The Investment Column: Bid rumours buoy Whitbread as it rejoins blue chips

Telecom Plus; Chime Communications

Our view: Buy

Share price: 1652p (+45p)

Shares in the pubs and budget hotel group Whitbread have soared in recent months on takeover speculation, as investors rub their hands at the prospect of a bidding war. The US property investor Starwood Capital has acquired a 3 per cent stake in the business and is thought be preparing a bid of more than £4bn while British private equity firm Apax Partners is expected to counter-bid. Shares have climbed more than 40 per cent since August as rumours swirl the City.

In the meantime, the streamlined business - following the sale of Whitbread's 50 per cent stake in Pizza Express and 235 less profitable pubs - has been performing well. Chief executive Alan Parker issued an upbeat trading update yesterday showing sales growth across three of it four divisions - the Costa café chain, David Lloyd Leisure centres and the budget hotel chain Premier Travel Inn. At its Brewers Fayre and Beefeater pub restaurants like-for-like sales were flat but analysts are expecting improvements next year. The pubs derive two-thirds of sales from food so are expected to benefit from the extension of the smoking ban into England and Wales.

Costa served up a like-for-like sales growth of 6 per cent for the 39 weeks to November while total sales were up 22 per cent boosted by 137 new store openings. Just this week the rapidly expanding chain celebrated the opening of its 500th UK store, in Oxford, and it is set to open the first café in Shanghai by Christmas. The group's plans for tapping into China's booming economy, and luring the Chinese away from traditional tea houses, are ambitious with 300 stores planned over the next five years.

However, the Premier Travel Inn chain is seen as the group's main driver with like-for-like sales growth of 7.7 per cent. Some 1,640 rooms were opened in the period and the group remains on track to open 2,500 this financial year. Across the group, total sales were up 10.1 per cent. Whitbread makes its return to the FTSE 100 Index on December 18, replacing British Energy. With bid speculation set to continue we recommend buy.

Telecom Plus

Our view: Buy

Share price: 184p (+28p)

Convergence is the buzz-word across the telecoms sector with companies rushing to offer an increasing number of services as part of the one package. Yet NTL's "quad-play" deal has been trumped by a telecoms tiddler in the form of Telecom Plus. Although it does not offer mobile telecoms, it adds gas and electricity into the mix alongside fixed-line and broadband services. The argument goes that customers that source gas and electricity from Telecom Plus are less likely to defect to cheaper broadband suppliers.

Telecom Plus is the only company to successfully develop a multi-product utility and telecoms billing system. One only has to look at Plusnet to gauge the worth of such technology. That telecoms minnow attracted a top-price takeover by BT - not for its 200,000 broadband customers but for its unique software. Telecom Plus has 213,000 customers but again it is its billing system that will draw the attention of suitors.

Telecom Plus entered the year in a poor state after a series of profit warnings on the back of its exposure to volatile wholesale gas and electricity prices. It found a saviour in nPower that took control of wholesale gas and electricity purchasing for the smaller company in February. In exchange nPower took an option to buy a 29 per cent stake in Telecom Plus, exercisable in 2009. This suggests that nPower could pounce on Telecom Plus if customers show an appetite for a combined utility and broadband product.

According to KBC Peel Hunt estimates, nPower's option values the company at over 230p a share without factoring in growth in 2009. This provides significant upside even after yesterday's gains on the back of strong first-half results. Buy

Chime Communications

Our view: Hold

Share price: 52p (+0.5p)

Lord Bell's PR empire is prospering. Doing the spinning for clients ranging as widely as BAE Systems, Zara Phillips, and Alex Goldfarb (friend of murdered Russian spy Alexander Litvinenko) is clearly a good business to be in - even if the last of these projects is pro bono work.

The dynamics of PR are quite different from the rest of the media sector, with no dependence on advertising. With its City PR interests - Bell Pottinger - Chime is more closely tied to the cycle in the Square Mile, where work is buoyed up by the rush of M&A activity.

In a trading update, the company said that it expected to see operating profit growth of 20 per cent this year. That means it should produce profits of some £11m. The outlook for 2007 is also healthy. But, given that Chime shares have outperformed already in 2006, this is a hold.