Market Report: Dana Petroleum retreats amid deal speculation

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Dana Petroleum was one of yesterday's losers amid rumours that the oil prospector may be holding out for an offer of up to 2,000p per share.

Months of bid speculation were followed last week by the disclosure that the Korea National Oil Corporation (KNOC), of South Korea, had made a "very preliminary" approach about a possible cash offer for Dana. Although there was no confirmation of a possible price, reports anticipated an offer of as much as 1,800p per share.

Yesterday, new chatter suggested that Dana, which fell 44p to 1,409p, might be holding out for up to 2,000p per share – a figure which the Koreans were rumoured to be unwilling to pay. There was no official statement to the stock market, however, suggesting that negotiations remain in train. Both Dana and KNOC declined to comment on the rumours.

In other news, UBS switched its view on Dana from "buy" to "neutral" and revised its target price to 1,470p to reflect a 50 per cent chance that a deal would take place. The broker said the Koreans were looking to Dana to grow production but, in the same circular, warned clients that "if a deal does not proceed, we believe Dana's share price could fall back to/below our prior target of 1,300p".

JPMorgan Cazenove also weighed in on the shares, saying that while a KNOC bid was possible, a large premium was "unlikely to be paid".

"Although we believe Dana's asset base and strategy lacks clear focus, we believe that at current levels the valuation is compelling. Thus, we would not be surprised to see a formal bid for the company by Knoc," JPMorgan said, suggesting a possible bid range of between 1,650p and 1,750p.

"Under a scenario of no formal offering being made, we see potential downside to 1,100p to 1,200p."

Overall, the benchmark FTSE 100 index closed above the 5,000 point mark, adding 49.82 points to close at 5,014.82, while the mid-cap FTSE 250 index was 61.59 points stronger at 9,562.68 as initial jitters about the strength of the world economic recovery were offset by the read-across from a strong start on Wall Street.

The move up was pinned on a higher earnings outlook from State Street, which lifted the mood around banking stocks. The sector was also supported by hopes that continental lenders would fare well in impending European stress tests.

Barclays led the way, swelling by more than 6 per cent or 17p to 291.6p amid continued speculation about possible moves to split the group's investment banking and retail arms, while Royal Bank of Scotland, which is reportedly planning to dispose of up to £3bn in property loans, was marked up by 1.92p to 42.83p.

The grocer J Sainsbury was among the strongest of the blue chips, rising by 16.1p to 344.3p as rumours of a bid interest, which first re-emerged late on Tuesday, gained traction. The Qatar Investment Authority was, once again, the name in the frame.

The wider supermarket sector was also firm, with Tesco adding 1.15p to close at 392.15p and WM Morrison ending the session 4.7p higher at 279.7p. Investors were seemingly unperturbed by Amazon's first foray into the British food market with the launch of grocery website.

Elsewhere, BT was 4.7p higher at 134.9p after Morgan Stanley said the telecoms group offered both restructuring potential and new product growth. Beyond that, "the pension deficit could be moving down significantly given market moves, reduced benefits and the Crown guarantee," the broker added, as it reiterated its "overweight" view and 190p target price on the stock.

In the retail sector, the B&Q owner Kingfisher was 3.1p ahead at 218.3p after Royal Bank of Scotland told clients to "buy", labelling the company the "highest quality restructuring play" among the larger UK retailers.

"Direct sourcing and common purchasing benefits, working capital improvements, margin improvement and attractive cashflow, coupled with low levels of net debt, make Kingfisher our top pick," the broker said, setting a 275p target price on Kingfigher's stock.

RBS was more cautious about Home Retail Group, the owner of Argos and Homebase, which closed 3p higher at 225.9p last night. While noting the possibility of a bid approach, the broker initiated coverage with a "hold" view, saying it expected increased competition and recent market share losses at Argos to weigh on future like-for-like sales and gross margins.

Turning to Homebase, RBS said it did not expect the DIY chain's "premium pricing strategy to resonate with consumers facing a household cashflow squeeze into 2011."

Further afield, the oil and gas services group Hunting was 10.6p better off at 464p after the analysts at RBC initiated coverage with an "outperform" rating. RBC adopted a similar stance on Petrofac, which closed 15p stronger at 1,209p. Wellstream, up 24.8p at 482.9p, was also strong despite the broker adopting an "underperform" view,

Wood Group and Lamprell, both of which are rated "sector perform" by the broker, were 9.4p ahead at 344.3p and 4.2p higher at 229.2p, respectively.