The energy group BG bounced back last night after Cazenove highlighted the prospect of a bid, noting that, at current levels, the stock was "perfectly mispriced".
The broker said the recent de-rating in BG's share price was "in anticipation of much weaker fundamentals which are assumed never to improve... An M&A [merger and acquisition] event could shake the market's entrenched and extreme pessimism," the broker said, turning its attention to the prospect of an offer from Exxon Mobile, the American group which has often been mentioned as a possible bidder. "On our estimates, Exxon Mobil could have net cash in excess of BG Group's market [enterprise value] by year end 2009 if it were to suspend its share buyback programme in 2009," Cazenove added, noting "an all-cash acquisition at say £10.2 per share (current share price +35 per cent) would actually be 9 per cent [earnings] accretive".
The assessment energised investors and BG swung to a high of 860.5p. At the close, the stock was up 41.5p to 814p.
Overall, the FTSE 100 was down 52.94 points at 4,229.73 while the FTSE 250 climbed to 6,443.11, up 43.66 points. The benchmark index fell back following early losses on Wall Street, where a series of poor corporate reports unsettled investors.
In the banking sector, HBOS was among the strongest, up 4.56 per cent, or 3.6p, at 82.5p, on reports that Standard Life, down 4.57 per cent or 10.75p at 224.25p, was considering increasing its stake in the lender.
Recent signs of a slowdown in China bore on banks with a large Asian presence and Standard Chartered was down 93p at 1,037p while HSBC lost 30p to 810p. The advertising group WPP was down 20.75p at 366.75p after Collins Stewart said it was "highly concerned that the market is about to be surprised by the scale of downgrades likely to hit agency stock's earnings forecasts". The broker added: "Our understanding from industry contacts is that trading over the last few weeks has taken a sharp turn down."
On the upside, private equity group 3i was the strongest on the FTSE 100, up 14.76 per cent or 66.5p at 517p, after Cazenove reiterated its "outperform" recommendation on the stock, noting that the "shares are fundamentally cheap". "3i remains a fundamentally good business, but its fortunes in the shorter term are inevitably linked to the equity market, which will increase unrealised losses if the fall further with the corresponding geared impact on the [net asset values]," the broker said, adding: "The good news is that 3i's robust financing structure and lack of debt means that despite this it can ride out the cycle and is very unlikely to become a forced seller".
Xstrata was the focus of rumours that Brazil's Vale was looking to acquire a 29 per cent interest in the business from Glencore, the commodities trader which recently rumoured to be looking to offload part of its 35 per cent stake in Anglo-Swiss miner. Traders played down the speculation, however, focusing instead on a positive interim management statement from the company. As a result, at close, the stock was up only 34p at 1,071p, off its intra-day high of 1,171p.
In defence, Cobham, up 2.6p at 169.6p, and BAE Systems, up 10.5p at 340p, were firm after Goldman Sachs weighed in on the sector. "With US defence outlays lagging the defence budget by around two years, we see [earnings] visibility and growth for the European defence stocks out to 2010, with stocks largely immune to the global GDP slowdown we forecast," the broker said. "These stocks also offer sound cash flow and strong balance sheets."
On the second tier, housing stocks bounced back from recent weakness as investors picked up bargains, sending Persimmon to 235.25p, up 17.68 per cent or 35.5p, and Barratt Developments to 62.25p, up 12.67 per cent or 7p. Bovis Homes advanced to 299.75p, up 10.71 per cent or 29p, and Redrow was up 10.32 per cent or 14.5p at 155p.
Traders said the relaxation in inter-bank lending rates had also attracted investors: reduced reluctance to lend to each other should prompt banks to lend more to customers, it was said, which, in due course, should improve the flow of mortgages. One market source attributed some of the gains to a possible bear squeeze as investors returned to the troubled sector.
Elsewhere, Debenhams rallied after the retail group announced plans to slash it dividend.
"The final dividend is reduced to 0.5p, giving a halved full-year total of 3p. This is a more aggressive and earlier cut than expected, but looks a sensible decision given debt position, macro outlook and the fact that the high apparent yield had proved little support for the shares," said Cazenove. Debenhams closed up 3.08 per cent or 1p at 33.5p.Reuse content