Market Report: Investors looking forward to Smiths Group break up

A break-up of Smiths Group? It is worth betting on, one broker was telling its clients yesterday. In fact, Smiths is one of the most desirable stocks on the FTSE 100, and its shareholders can expect to benefit from the wave of mergers and acquisition activity that will soon crash over this particular industrial behemoth.

UBS is the broker recommending the purchase. It added Smiths to its "most preferred Alpha Preference portfolio" yesterday, saying it was "back on the radar". It slapped a price target of £14 on the shares, which would give new buyers a clear profit of more than £2.50.

Chief executive Phillip Bowman is currently carrying out a restructuring of the group, and the UBS analyst Avi Hoddes's take is that, after its completion, "Smiths will ultimately be broken up". The analyst added: "This despite low single-digit organic revenue growth across the group. Recent data points indicate that general M&A activity has picked up." UBS forecast full-year revenues of £2.7bn when Smiths reports its numbers next month, with pre-tax profits at £417m, and it predicted upgrades to City forecasts after the results. The shares ended the day rising 24p to 1148p.

There was little else in the way of positive news to excite the market, and there was evidence of investors heading for the defensive stocks yesterday, frightened over the economic outlook. The big pharmaceutical giants were particular beneficiaries, with GlaxoSmithKline closing the highest of all, up 25p at 1,177p.

The only real chatter surrounded Cairn Energy as rumours of an approach for the oil group swept the market in the morning. Tongues were wagging over potential suitors, with favourites including Italy's ENI as well as the UK's own Royal Dutch Shell. The talk of a potential 700p per share approach from a "cash-rich" oil giant did send Cairn's shares to the top of the blue chips in the morning yesterday. It retreated during the day, eventually falling into the red, 1p down at 460p, as traders poured cold water on the rumours. Cairn was handed approval to drill in Greenland in June, where some have predicted a fifth of the world's undiscovered oil and gas reserves lie. One trader said: "It would be a real surprise if either side jumps before the results from Greenland come in; it could change the entire company. At the moment its India operation is supporting the group."

As the summer continued to drag on the trading floors of the City, and the US market opened sharply lower, the FTSE 100 retreated 34.1 points to 5376.4. The previous day's strength in the mining sector evaporated, with Vedanta Resources the worst, as the price of metals slipped, linked to expectations of poor Chinese inflation figures due out this week. It closed down 103p at 2,408p.

Worst blue chip of the day was Tui Travel, after its results were badly received. The travel agency group plunged as much as 10 per cent at one stage after a profit warning. The shares closed down 22.5p at 203.1p, a 20-month low. KBC Peel Hunt said "even where there is good volume news, the margin picture has deteriorated".

Intercontinental Hotels put out rather more positive numbers, yet the stock also tumbled. Some speculated that a note from Bank of America Merrill Lynch hit the stock. The broker kept its "underperform" rating, citing uncertainty on how the macroeconomic conditions would affect the group for the rest of the year. Intercontinental closed down 1,078p at 46p.

Another of the larger fallers was also a victim of the brokers. Invensys, a UK engineering company, dropped 9p to 260p as Goldman Sachs cut its price target from 369p to 351p. The vampire squid cut its forecasts to account for lower profits expected in the rail business, as revealed in Invensys's interims last month.

The housing stocks took a hammering on the second string, with Redrow the worst on the day. The group gave up 8.8p to close at 118p, retreating after four consecutive session rises. It was followed closely by Barratt Developments, which dipped 5.8p to 101.4p. But there was finally some respite for the social housing group Connaught. After giving up nearly a third of its value the day before, the stock rebounded 2.4p, 21.8 per cent, to 13.2p – although it left many scratching their heads over whether there really was optimism in its negotiations with the banks, or it was just a bear squeeze.

On Aim, Scotgold Resources nosedived 26 per cent. The shares were suspended in the morning after the executive director of planning and rural development for the Loch Lomond and Trossachs National Park called for a block on the mine it was planning. The final approval vote takes place next week and the company can appeal to the Scottish government if it goes against them. The shares resumed trading to close at 3.5p. Down among the small caps was logistics software group Kewill as it revealed that talks over a potential takeover "have not progressed to an acceptable offer and have now been terminated". The shares sunk to pre-talk levels, down 15.25p at 101p.

On the upside, Tissue Regenix was up 3.45 per cent as it received European approval for a vascular patch, which is designed to be permanently inserted into the body. The tissue replacements developer rose 0.5p to 15p.

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