Market Report: Deutsche raises hopes of Rentokil break-up

Could Rentokil Initial be about to break itself up? Deutsche Bank certainly seems to think so. The German broker highlighted yesterday that such a move could result in a massive return of cash to shareholders. In a note to clients, Deutsche said: "Given Rentokil's poor trading performance, the board may consider a full break-up of the company. This could lead to a huge share buy-back."

Could Rentokil Initial be about to break itself up? Deutsche Bank certainly seems to think so. The German broker highlighted yesterday that such a move could result in a massive return of cash to shareholders. In a note to clients, Deutsche said: "Given Rentokil's poor trading performance, the board may consider a full break-up of the company. This could lead to a huge share buy-back."

Rentokil's business review, which is expected to accompany interim results from the pest control group on 26 August, may prove to be the occasion at which such a move is announced, the broker suggested. Deutsche believes that at the least it will detail the group's dividend and share buy-back policy, but given the company's lack of direction, something more radical is likely.

If Rentokil sold its divisions, leaving it to focus on its hygiene operations, the company would have enough cash on its balance sheet to buy back up to 66 per cent of its issue share capital, Deutsche calculated. At its current share price this would enhance earnings 22 per cent and leave the remaining business trading on just eight times next year's earnings. Even a partial break-up, which left Rentokil's hygiene, pest control and security units, could give the group the firepower to launch a 38 per cent buy-back.

Despite these largefigures being bandied about by the German broker, Rentokil fell 0.75p to 145.5p as the malaise in the wider market weighed on the stock. The FTSE 100 closed down 23.5 points to 4,314.4, while the FTSE 250 dropped 51.9 to 5,834.4. Dealers blamed continued worry about the state of the US economy, which follows Friday's disappointing employment growth figures.

Wm Morrison lost 6.5p to 171.25p after ABN Amro sold 21 million shares at 174p on behalf of a client. One can't blame the seller for wanting to exit the supermarket group. According to the latest market research cited by Credit Suisse First Boston yesterday, Safeway, recently acquired by Morrison's, is losing sales to every major UK food retailer, with Tesco, down 3.25p to 254.25p, the major beneficiary.

"This suggests that Morrison's remedial actions have yet to take effect," suggested the Swiss broker, which urged investors to move into Tesco. It calculates that Tesco has enjoyed a significant acceleration in UK sales so far this year and that it gains more than £600m in sales annually from its competitors. The group's share price performance has been relatively dull since its first-quarter results in June, due to concerns that newly launched promotions by competitors may be damaging its sales. Given the data being cited by CSFB, this is obviously not the case.

The oil sector did well thanks to yet another rise in the price of crude. The latest appreciation seems to have been caused by escalating unrest in Basra, Iraq's southern oil production centre, and it helped Shell gain 5.25p to 394p and BP add 1.75p to 501.25p.

But there was a warning from Dresdner Kleinwort Wasserstein that investors should now stay clear of BP, at least in the short term. It believes that the intensity of the oil giant's ongoing share buy-back, which averaged 11 million shares per day recently, is unsustainable going forward. This is likely to hit BP shares, the German broker cautioned as it downgraded the stock from "hold" to "reduce".

Franklin Resources, the US value investor, declared a 3.5 per cent stake in BSkyB, down 8.5p to 484p. Franklin becomes the satellite broadcaster's second-largest shareholder after Rupert Murdoch's News Corp.

Kiln fell 2p to 76p on worries that the softening of property underwriting premiums could dampen profits, while its fellow Lloyds insurer Cox retreated 0.5p to 58.5p on talk that a broker downgrade is on the way. Blacks Leisure retreated 7p to 401p amid fears that weather trends may have negatively impacted like-for-like sales at the retailer.

Yates put on 0.5p to 144.5p after the bid for the bars operator from the private equity group GI Partners was declared unconditional. GI was forced to raise its cash offer for Yates to 147p a share from 140p last month, after coming up against opposition from a family consortium accounting for 20 per cent of the company.

API, the packaging sector minnow, ticked 0.5p higher to 71p after disclosing two director share purchases. Andrew Walker and Richard Wright, non-executives at API, bought 41,000 and 20,000 shares respectively. Something of a buzz has surrounded the group's shares since it emerged last month that Steel Partners LLP had built an 8 per cent stake in the company. The New York-based hedge fund is known to be an aggressive investor and has been tipped as likely to ask for a board seat. Before that, market professionals believe it will want to add to its holding to get more leverage over the company and its management.

Market Movers

Abbey National 582p (up 4p, 0.7 per cent). Investors bet on a counter bid for the bank.

Benfield Group 233.75p (up 8.5p, 3.8 per cent). Continues to benefit from talk of a possible bid for the insurer.

Manchester United 260p (up 5.5p, 2.2 per cent). Speculation that Malcolm Glazer might buy out the Cubic Expression stake as a precursor to an outright takeover excites.

Headlam Group 399.5p (up 7.5p, 1.9 per cent). Posts a 19 per cent rise in first-half profits and an 11 per cent jump in its interim dividend.

Independent International Investment Research 26.5p (up 11.5p, 76.7 per cent). The group's chairman issues a bullish AGM statement.

Synstar 99.5p (up 21.25p, 27.2 per cent). Receives a 100p a share bid from Hewlett-Packard, valuing the IT services group at £162m.

Petrel Resources 50.5p (up 8.5p, 20.3 per cent). Says it is in talks to secure exploration sites in Iraq.

Filtronic 220p (up 32.5p, 17.4 per cent). Deutsche Bank buys 220,000 shares, taking its total holding to 8.3 million, or 11.1 per cent.

Scott Tod 48.5p (up 3.5p, 7.8 per cent). Says trading is running ahead of expectations.

Eidos 115p (up 6.25p, 5.7 per cent). Investors pile into the stock on hopes of a bid from UbiSoft, its French rival.

Vernalis 79.5p (up 4p, 5.3 per cent). Extends its cancer programme with the pharmaceuticals industry giant Novartis.

CSR 330p (up 7p, 2.2 per cent). Rally after recent weakness.

AIT Group 33.25p (down 20.25p, 37.9 per cent). Arbuthnot Securities downgrades to "hold" from "buy" after a full-year profits warning from the software group.

European Diamonds 49.5p (down 5p, 9.2 per cent). Unveils plans to raise £6.5m via a placing at 40p and says it will use the cash to fund its diamond mine in Lesotho.

Marconi Corp 570p (down 40p, 6.6 per cent). Investors worry about growth prospects at the group following its first-quarter results.