Market Report: Rentokil sets a takeover trap to capture earnings

IS RENTOKIL INITIAL about to return to the takeover trail?

The pest control and cleaning giant was back on dealers' wanted list yesterday, amid suggestions that it is preparing a pleasant surprise for its shareholders. The shares settled 5.75p better at 237p in fairly good volume.

Part of the rise was due to a "buy" note from broker Charles Stanley, but traders were convinced that Rentokil's jump was caused by more than analytical support.

They whispered that Rentokil's boss Sir Clive Thompson might be looking at a large deal to push earnings growth back to the mythical 20 per cent level. Sir Clive had to wipe a lot of egg off his face a few months back, when he conceded that this year's growth would be in the 10-15 per cent range.

A big takeover similar to the acquisition of BET some three years ago could restore the 20 per cent growth rate in one fell swoop. UK targets include the catering giant Compass, up 4p to 628.5p and even the business services group Hays, down 12p to 662p. However, Sir Clive could decide to look abroad and launch a bid for one of Rentokil's European rivals. A raft of bolt-on buys is also an option. If a takeover fails to materialise, a share buyback will be the next best thing. According to the Charles Stanley note, Rentokil's annual free cash flow of pounds 200m is a sizeable warchest for a considerable cash back.

The remaining blue chips rebounded from recent weakness amid benign US inflation data. The FTSE 100 rallied over 90 points as the Dow opened firmer but a late retreat in the States forced London to close just 27.5 up at 6473.1. The undercard followed suit, with the FTSE 250 ending 13.5 higher at 6061.6 and the Small Cap finishing 7.4 better at 2742.5.

Banks were one of the star sectors ahead of their result season, boosted by positive broker comments.

Woolwich was the day's best financial, rising 18.5p to 379.25p on revived talk of a merger with Bank of Ireland, unchanged at 17.40 euros following its decision to be quoted in the European currency. Mooted bid target Barclays firmed 46p to 1785p, while Abbey National, another takeover play, jumped 39p to 1193p. NatWest was 35p better at 1291p and Legal & General rebounded 2.75p to 155.5 in big volume on resurfacing bid whispers.

Telecoms were in demand. Energis stormed 86p ahead to 1673p on ongoing rumours of stakebuilding in newcomer Kingston Communications, up 9p to 328p. GEC, now a telecom group, soared 26.5p to 659.5p after forming a strategic partnership with Ericsson. Some wild rumours talked of bid by the UK group for the leaderless Swedish company. BT rang up a 23p advance to 1121p said its all-important joint venture with AT &T of the US will be operational soon. Whispers of a full-blown merger between the two were heard. The minnow Atlantic Telecom, results today, buzzed 11.5p higher to a best-ever 344p. It is close to the FTSE 250 and some trackers may be buying.

However, Cable & Wireless dropped 34p to 799.5p on fears that there are no bidders left for One2One. Its offshoot Cable & Wireless Communications surged 39p to 696.5p on persistent talk of a bid from fellow cable group Telewest, up 6.25p to 293p.

Freeserve mania pushed Dixons 74p higher to 1399p while Hilton booked in a 6p rise to 251.75p on revived rumours of a merger with its US namesake and a Credit Lyonnais buy note. Publisher Emap moved up 46p to 1206p as Goldman Sachs and Morgan Stanley said "buy" ahead of today's AGM. Marks & Spencer firmed 8.75p to 388.5p even though today's trading statement will be grim. BP Amoco flared 20p to 1259p as traders filled their boots in anticipation of huge disposals to be unveiled at today's strategy meeting.

Whitbread poured 36p lower to 929p after its bid for the pubs owned by Allied Domecq, down 17.5p to 575.5p, was referred to the competition watchdog. Bass, up 14p to 938.5p, and Punch Taverns, which yesterday bought Inn Business for 88p per share, are now favourite.

Perennial bid target London Clubs, the casino group, span 6.5p higher to 161.5p on rumours that Stanley Leisure, flat at 270p ahead of today's figures, might bid 220p-per-share.

The transport group Arriva, down 9.5p to 334.5p, was derailed by rumours of a profit warning. However, the company has reassured brokers that trading is flat but not disastrous. Whispers of depressed sales weighed on Pizza Express, 21.5p lower at 786p and engineer Charter, down 20p to 331.5p.

The computer game maker Eidos beamed 234p higher to a record 2812.5p after a Warburg's "strong buy". There is talk of bumper sales for its Tomb Raider II, starring pixellated beauty Lara Croft.

Returning takeover rumours and positive sentiment in the sector hoisted paper group DS Smith 12.5p higher to 162p. Bid whispers were also behind Morgan Crucible's 8.5p rise to 267p.

Computer services group MSB, rose 2.5p to 182.5p on rumours that the much-rumoured bid is close, but rival MDIS crashed 5.25p to a yearly nadir of 20.5p after warning of a interim loss.

Software tiddler JBA rose 45p to 191.5p after unveiling a bid approach. A mooted predator was larger rival FI, up 6.5p at 370p. Paint maker Craig & Rose brushed 30p higher to 132.5p after a pounds 910,000 bid from shareholder Alaster Cunningham, while AIM-listed advertiser Sports & Outdoor Media was kicked up 22p to 101.5p after announcing offer talks.

SEAQ VOLUME: 1.2bn

SEAQ TRADES: 77,582

GILTS INDEX: 106.76 +0

THE BEARS are having a field day with London Forfaiting. The market is awash with rumours that the financial group is about to announce a debt write-off of up to pounds 60m and issue a profit warning. The pessimists were given a boost yesterday when it emerged that London Forfaiting has brought forward results from September to the end of the month. This was seen as further evidence that all is not well and the shares lost 4p to 48.5p.

GEARHOUSE, the stage equipment hirer, rose 9p to 101.5p after reporting an upturn in its main markets. However, the positive trading statement did little to silence talks of a bid. According to some traders, Gearhouse could soon find itself on the receiving end of an offer of around 150p, which would value it at some pounds 27m. The smart money is on a strike from one of the company's foreign rivals, although the intervention of a UK predator cannot be ruled out.