interest centred on JP Morgan, a rumoured partner long before MS arrived on the scene, and two German banks, Deutsche and Dresdner. The Germans denied interest.

Lehman Brothers, another US group, also had its supporters.

Once Warburg was forced to admit the MS interest it displayed its own doubts about its ability to emerge as an international player in the world's financial markets. The market, consequently, thinks it is vulnerable to a bid. It has since increased anxiety by feeling obliged to reshuffle its fixed interest operations, but has enjoyed the consolation of being London's biggest deal-maker for the third year runnning.

At first it appeared that Kleinwort was merely clinging to Warburg's coat tails. But a late flurry prompted the theory that it could be the intended victim.

Other financials were strong. Hambros rose 7p to 250p and fund manager Jupiter Tyndall, in talks with three Continental banks, 5p to 384p. Mercury, reflecting the Warburg excitement, jumped 52p to 748p.

Elsewhere shares were uncertain. A disappointing inflation increase and the higher Halifax mortgage rates dulled enthusiasm, and the FT-SE 100 index ended half a point higher at 3,054.9. A programme trade helped to swell turnover to 836.9 million shares,the highest this year.

Kingfisher's warning of "unsatisfactory'' year's profits sent the shares tumbling 19p to 402p; Blenheim, the exhibitions group, crashed 35p to 199p on its profit warning.

British Steel rose 3.5p to 155.25p after a dinner with analysts; Warburg switched from hold to buy. BT attracted an array of comments, with Shaw & Co saying switch into Cable and Wireless and NatWest Securities moving from add to hold. The shares rose 2.5p to 401.5p; Cable, with Credit Lyonnais Laing suggesting a target price of 450p, eased 3p to 378p.

Northern Electric, with Swiss Bank Corporation lifting its holding to 4.07 per cent, slipped 3p to 971p. The Stock Exchange cleared SBC's derivative deals but is looking at its rule book.

British Aerospace rose 9.5p to 460.5p on confirmation it was in talks to merge its regional aircraft business, and VSEL continued to advance on hopes of an early resumption of takeover hostilities between BAe and GEC. The shares gained 13p to 1,463p, an 83p gain since Friday.

Mirror Group shaded 1p to 128p. NatWest has cut its forecasts from £75.4m to £71.1m and from £88.4m to £75.2m.

Albert Fisher, the food group, was the subject of busy trading, with big deals going through at 43p and 43.5p. The shares ended at 45p.

Whether Century Inns, the owner of 315 hostelries which yesterday issued its pathfinder prospectus, will actually make it to market is the question being asked in the drinks trade. There is a strong rumour that a merger and acquisitions team at a Swiss bank in London has made further take-over overtures on behalf of Labatt's, the Canadian company with a chain of 500 pubs.

The possibility of Waste Management International joining the exclusive Footsie club is raised by NatWest Securities. As part of a possible restructuring of WMX Technologies, its US parent, a further 5 per cent of WMI could be sold off allowing elevationto the FT-SE 100 index without new shares being issued. WMI shares rose 7p to 407p, giving a capitalisation approaching £1.5bn.

MARKET REPORT The FT-SE 100 index firmed 0.5 points to 3,054.9 and the FT-SE 250 index slipped 1.6 to 3,465. Volume was 836.9 million shares with 20,595 bargains. Government stock eased back.