Market Report: International Power gains amid bid talk

The rumour mill was in full flow surrounding International Power, the power generator which bubbled higher last night as speculators bought in, pegging their hopes on the possibility of a bid.

The company has featured in market chatter for about a week now, with traders repeatedly citing talk of takeover interest. The most prominent theory casts France's GDF Suez as the most likely bidder, although some have pinned recent share price gains on other factors, such as better than expected carbon trading plans from Australia's Department of Climate Change. But the rumours gained traction yesterday after Bank of America-Merrill Lynch weighed in, saying the fit between the International Power and the GDF portfolio, minus the latter's engineering consultancy Tractebel, was "excellent".

"In the US, both groups are exposed to the same states, in the Middle East both have a strong exposure to independent power producer projects and in the UK [International Power's] generation assets would fit GDF's new ambitions to enter the UK power market," the broker said. The company's Australian and Pakistani assets were the only ones that would not match with the French group's portfolio, BofA/Merrill added.

The broker went on to say that GDF, which is reportedly seeking approval from the French government to launch an offer before the year is out, "has the balance sheet to make such a move", boosting hopes of a deal. Coupled with the rumours, the assessment helped lift International Power, which has also been linked with E.on, to an intraday high of 289.4p, up 5 per cent, in early trading. The stock eased as the session progressed, closing at 282.5p, up 2.5 per cent or 6.9p.

Overall, the FTSE 100 once again struggled to find direction, though late buying help push the index to 5,364.81, up 40.85 points. The FTSE 250 index was slightly lower at 9,170.76, a fall of 10.42 points. Sovereign debt was on the agenda, amid concern about news that the Dubai government was asking creditors for two of its largest corporate entities, Nakheel, the property developer owned by the Dubai World conglomerate, and Dubai World itself, for a debt standstill agreement. In response, the cost of insuring the city state's debt against default soared, with credit default spreads ballooning.

Elsewhere, traders welcomed, but were unenthusiastic, about news from the Office for National Statistics, which said Britain's economy shrank by 0.3 per cent in the third quarter, which was marginally better than initial estimates of a 0.4 per cent decline. Parts of the mining sector were in fine form as the US dollar declined again, boosting the price of commodities such as gold. As a result, Randgold Resources swung up 3 per cent, or 150p, to 5190p. In the wider sector, BHP Billion was 57.5p heavier at 1915p, while Lonmin rallied by 56p to 1813p after its target price was raised from 2060p to 2100p at Citigroup.

On the downside, the banking sector failed to make much headway, despite a favourable Supreme Court ruling on overdraft fees. Royal Bank of Scotland remained under pressure, declining by 0.54p to 35.765p, while Lloyds Banking Group, although 0.44p higher at 94.25p, failed to maintain Tuesday's momentum. Barclays was 2.3p ahead at 315.3p.

Credit Suisse supported sentiment around the oil services group Wellstream, which gained 13.5p to 500p after the broker upped its stance on the stock from "neutral" to "outperform" in a new sector round-up. Petrofac, which was also moved to "outperform", was less successful, falling 5p to 985p. Wood Group, also rated "outperform" at Credit Suisse, was 2.1p higher at 311.1p. "With the oil price having stabilised at a level that justifies the vast majority of developments (except oil sans), confident in the spending picture has returned," the broker said. "In our view, the market is paying for growth despite a weak 2010 outlook and the possibility of further earnings downgrades."

Further afield, Taylor Wimpey was the focus of some positive comment from Morgan Stanley, which said it remained bullish on the stock owing to the company's product mix and geographic exposure. "Taylor Wimpey builds more traditional houses versus peers and also has attractive current and future geographic positioning in the south of the UK through its land bank," the broker said, sticking to its "overweight" stance. The asset failed to lift the stock, however, with Taylor Wimpey falling 0.75p to 36p. It declined with the wider sector, which was hit by profit-taking. Berkeley, which was rated "equal weight" at Morgan Stanley, was 10p weaker at 834p, while Barratt Developments lost 4.1 per cent, or 5.1p, to close at 118.5p and Bovis Homes fell by almost 3 per cent, or 11.7p, to 406.9p.

On the upside, the support services group Rentokil Initial gained ground, rising by 3.3p to 104.2p as deal rumours persisted, although traders played down the possibility of a bid. Speculation regarding the chances of a disposal was seen as more credible, with one market source citing rumours suggesting an announcement might be forthcoming as early as next week.