Market Report: Talk of Rentokil break-up bid excites traders

Is there about to be a break-up bid for Rentokil? Well, that was certainly the talk among those buying into shares of the pest control giant yesterday, which finished 8p higher at 152.5p as more than 65 million shares changed hands. On an average day, the volume of Rentokil stock traded rarely tops 20 million.

Is there about to be a break-up bid for Rentokil? Well, that was certainly the talk among those buying into shares of the pest control giant yesterday, which finished 8p higher at 152.5p as more than 65 million shares changed hands. On an average day, the volume of Rentokil stock traded rarely tops 20 million.

It seems the speculation was prompted by a jump in the price of Rentokil's five-year credit default swaps. These protect the buyer from a default by Rentokil on its credit obligations, and a jump in their value means investors believe Rentokil is about to issue a large amount of debt. Any break-up bid for the group is most likely to come in the form of a private equity backed buyout, with the majority of the cash raised by the buyer borrowing heavily against the company's assets and future cash flows.

Rentokil is an ideal target for a leveraged buyout, thanks to the defensive nature of the business and its strong cash flows. Meanwhile, the group's shares stand near a four-year low following last month's profits warning.

Market professionals noted that the price of Marks & Spencer credit default swaps rose sharply before news broke of Philip Green's takeover offer, which will see the retail entrepreneur borrow the majority of the money required for the deal.

Elsewhere on the blue-chip leaderboard, William Morrison rose 4.5p to 232p as ABN Amro was heard hinting at a sharp upturn in trading at Safeway. "The pattern of trading at Safeway since Morrison took over the group has been much stronger than previously understood," the Dutch broker said following a meeting with senior manages at Morrison. Sales at Safeway are believed to have suffered a large fall in the immediate aftermath of the link-up with Morrison but if what ABN says is correct, they seem to have recovered sharply since.

William Hill was not so lucky. Its shares fell 18.5p to 540p after David Harding, the chief executive of the betting shop giant, sold almost his entire holding. He disposed of 946,000 shares at 555p following the exercise of options, which leaves him with a holding of just 50,000 shares. Seymour Pierce urged investors to sell down their holdings following the news as it argued that William Hill's rating looks far too rich and warned that the company's planned move into gaming will be expensive.

Imperial Tobacco dropped 27p to 1,203p as investors were unsettled by news of a sharp drop in German cigarette shipment volumes during the first five months of the year. Germany is an important market for Imperial and accounts for about 20 per cent of the company's earnings. The fall in volumes seems to be the result of price increases prompted by tax changes, and market professionals fear it may prompt downgrades to earnings forecasts at Imperial.

Whispers that bid talks at WH Smith have hit the rocks sent the retailer 8.75p lower to 345p. Permira, the private equity house which has put in a £940m indicative offer for Smiths, has been conducting due diligence for more than a month. Venture Production rose to within a whisker of its all-time high, up 6.5p to 185p, following Wednesday's bullish trading statement from the oil explorer.

CML Microsystems rose 10p to 385p in reaction to the purchase of 4,000 shares at 375p by Nigel Clark, the finance director. Institutional investors have also been buying into the semiconductor designer of late. Both Eaglet and Lion Trust have added to their holdings. Synstar dropped 1.5p to 69p as brokers struggled to clear a large seller from the market. Protherics improved 2.75p to 54.25p on hopes that the biotech group would soon win approval from the US Food and Drug Administration for its kidney drug, Voraxaze.

Stagecoach Theatre Arts, which runs a series of art schools for children, dropped 22.5p to 85p following a profits warning. Corporate Synergy cut its rating to "reduce" from "buy" and urged the company, which has expanded recently into sports training, to get back to its core business. The broker believes the company's shares have further to fall.

Datacash gained 6p to 96p as Numis Securities tipped the stock as a takeover target. "We have voiced our positive view on Datacash a number of times, most recently as a potential acquisition target given the likelihood of consolidation among chip and pin players", Numis said. Datacash will benefit greatly from a change in credit card legislation next year. This has led to the introduction of chip and pin technology by retailers and credit card companies.

There were two new issues on AIM. Hambledon Mining, the Kazakhstan-focused gold explorer, raised £2.5m via a placing of 50 million new shares at 5p. It closed at 6.87p, valuing the group at £12m. Meanwhile, Real Estate Investors floated at 10p and raised £2.3m. Of that figure, directors of the commercial property company invested £650,000. REI shares closed at 12p.

MARKET MOVERS

Kingfisher 295.75p (up 2.25p, 0.7 per cent). Appoints Peter Partma as the new executive to spearhead a drive by the company into Russia.

Allied Domecq 464.25p (up 3.25p, 0.7 per cent). Deutsche Bank reiterates its "buy" rating and 500p price target after the company's recent presentations to investors in the US.

Alba 804p (up 20.5p, 3.7 per cent). Posts forecast-busting full-year figures and issues an optimistic outlook statement.

Balfour Beatty 262.5p (up 9.25p, 3.7 per cent). The construction group is named preferred bidder for a schools building project in Scotland worth £140m.

Hartford 1.5p (up 0.3p, 24.6 per cent). Directors pile into the stock after a strong set of interim results from the company.

Virotec 28p (up 5.25p, 23.1 per cent). Results from the US Environment Protection Agency give one of its lead products the thumbs up.

Bede 28p (up 3p, 12.0 per cent). Raises £700,000 at 25.5p and unveils a series of contract wins.

Alltracel Pharmaceuticals 24p (up 1.5p, 6.7 per cent). News about a series of product launches excites.

Dewhurst 145p (up 12p, 9.0 per cent). Posts solid interim figures.

Henlys 0.9p (down 16.6p, 94.9 per cent). Management unveils a restructuring plan which will virtually wipe out all shareholder value and plans to delist the stock.

Landround 222.5p (down 120p, 35.0 per cent). Warns that its full-year results will not meet expectations
after a disappointing first half.

Manganese Bronze 206.5p (down 19p, 8.5 per cent). Issues a full-year profit warning as its Zingo business continues to be loss-making.

European Colour 17p (down 1.25p, 6.7 per cent). Posts annual loss of £3.1m, compared with a loss of £4.1m a year earlier, and scraps its dividend payment.

TBI 63p (down 1p, 1.5 per cent). Brokers make cautious comments about the airports group following uninspiring full-year results.