Market Report: British Energy lit up by bid rumours and upgrade

A broker upgrade and bid rumours boosted British Energy, which rose while the FTSE 100, spooked by risking inflation, falling retail sales and the spectre of yet more turmoil in the US financial system, sunk deeper into bear market territory yesterday,

The utility bucked the trend after Morgan Stanley raised its target price for the stock to 650p from 555p, recommending a long British Energy (BGY) and short Drax trade (in effect recommending the bet that the price of British Energy will rise while the price of Drax will decline).

The broker said that, counter-intuitively, British Energy's talks with potential predators were acting as a break on the share price performance.

"Given the tension between investors (and BGY) who see high value for the company in the current power market conditions, and utilities (who will have more conservative assumptions) we believe a joint venture option [instead of a full takeover] is the more likely outcome," said the broker, adding: "Clarity should provide the catalyst [for the shares]."

The positive assessment was supplemented by renewed rumours, played down by traders, of a new bidder to counter EDF, the French utility believed to have offered between 680p and 735p per share for the company. By the close, British Energy was up 9.5p at 715.5p. Drax lost 16.5p to 749p.

Elsewhere, rumours of fresh stake building by J Sainsbury's Qatari investors pushed up the price of the supermarket chain. The talk was borne of some large mid-morning trades and took the chain up by 3.5p to 271p. There was also talk that the Qataris, who have a 15 per cent stake in the LSE, had been approached by a buyer. That took LSE stock up by 2.5p to 708.5p. "Normally, it would not be considered good news, but in this market it suggests LSE is back in play," said one trader.

Overall, the FTSE 100 closed down 128.5, or 2.4 per cent, at 5,171.9. The market was hit by weak sentiment on Wall Street, where investors are worried about the financial health of Fannie Mae and Freddie Mac, the US mortgage market giants, and gloomy comments by the Federal Reserve chairman, Ben Bernanke, about the economic health of the US.

New figures from the Office of National Statistics, which revealed that UK consumer price inflation leapt to 3.8 per cent in June from 3.3 per cent in May, and from the British Retail Consortium, which said that June like-for-like sales were 0.4 per cent below a year ago, also weighed on the London benchmark.

The FTSE 250 was also down and lost 166.4 points to 8,279.3 as investors sold out of retailers, media stocks and the housebuilding sector.

On the FTSE 100, Royal Bank of Scotland lost more than 7 per cent or 12.7p to 167.3p. Beside concern for the US financial system, uncertainty about the sale of RBS's insurance assets bore on the stock, which finished at first place on the loser board. HBOS, whose shareholders have until 18 July to decide whether or not to take part in its rights issue, lost 12p to 260p – 15p below the 275p per share rights offer price – and Lloyds TSB was down 9.25p at 273p.

Alliance & Leicester was also weak, down 3.13 per cent or 10.5p at 324.5p, after analysts at Goldman Sachs, Credit Suisse and Citigroup played down the likelihood of a counter offer to Banco Santander's takeover proposal.

"Although other UK banks may be able to generate similar cost synergies [to Santander] we do not find any other combination as compelling," said Citi. On the upside, weakness in the price of oil boosted TUI Travel, which gained 5.7p to 176.6p.

The late development, sparked by concerns about US consumption, also boosted Thomas Cook, up 3.7p at 179.5p, and British Airways, up 3.5p at 210.75p.

On the FTSE 250, Imperial Energy led the way and gained more than 18 per cent or 164p to 1074p after confirming that it was in engaged in discussions regarding a possible 1,290p per share takeover proposal, believed to be from the Oil & Natural Gas Corporation (ONGC) of India, the state-owned oil company.

The recruitment specialist Hays added 1p to close at 72p after UBS removed the company from its European support services "least preferred list", citing the recent weakness in the share price.

Rentokil Initial, which was added to the list, lost 6p to 92p. "We think the current price reflects a premium for the turnaround strategy which we are yet to hear about and will be executed in a worsening economic environment," said the broker.

Among the smaller companies, Photo-Me International lost 1.5p to 11.5p after Goldman Sachs reduced its target price for the company's stock to 15.10p from 17p, citing a challenging outlook for the automatic photo booth operator.