Kensington shares leap as sale of mortgage provider looms

Shares in Kensington Group, the specialist mortgage lender, leapt as much as 17 per cent yesterday as shareholders anticipated an imminent bid for the group.

Responding to reports over the weekend, which suggested a number of investment banks were eyeing the company, Kensington issued a short statement yesterday acknowledging that it was "continuing its review of the group [and] considering the best options to maximise shareholder value".

The company, whose shares closed up 15.8 per cent at 882p yesterday giving it a market value of £464m, added that there could be no certainty that the review would lead to an offer.

However, analysts at the investment bank Keefe, Bruyette & Woods said they believed the statement signalled that the company was officially up for sale. "We interpret this as saying the company is on the blocks but it is early days," the bank wrote in a research note. "The most likely buyer, in our view, would be a big investment bank building an integrated mortgage securitisation model."

Kensington specialises in lending to people with poor credit ratings, and offers buy-to-let mortgages and self-certification loans.

The group announced in November that it had asked its advisers, Rothschild, to review strategic options for its business, but stressed at the time it had not received any offers.

Last month, the company revealed it had sold its loss-making business TML, which sold sub-prime mortgages directly to consumers. The sale resulted in a £16m write-off of goodwill. As well as considering a potential sale of the group, Rothschild is believed to be considering ways of accelerating the company's organic growth.

Lehman Brothers, Citigroup, Bear Stearns and Deutsche Bank are believed to be among the banks eyeing Kensington. All have increased their activity in the sector in recent months, packaging up loan books and converting them into bonds, which are then traded through their structured finance desks. However, it is believed there is reluctance among the banks to pay a high price for the lender, given the current choppy conditions in the UK sub-prime lending market.

Kensington has been at the centre of takeover speculation since it issued a profits warning and announced its strategic review in November, sending its shares to 12-month lows of 726p. The group blamed a rise in bad debts and an increase in competition within the sector for its change in fortunes.

However, shares in the company have recovered over the past couple of months.