Market Report: Takeover talk helps Reckitt buck sell-off

It's hard to look past the banks and housebuilders on a day of devastation for the market, as Northern Rock laid waste to the top tier. After the dust settled, one of the few stocks to be left in positive territory was Reckitt Benckiser, as Merrill Lynch conjured up a bit of takeover nostalgia.

The US broker upgraded the group to "buy" as it backed the resurrection of merger talks with Wolters Kluwer. Speculation surrounding a potential deal hit the rumour mill earlier this year, but was first proposed a decade ago. It said the deal had compelling logic, but admitted it didn't look imminent.

The market's predictions on Thursday of problems at Northern Rock were vindicated yesterday... and how. The beleaguered mortgage lender shed almost a third of its value as news broke it had to be bailed out by the Bank of England.

Spreadbetters Capital Spreads said that as the stock was now trading at 4.5 times price to earnings multiples, it made "an outstanding takeover target for a cash-rich financial operation (if there is such a thing)". The market was a sea of red, as UK investors scrambled to sell. The FTSE 100 spiralled more than 2 per cent by mid-afternoon, although a rally saw it finish the day 74.6 points lower at 6,289.3. The fallout was everywhere to be seen, with UK banks particularly hit. Alliance & Leicester, HBOS and Barclays ended among the worst performers. The quote of the day came from one equities trader, who said: "Sell banks until your head caves in."

The housebuilders also crumbled on fears home buying will become harder. Persimmon was the biggest faller, closing 6.62 per cent lower at 1016p.

The power groups were seen as good defensive stocks in the morning, with International Power the pick of the bunch, rising 0.82 per cent to 428.5p. None ended the day in the black.

Beyond the wider market sell off, Cadbury Schweppes was dragged down as reports that it had turned down a bid for its US beverages arm. The confectioner's stock fell after it turned down an offer of up to £6.9bn from a private equity consortium, comprising Blackstone, KKR and Lion Capital. Panmure Gordon backed the decision, saying the deal "appears to require vendor financing, which Cadbury have quite rightly rejected in our view". It closed down 7.5p at 580p.

Segro, formerly Slough Estates, fell as it announced an overhaul of the group's structure. It is set to introduce three business units to replace the regional format in the UK. The stock gave up 15p to close 493.5p.

Another to feel the burn was Wolseley, after it was downgraded by Credit Suisse to "underperform". The stock fell 3.86 per cent to 921p as the broker said the low possibility of bid speculation returning, and continued concerns in the US housing market "suggest that risk is still skewed to downside for Wolseley".

On the second string, Paragon Group led the fallers in the wake of Northern Rock's disastrous news. The consumer lender's board was quick to try and calm investor fears, saying a £1bn securitisation in July meant new business flows were "fully accommodated". Paragon added it has no involvement in the US mortgage market, or structured investment vehicles and collateralised debt obligations. The statements encouraged a mini-rally, but the stock still shed 16.76 per cent to close at 298p. Bradford & Bingley followed the top tier bankers, closing the second worst performer, down 7.7 per cent at 329.75p.

Elsewhere, Ladbrokes hit a losing streak, falling 9.75 to 434.25p after Landesbanki called it "a poor bet on unfounded bid speculation". The broker said Ladbrokes' rally had run its course and reiterated its support for William Hill, which it said was undervalued.

Energy firms led the defensive rearguard action on the mid tier, with Dana Petroleum, up 1.94 per cent to 1000p, performing strongly alongside Burren Energy, which reports its interim results next week, closing up 1.79 per cent at 853p.

Traders in the growth stocks said the market was pretty quiet as chaos reigned above. There was big news for Galahad Gold, which is set to be wound up. The board released a statement saying it had concluded that "a voluntary liquidation of Galahad is in the best interests of the shareholders". It said that increases in metal prices mean that investing in the mining sector is unlikely to deliver attractive returns.

Investors in Regal Petroleum were disappointed as it sold a 50 per cent stake in its Ukraine gas project. The sale to MND Exploration for $330m, sent the shares down 13.75p to 216.75p, as traders had expected the company would sell the whole field, or even be taken over itself.

Among the risers was EQ Group, after news of a £6.4m bid from rival Optimisa. The offer, a 22 per cent premium to the company's closing price on Thursday, sent the shares up 20.34 per cent to 71p.