Market Report: Return of bid talk helps Smith & Nephew

The revival of bid rumours, plus claims that investors are seriously undervaluing the artificial hips and knees manufacturer, helped Smith & Nephew (S&N) continue on its road to recovery yesterday.

The blue-chip group was hurt badly by the recent widespread sell-off, and although it has managed a partial rally in the past few weeks, it remains nearly 20 per cent lower than its recent peak in February, thanks in part to pessimism over the state of the orthopaedics market.

Last night, however, it closed 22.5p better off at 596.5p after reheated takeover chatter once again emerged suggesting its US peer, Stryker, could be interested in a possible move. Such speculation has been seen constantly around S&N for a while now, and it was reported to have rejected an approach worth over 750p a share from Johnson & Johnson late last year.

This time market gossips said any potential offer could be pitched between 850p and 900p a share, adding that if Stryker did move in, others were likely to follow. Traders refused to get too excited over the vague rumours, however, pointing out that they have heard similar mutterings plenty of times before.

Also helping S&N was Deutsche Bank's decision to start its coverage on the company with a "buy" rating, saying the fall in its share price had made it "too attractive to ignore".

"We think investors have over-discounted the temporary slowdown in S&N's sales and earnings growth outlook and have not priced-in material improvements in its ability to generate cash... or additional work it is doing to lift this further in the future," said the broker's analyst Yi-Dan Wang, who gave it a target price of 775p.

With global markets rallying on Monday as the City enjoyed the bank holiday, the FTSE 100 was eager to catch up yesterday and initially rose almost 3 per cent. Data showing a major fall in US consumer confidence, which dropped to a 28-month low, held the benchmark index back slightly, although by the bell it was still 138.74 points higher at 5,268.66.

The announcement this week that two of Greece's largest banks – Eurobank and Alpha Bank – are to merge gave some encouragement to the beleaguered sector. Saying the deal was "a step in the right direction", Nomura's Prathmesh Dave suggested it could spark further tie-ups in Greece as well as in Spain and Portugal.

So welcome was the news that in early trading Royal Bank of Scotland shot up over 13 per cent, before finishing 1.76p stronger at 23.64p, while Lloyds Banking Group climbed 2.32p to 32.03p. RBS was also given a boost by Deutsche Bank upgrading its advice to "buy", although the broker kept Barclays – up 10.4p to 165.4p – as its favourite choice.

In the wider financial sector, the insurers were enjoying the benefit of Hurricane Irene seemingly causing less damage in the US than had first been expected. JP Morgan Cazenove noted early estimates put the cost of the storm not far off $8bn while now it seemed as if it was not going to cause more than $3bn of damage, as Aviva ticked up 18.1p to 329.7p and Legal & General advanced 5.6p to 103.8p.

Vodafone underperformed the blue-chip index, edging forwards just 0.6p to 162.5p after confirming talks with its Greek peer Wind Hellas over "a potential business combination". Espirito Santo was keen on the move, saying that although "some observers may question whether Vodafone should be committing more capital to Greece... this is exactly the right point in the cycle, when valuations have been crushed."

Down on the FTSE 250, Tui Travel pushed forwards 4.7p to 154.4p as Charles Stanley's Douglas McNeill said the likelihood of its parent company Tui AG making a move for the rest of the company it does not own was being underestimated. The analyst claimed the tour operator's fall of nearly 40 per cent since May "implies virtually no chance of a bid", but he gave the scenario a 33 per cent probability of happening and upgraded Tui's rating to "buy".

Elsewhere, EasyJet flew up 13.5p to 337.8p as investors reacted with enthusiasm to reports over the weekend claiming the budget airline could be about to make a one-off special dividend payment.

There was a double boost for the housebuilders, with Bank of England figures showing an uplift in the number of mortgage approvals while Bovis – up 18.5p to 369.5p – managed a first-half pre-tax profit of £8.1m. That was more than double the same period the previous year, and as a result Barratt Developments advanced 6.05p to 78.9p while Taylor Wimpey powered up 1.3p to 31.76p.

Despite saying it was not in discussions over a sale of the company, Gulf Keystone still spurted up 5.5p to 136p on the Alternative Investment Market after reports over the weekend claimed the oil explorer's chief executive was considering such a move.

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