With their appetites whetted by a £7.5bn bid approach for industrial gases group BOC, speculators were casting around for potential takeover targets yesterday. EMI emerged as one of their favourites after a broking house with close links to the music group put forward the case for a merger with a US rival.
Reiterating its buy recommendation, Deutsche Bank, which is one of EMI's three corporate brokers, said a deal with Warner Music made a huge amount of sense. "EMI and Warner Music seems to us the likely end game in music industry consolidation and has compelling strategic and economic logic, mainly stemming from cost savings," analyst Paul Reynolds said in a 38-page research note that landed on clients' desks yesterday.
Mr Reynolds estimates that synergies from a merger with Warner Music would be worth an extra 58p on the EMI price. If a deal is not possible because of regulatory constraints, he believes EMI could generate value for investors by selling its music publishing division and using the proceeds to reduce debt and then buy shares back. He estimates this would lift earnings by 26% and leave EMI trading on a prospective price earnings ratio of 10 - a 33% discount to peers. EMI shares closed 7.25p higher at 255p - one of the biggest risers in the FTSE 250.
The bid for BOC failed to inspire the wider market which closed lower. Weighed down by further weakness in Vodafone, which fell 3.75p to 117.75p after its trading update failed to impress, and a poor performance from the heavyweight banking sector, the FTSE 100 came to rest 27.1 points lower at 5633.8 - its third consecutive session of losses.
Elsewhere the picture was brighter. Inspired by EMI and speciality chemicals company Yule Catto, which rose 13.5p to 261.5p on the back of the BOC bid, the FTSE 250 came to rest 14.6 points higher at 8929, while the FTSE Small Cap index improved 10.2 points to 3416.1.
Market turnover reached 3.3bn shares with Vodafone accounting for 25% of that total.
PartyGaming, which is due to issue a fourth-quarter trading statement on Friday, climbed 9p to 149p after small cap rival Empire Online, up 13.5p to 100p, said it was confident of achieving analysts' forecasts for 2006.
InterContinental Hotels Group was also in demand, rising 16p to 847p after Merrill Lynch predicted the company would return a further £500m to shareholders in the second quarter.
Insurance group Aviva eased 5.5p to 702p after Morgan Stanley maintained its equal-weight rating on the stock citing acquisition concerns. "Whatever the merits of current press speculation about a link-up between Aviva and Prudential, a large scale transaction could be a mechanism by which Aviva addresses its strategic issues (lack of growth)," the US broker said.
Elsewhere, Kingfisher, owner of the B&Q DIY chain, faded 1.75p to 233.75p despite the purchase of 60,000 shares by its chairman designate Peter Jackson.
Away from the blue chips, spread betting group IG Index fell 7.25p to 181.75p after CVC Capital Partners, a pre-flotation backer of the company, took advantage of recent share price strength to offload 37.6m shares at 184p each. IG shares hit a record high last week.
Corus, the Anglo-Dutch steel maker, firmed 0.25p to 61.75p on hopes that Germany's Thyssen Krupp will turn its attention to Corus now it has decided not to raise its offer for Dofasco.
George Wimpey improved 7.25p to 490.75p after Mark Pain, the new finance director of Barratt Developments, 14p stronger at 961.5p, said his intention was to push the company into the FTSE 100. With a market capitalisation of £2.3bn, traders believe the only way he can do this is via an acquisition of a rival such as George Wimpey.
Among the small caps, nCipher, the IT security specialist, was among the standout features. Its shares advanced 31p to 251.5p after the company confirmed Monday's rumours and admitted a takeover approach. Julian Tolley, analyst at Dawnay, Day Townsley, reckons a fair exit price for nCipher would be something north of 300p a share.
Lambert Howarth, the biggest supplier of shoes to M&S, eased 5.75p to 194.5p on reports that it faces a shareholder revolt because its chief executive, Garry Hogarth, sold stock worth £3m seven weeks before a profits warning. In light of the report, traders said it was interesting to note the appearance of North Atlantic Value, the activist investment vehicle run by Christopher Mills, on the Lambert Howarth share register with a 3.1% stake. This could be bad news for Mr Hogarth. Mr Mills effectively engineered the departure of Ian Gowrie-Smith from SkyePharma, down 2p at 43.5p, and recently put construction group MJ Glesson, 7p weaker at 362.5p, into play.
European Motor Holdings firmed 2.5p to 352.75p after serial stake builder Jack Petchey declared an increased holding of 12.4%. Metals Exploration eased 1.5p to 33p despite talk that it is set to announce a joint venture with an Australian company that will enable fast track development of its Masapelid project in the Philippines. Regal Petroleum firmed 1p to 115.5p after former chairman Frank Timis announced an increased holding of 8.85%.
Compass on the turn
Contract catering group Compass was under pressure yesterday as the highly rated support services team at Dresdner Kleinwort Wasserstein said its recent strong run had left the shares looking overvalued. Compass has outperformed the wider market by 3% since the start of the year, a performance the broker attributes to increased confidence in the company's long-term strategy and hopes that a bid battle will develop for its travel catering arm, SSP. However, Dresdner believes the stock looks expensive because of several operational and financial uncertainties, which include the weakening dollar, fallout from the UN investigation into procurements practices and the risk of a dividend cut. With Dresdner downgrading to sell, Compass shares fell 3.5p to 230p.