Market Report: Imperial Tobacco shares light up on takeover talk

There's no stubbing out the takeover talk around Imperial Tobacco at the moment. The cigarette manufacturer, whose brands include Lambert & Butler, set a new, all-time high last night, after its share price once again lit up on suggestions its days of independence might be numbered.

Speculation has been rife for a while now that – with four companies currently dominating the European market – as the smallest of the bunch, Imperial was the most likely to be taken out. The idea was revived again yesterday by Deutsche Bank's Jonathan Fell after he argued that consolidation "makes powerful sense".

"We believe that it would make a lot of sense for both British American Tobacco and Japan Tobacco to boost their profitability in the EU via an increase in their scale," said the analyst, pointing out that their margins in the region are significantly lower than Imperial's.

One issue is that any deal would be likely to provoke major competition concerns, and Mr Fell argued that while a suitor acting on its own could make disposals to clear this hurdle, it was more likely that "two (or more) companies would team-up first to agree a split of Imperial's assets before making a bid".

He also cited the possibility of interest from China, saying that "if Chinese companies ever want serious exposure to international cigarette markets we think M&A may be their only option".

However, the analyst did urge some caution, adding he was "not arguing that a bid has to be imminent" and that – with the region hardly the most stable place economically at the moment – "acquirers may feel that this is not the ideal time to make a large EU acquisition".

Nonetheless, Imperial climbed 43p to 2,492p as traders claimed it was also being helped by its defensive qualities, although British American Tobacco could only creep up 3p to 3,148p.

It was not the only blue-chip stock whose takeover potential was in the spotlight. Vague bid rumours continued to swirl around Shire, with the drugs maker ticking up 7p to 2,300p, while Sainsbury's advance of 5.9p to 296p prompted the revival of tired speculation regarding its major shareholder Qatar Holdings.

However, dealers who had heard the tale umpteen times preferred to point to positive industry data earlier in the week as Tesco and Morrisons were lifted 2.3p to 320.3p and 3.4p to 295.7p respectively.

Overall, the FTSE 100 fell for a third-consecutive session, although a late rally meant it was once again a relatively minor move, with the top-tier index finishing just 6.78 points lower at 5,885.38.

The banks were hit in early trading by Moody's warning late on Wednesday that a number of the sector's biggest names could see their credit ratings downgraded. Nonetheless, by the bell Barclays was 3.25p better off at 244.9 and Lloyds ticked up 0.46p to 34.39p, although Royal Bank of Scotland was pegged back 0.24p to 26.75p.

Encouraging housing figures from across the Atlantic saw Wolseley – which is heavily exposed to the US – jump up 33p to 2,355p, with the world's biggest building supplies firm also helped by speculation a dividend increase may be on the cards.

Elsewhere, positive results from rival Nestlé meant the possibility of a break-up at Unilever was once again being mulled over. Saying the Swiss group's numbers showed "a stark contrast to Unilever's food performance", Liberum Capital's analysts suggested the Marmite-owner – which finished 15p higher at 2,070p – should "break the company into two divisions... and get full value for its robust HPC unit".

Amid further Greek uncertainty, many commodity stocks were in the red, with steel producer Evraz dipping 15.5p to 420.8p to finish bottom of the Footsie.

However, Swiss miner Xstrata was a mere 2.5p lower at 1,177p as vague speculation persisted that Glencore (up 4.6p to 426.6p) could soon respond to shareholder pressure and improve the terms of their merger deal, although traders played the talk down.

The biggest move among the diggers was suffered by Talvivaara, which slumped 14.45 per cent to 281.9p on the FTSE 250 after revealing it was issuing nearly 25m new shares at a discounted price of 280p a pop.

Elsewhere, Misys – which is set to merge with Swiss peer Temenos – climbed 9p to 314p as talk of a possible counter-bid refused to go away, with the latest speculation claiming there could be a potential 400p a share approach by private equity.

Xcite Energy continued its remarkable week, with the North Sea explorer now having added more than 40 per cent since Monday. Its latest move saw it advance 35p to 165p on AIM amid hopes good news could be on its way regarding its Bentley field, which is awaiting clearance from the Department of Energy and Climate Change for the first stage of development.