Market Report: Bid speculation causes Severn Trent to surge

After a surge in takeover speculation last week, the story doing the rounds yesterday was that Severn Trent, the Midlands water utility, is also being stalked by a consortium of private equity buyers. The talk is that a bid for Severn Trent could value the company at up to £5bn, or 1,440p per share. Private equity has shunned highly regulated utilities in the past, but thanks to aggressive infrastructure investment, led by Macquarie Bank and Goldman Sachs, such assets are no longer being ignored. Shares in Severn Trent attracted plenty of buyers yesterday, sending the shares to a high of 1,353p, up 80p, before a bout of profit-taking saw the shares close 25p firmer at 1,298p.

Sceptics said that such a high premium was unlikely and pointed to the travails of RWE, the German utility group that is thought to have had few takers in its attempts to sell Thames Water, due for a £7bn initial public offering later this year.

The sugar producer Tate & Lyle was also well bid, 18p better at 685p, on news that the US and Mexico have agreed to eliminate taxes on soft drinks made with sweeteners rather than sugar. Brokers believe that the news will have a very positive impact on Tate, which makes sucralose, a widely used sweeteners. Broker Goldman Sachs upped its target price for the shares to 700p.

London markets gave back some of the gains made last week, the best five-day trading session of the year so far. The FTSE100 closed 46.6 lower at 5928.3 as a similar bout of profit-taking also sent New York shares lower in early deals.

Slough Estates made its debut in the main index, taking up one of the places vacated by Boots and Alliance Unichem, as the two pharmacy groups began trading as a single entity. Slough made a slightly inauspicious start to life in the blue-chip index, falling 16p to 664p as traders locked in profits after last week's gains. Other property stocks were also out of favour, with Land Securities, the UK's biggest landlord, shedding 9p to 1,973p and British Land closing 18p weaker at 1,367p.

Meanwhile, Alliance Boots dropped 20.5p to 786p as traders were unimpressed by half-year numbers from Alliance and a trading update from Boots. The German broker Dresdner Kleinwort reiterated its "sell" advice on the merged group with a price target of just 690p.

Investors continued to desert Greggs, the baking group, ahead of results this week. The word among investors is that recent trade has been affected by the hot weather, and combined with further increases in energy costs there is every chance that the group could disappoint the market again on Friday. Only 153,374 shares changed hands yesterday, but it was all one-way business at the stock fell by 165p to close at 3,585p.

Talk of a management buy-out or private equity bid for the estate agency group Countrywide attracted more support after surfacing at the end of last week. The shares surged 14p to 438.5p in early deals before profit-taking saw the stock close 2.5p worse at 422p. Talk in the market is that an offer of 500p per share, valuing the group at £880m including only £5m of debt, could be on its way as early as this week.

It is now almost a month since the photo-booth operator Photo-Me International confirmed that it was undertaking a strategic review that may lead to an offer being made for the company. Since then there has been no news, and investors continued to book profits in the belief that an offer should have been made by now, sending the shares 4.5p lower to close at 103.5p.

In the small caps, alternative fuel investors took another beating over ITM Power, as the hydrogen fuel development group confirmed losses of £1.9m for the full year to 30 April. The shares have tanked since early May when the stock was trading at 350p, and yesterday's news, despite being in line with internal budgets, sent the shares 22.5p lower to 171p.

Jessops, the photographic retailer, was strong on decent volume although market makers were at a loss to explain the 7.75p improvement to 115.5p. Volume was more than four times the recent daily total as more than 1.4 million shares changed hands. One trader said: "It's either the stock playing a bit of catch-up or it's a bit of speculative support based on anecdotal evidence of good summer sales."

Insurance sector watchers will be on the look-out for Heritage Underwriting as it makes its AIM debut today. The company raised £15m through an institutional placing organised by the broker KBC Peel Hunt at 75p, and is hoping to use the proceeds of the float to expand its business in the US and take advantage of high premiums at the start of the hurricane season.