Market Report: Traders pin hope on Glaxo bid for AstraZeneca

The UK's second largest pharmaceutical group, AstraZeneca, has been the subject of vague bid speculation in the past, but the talk doing the rounds yesterday was a little more concrete than usual.

Despite the regulatory hurdles a deal would face, some traders believe GlaxoSmithKline is lining up an audacious bid should its offer for the over-the-counter division of Pfizer fall through. At the moment GSK is thought to be the favourite to win that $15bn (£8bn) auction. However, should GSK fail to win the Pfizer brands it may turn its sights on to a much bigger catch. AstraZeneca, with a market capitalisation of £46.8bn including debt, is more than 5.5 times larger than Pfizer's consumer division.

AstraZeneca was in demand all day against a flat market, although a bout of profit-taking saw the shares fall from the high of 3,085p to close at 3,016p, 74p better. GSK was out of favour and dropped 5p to close at 1,474p. Investors are thought to be keen on a deal, since GlaxoSmithKline shares have dramatically underperformed the wider market in the past three years.

Elsewhere in the large-cap index, Lloyds TSB led a strong banking sector, 12p better to 515p, as the US broker Morgan Stanley increased its forecasts for the group and upped its target price to 611p. HSBC firmed 8p to 931p along with Standard Chartered, up 17p to 1,232p as Asian markets improved overnight. Even Alliance & Leicester, out of favour with investors on Tuesday after the French suitor, Crédit Agricole, spent £3.1bn on a Greek bank, managed a slight recovery, closing 7p firmer at 1,097p.

Shares in BAE Systems were unloved, falling 3.75p to 345p, as traders have become increasingly concerned over the negotiations to sell its 20 per cent stake in Airbus. The European commercial airline manufacturer is experiencing delays of up to seven months for delivery of the new A380 airliner, leading to a profits warning yesterday from the main shareholder, EADS. Shares in BAE have now fallen more than 23 per cent from the 2006 high of 450p.

London trading was subdued for most of the day, as traders stood on the sidelines waiting for UK inflation data. When it came out exactly as expected, there was little reaction and the market remained caught in a narrow trading range for the rest of the session. The FTSE 100 ended 12.8 worse at 5,506.8.

The housebuilder Crest Nicholson was well bid in early deals, 31p better at 519p, after a rumour circulated thatBovis Homes was poised to buy the 23.4 per cent stake in the group of the entrepreneur, Gerald Ronson. The story has done the rounds before and a bout of profit-taking in the afternoon saw the shares close 17.5p better at 505p. One sceptical trader said: "Gerald is in no hurry to sell and the sector has been knocked back by interest rate worries in the last few weeks. Bovis might buy it but I suspect the stake will only be sold to a knockout bid at the moment." Bovis added 17p to close at 779.5p.

Takeover talk is never far away from the music publishing group EMI, but the talk doing the rounds yesterday was that Warner Music was poised to launch a bid for the company. The two groups have been linked on several occasions in the past but most of the chat has centred around EMI bidding for Warner, which turned down an informal offer of $28.50 per share from EMI in May. Traders said an approach from Warner would not be a surprise, as the boards of both companies are known to favour a link-up. However, not everyone believed the rumour as EMI closed 2.75p weaker at 264.75p on decent volume of 7.4 million shares.

In the smaller companies, market-makers blamed tightening margin requirements at spread-betting firms for a sharp decline in a handful of smaller energy stocks. Rumours were rife that several firms that offer margin credit to traders have raises rates, prompting a rush of forced sellers into the market. Empyrean Energy, whose share price has declined from a high of 164.5p in February, is thought to be one of the affected stocks, and lost 10p to close at 59.5p. Metals Exploration was 1.75p worse at 32.5p.

Afren, another oil exploration and production company, climbed 3p to 47p on the back of particularly heavy volume on Tuesday, when more than seven times the average daily volume was traded. Market-makers said the company could be about to give the market a positive drilling update, and said the shares look "very cheap".

Monstermob, the ringtones group that shocked the market by announcing an earnings shortfall and the departure of its chief, found little support in the market and declined 22.5p to 130.5p. Some traders expect the stock to recover at least some of its recent losses tomorrow, as short sellers look to close positions.