Market Report: AstraZeneca bid talk helps to lift Shire higher

Shire Pharmaceuticals was the focus of bid talk again yesterday. Last week, the company's share price gained almost 5 per cent after the market played host to rumours that Pfizer, the American drugs giant, was mulling a £13-per-share offer. Last night, the talk shifted to AstraZeneca, another drugs giant which has also been pegged as a likely bidder.

The source of the speculation was a new note from UBS in which the broker asked: "Would [AstraZeneca] pay 1,424p to acquire Shire?" Well, according to UBS analysts Gbola Amusa and Martin Wales, "AstraZeneca can pay up to 1,425p, greater than a 40 per cent premium, and achieve an economically accretive acquisition... we see financial reasons as the main motivation for AstraZeneca to seek to acquire Shire".

They added: "AstraZeneca moving now for Shire would be consistent with out expectation that AstraZeneca may turn to M&A to renew its growth prospects."

Hopes of a deal added 6.16 per cent to Shire's stock, which was up 61.5p at 1,060p. AstraZeneca rose 2.35 per cent or 41p to 1,789p.

Overall, the FTSE 100, buoyed by Wall Street, which supplemented a late rally on Monday with a firm start on Tuesday, climbed by 3.54 per cent or 191.4 points to 5,605.8. Investor confidence was lifted by hopes of an interest rate cut from the US Federal Reserve, which met after the market closed, delivering a 75-basis point reduction. Confidence was also boosted by better-than-expected earnings figures from Lehman Brothers and its rival Goldman Sachs.

The FTSE 250 took its cue from the London benchmark, closing up 2.35 per cent or 220.8 at 9,601.5.

On the FTSE 100, specialist financial stocks such as ICAP, which gained 44.5p to 551p, Man Group, which climbed 43.5p to 529.5p, and IG Group, which put on 16p to 333.25p, recovered after suffering in Monday's tumult.

Banking stocks also staged a comeback. HBOS was up by 19.75p to 480.25p. Morgan Stanley, in a new note, said the company's shares had been "oversold".

"Since the outset of the credit crunch in August 2007, the market has focused almost entirely on the ratio of loan to deposits for spotting those banks most reliant on wholesale funding," the broker said. It added: "While clearly relevant, the loan-to-deposit ratio understates the reliance on wholesale funding for those banks that carry other banking assets such as debt securities. So, despite market perception, HBOS is not that different to the other big banks, with 49 per cent of funding coming from deposits versus an estimated 57 per cent at Lloyds TSB, 60 per cent at HSBC and 49 per cent at RBS."

Lloyds TSB put on 18.75p to 416.5p, while HSBC added 54p to 800p. Royal Bank of Scotland climbed 21.25p to 326p.

On the FTSE 250, Restaurant Group gained 7.75p to 146p. Market speculation suggested that the owner of the Garfunkel's and Chiquito-branded restaurant chains was subject to some stake-building by the rival group Tragus, the company behind Café Rouge, or Gondola Holdings, which owns the Pizza Express and Ask-branded restaurant chains. Restaurant Group was also helped by Goldman Sachs raising its target price for the company's stock to 170p from 160p. The shares closed at 146p, up 7.75p.

The defence and security technology group QinetiQ was up after UBS reiterated its "buy" recommendation for its stock. The company played host to investors and analysts at its MoD Boscombe Down in Salisbury yesterday. "The trip highlighted the long-term visibility for its UK MoD LTPA [Long-term partnering agreement] contract," said UBS. "Non-task services for LTPA make up £170m of annual revenue and are contracted for 20+ years. Tasks made up £90m of revenues in '07 and are growing." QinetiQ's share price rose 6p to 189.5p.

The energy company Drax fell 4p to 519p following a bearish note from Morgan Stanley, which downgraded Drax to "underweight" from "equal-weight", cutting its target price to 490p from 640p. "At current commodity prices, we estimate the shares are worth only 390p," the broker said, adding: "We prefer International Power, as we see a positive outlook in its merchant markets and good opportunities for growth in all contracted markets, and British Energy, as it benefits from high UK power prices without the downside risk from a high coal price environment."

On AIM, the software group Flomerics was also up after telling the market that Bluehone Investors, the fund management boutique, had sold its stake in the company to Oregon-based Mentor Graphics Corporation. News that Mentor, which picked up around 20 per cent of the company from another shareholder last week, paid 104p per share to take its stake up beyond 26 per cent lifted Flomerics 22p to 80p.