Market Report: Corus glitters after broker's steel merger note

It is inevitable that Corus will soon either merge with or be taken over by a rival steel maker from a developing country. So argued Morgan Stanley in a note to investors yesterday and it sent Corus shares roaring to near the top of the FTSE 100 leaderboard, up 10p to 369.75p.

The company's management has in the past indicated that a deal with a low-cost player is a possibility and throughout the summer rumours of a tie-up with Russia's Severstal surrounded the Anglo-Dutch group. However, Morgan Stanley said yesterday that Corus directors are now actively pursuing a deal and spend more than 50 per cent of their time working on a tie-up of some form.

The US broker believes it will probably link up with a producer in Brazil, Russia, India or China and predicted that it could unlock up to £250m of cost savings. It said: "If such a deal were to occur, we believe the combined company could soon find itself as the new No 2 global player and capture synergies of more than £250m, a forecast which Corus management say is not unreasonable."

Consolidation in the global steel industry was sparked this summer by the merger of Europe's Arcelor with Mittal Steel. The pressure to do deals is not just about wanting to be big or global but is primarily aimed at cutting costs. The Arcelor-Mittal combination aims to produce up to £1bn of savings. Morgan Stanley is convinced that should Corus venture into the developing world to do a deal, it will probably add as much as 100p to its share price.

Elsewhere in the blue-chip index, Man Group rose 10.25p to 436p on rumours of a possible bid for the world's biggest hedge fund manager from Goldman Sachs. Recent news that Man's chief executive, Stanley Fink, is to step back to become non-executive chairman has prompted a slew of speculation about the company's future. Holding Man Group shares back from further gains was the revelation that it has a small exposure to Amaranth, the US hedge fund which has suffered heavy losses from betting on natural gas prices.

Dealers pointed out that Tesco is probably the only major company likely to be affected by the coup in Thailand. The supermarket group generates about 3 per cent of its sales in the South Asia country. Nevertheless, Tesco shares shrugged off the drama in Thailand and added 1p to 372.25p.

Drax lost 20.5p to 835p as Goldman Sachs warned that earnings at the electricity provider are likely to peak next year as lower prices and higher carbon dioxide costs hit profits. The US broker slapped a 522p price target on Drax and urged its clients to sell the stock. Earlier this week, Gordon Horsfield, the chairman of the electricity generator, sold 1.3 million shares at 895p and bagged more than £12m.

RHM gave up 4.75p to 284.5p after Credit Suisse turned more cautious on the cake and bread maker. It downgraded its stance to "neutral" from "outperform" before the group's annual meeting next week.

UTV fell 7.25p to 357.75p as the broadcaster formally abandoned plans to merge with SMG, 7.25p lower to 67.25p. Analysts said a tie-up between the two would have yielded significant financial and strategic benefits. UTV said it was pulling out because of the weak results posted by SMG last week. SMG shares had previously been buoyed by hopes of a deal being struck.

Tomkins dropped 3.75p to 237.25p in heavy volume amid talk the engineer has had a bad September in terms of trading and has been busy urging analysts to reduce their forecasts for its full-year earnings. More than 45 million Tomkins shares changed hands - more than double the volume on an average day. Unite, 11p higher to 441p, revealed that Nicholas Porter, its non-executive chairman, had sold 1 million shares in the group at 426p. He retains a stake of 7.5 million shares (or 6.1 per cent) in the builder of student accommodation.

Retail Decisions, down 6.5p to 153.5p, and Photo-Me, off 0.25p to 108p, disappointed investors with their respective update statements. Both companies are in takeover talks and assured the City yesterday that negotiations are ongoing. However, investors seem to be losing patience - not surprising given that Retail Decisions has been in offer talks since the start of July and Photo-Me since the start of June.

At the small companies end of the market, Sports Café added 7.5p to 52p on talk that a 65p-a-share offer for the bar operator will soon be unveiled.