Market Report: Liberty flies high on Simon Property bid talk

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Stake-building by America's largest public real estate group took Liberty International to pole position on the FTSE 100 yesterday.

Simon Property Group, the Indiana-based real estate giant, revealed a 3.45 per cent stake in the UK group, sparking talk of a possible bid and propelling Liberty's stock 70p to 945p.

Traders said that news of the stake, and the ensuing takeover speculation, had led to some short covering in Liberty, 15.11 per cent of which is out on loan, according to Data Explorers. "It's pushed out a few bears, especially after the news in British Land," said one trader, referring to the recent stake building in Liberty's rival by the Government of Singapore Investment Corporation, which took its holding in British Land past the 5 per cent threshold earlier this week.

Analysts, however, were not as enthusiastic as the market – they played down the probability of a full bid from Simon, citing the challenge of funding the acquisition in current market conditions. While the American group clearly sees some value in Liberty, it was premature to expect a takeover in the short term, they said.

In the wider sector, British Land, 9.76 per cent of which is out on loan, gained 6.22 per cent, or 44p, to 751.5p and closed at fifth place on the FTSE 100 leader board. Hammerson was up more than 5 per cent, or 45p, at 918p.

The banking sector was excited by rumours of a possible bid for Lehman Brothers, the Wall Street investment bank, which was said to be in the sights of Korea Development Bank. The talk mitigated fears for Fannie Mae and Freddie Mac, the American mortgage market giants, and helped US indices register early gains, which in turn fuelled a relief rally in UK financials.

HBOS bounced 17p to 289p, and Barclays gained 15.75p to 326.75p. Vague bid rumours were evident around Lloyds TSB, which closed up 19.5p at 299.5p, claiming second place on the benchmark index.

Overall, the London market ended the week on a high with the FTSE 100 up 135.4 at 5,505.6 and the FTSE 250 rising 243.6 to 9,182.7. Investor sentiment strengthened significantly after Wall Street bounced thanks to the Lehman Brothers bid speculation. A slide in the price of oil and rising expectations of interest rate cuts supplemented the positive mood across the market.

Resource stocks populated the bottom end of the FTSE 100 as investors took profits. Xstrata was the second weakest, down 1.87 per cent, or 59p, at 3,101p, and Vedanta Resources eased 10p to 1,798p.

On the FTSE 250, Rentokil Initial was the worst off, down 6.1 per cent, or 4.5p, at 69.25p after revealing a cut to its interim dividend. "The real issue for the group is how long will the recovery take and whether the banks will be supportive," said Panmure Gordon, reiterating its "sell" recommendation for the stock. "We see a rights issue as a distinct possibility. Interest cover looks low... and with debt due to be refinanced, we believe lenders will only lend at much higher rates. As such, the market is likely to worry about covenants."

Michael Page was just behind, down 16.5p at 357p, after Goldman Sachs switched its stance on the staffing group to "neutral" from "buy". The change came as part of a European business services review, in which the broker also downgraded to "neutral" from "buy" SThree, off 3.25p at 200.75p, and Electrocomponents, which lost 2.5p to 172p, and upgraded Davis Service, which gained 7.5p to 403.5p, to "buy".

The engineering software specialist Aveva was up 45p at 1,404p after JP Morgan initiated coverage on the stock with an "overweight" rating and a 1,700p target price.

"Aveva's long-standing experience and engineering expertise in its focus industries positions it attractively with few direct challengers," the broker said, adding that the growth opportunity for the company in the oil sector "should remain intact as long as oil stays above $70-$80 per barrel".

Also on the upside, Benfield gained 27.49 per cent or 74.5p to 345.5p after Aon revealed a recommended 350p-per-share offer for the reinsurance and risk intermediary. The news had a positive effect on its peer Jardine Lloyd Thomson, which gained 20.5p to 459p.

Elsewhere, hopes of an interest rate cut helped the housebuilders, which stand to benefit if the mortgage market opens up again, supplement earlier gains. Persimmon was the strongest in the sector on the FTSE 250, up 10.09 per cent or 33p at 360p. Taylor Wimpey advanced 3.25p, or 7.69 per cent, to 45.5p.

On AIM, Xpertise soared 65.5p, or 85.06 per cent, to 142.5p after its rival QA-IQ launched a 150p-per-share cash offer for the training group. The bid, which values Xpertise at around £8.7m, represents a 95 per cent premium to the target's 77p closing price on Thursday.