Market Report: Surge in Pennon as hopes of Spanish bid build

There are certainly more glamorous businesses in the UK than water and waste management, but Pennon shareholders have been well rewarded over the past couple of years as the share price has more than doubled since January 2004.

Traders say Pennon's business has attracted the interest of foreign investors on more than one occasion, and the name now in the frame is Grupo FCC, a Spanish construction and utility services group with a market capitalisation of more than €8bn (£5.6bn). Like Grupo Ferrovial, the Spanish group leading a consortium of bidders trying to buy the airport operator BAA, FCC's main business is construction.

According to market rumours, FCC began talking with Pennon at the end of last year but an informal approach led to nothing. The two are thought to be talking again, with FCC now thinking about bidding for all of Pennon rather than just its waste business, which accounted for 21 per cent of last year's profit. Goldman Sachs is thought to be advising FCC.

One trader said: "Pennon is unlikely to entertain offers for the waste business on its own. Unregulated business is driving growth and FCC may have to take the water business on board as well if it is to make the deal happen, but that may restrict the price. FCC is not likely to want to pay more than 1,450p for Pennon." Shares in Pennon closed 31p better at 1,354p on good volume.

Its fellow water utility Severn Trent led the FTSE 100 risers, closing up 71p at 1,197p as it confirmed it would float off its own waste business, Biffa. The broker Merrill Lynch said Biffa could be worth up to £1.25bn, putting it well into the FTSE 250 when it comes to the market.

The defence contractor BAE Systems was a beneficiary of positive market chat as traders speculated that Saudi Arabia is poised to confirm an order for the Eurofighter, a deal which could be worth as much as £1bn per year for BAE. The heavyweight US broker Morgan Stanley was also positive on the implications of consolidation in the UK shipbuilding industry for BAE, saying in a note to clients that a share in Babcock and VT Group could add 2 per cent to BAE earnings and substantially increase margins across its shipbuilding operations. BAE was 15.5p better at 439.25p, while Babcock was up 0.25p at 313p and VT Group firmed 5p to 456p.

Yet again the FTSE 100 was unable to hold on to the previous day's gains, with traders seeing little point in pushing the market significantly higher. The London market spent the whole session in negative territory and was just able to hold on to the 6,000 mark as it closed 19.6 lower at 6,004.7 after a quiet Wall Street opening failed to inspire buyers.

Leading the fallers was Tate & Lyle, as the US consumer group Citizens for Health said it would push for the FDA to take another look at Splenda, Tate's low-calorie sugar alternative. The news has come after a forgettable couple of weeks for Tate, and with a market capitalisation of £2.7bn its coveted FTSE 100 place is also up for grabs if there is no change in fortune before the next index committee meeting. The shares fell 11p to 564.5p.

Traders continued to push Kazakhmys higher as the stock added another 64.5p at 1,181p. One trader said: "The strength in this stock is an indication that many people believe the commodities market bull run is far from over. Global macroeconomics and developing markets are driving mining stocks higher and this run could have plenty left in it. Any sell-off is a buying opportunity."

Housebuilding stocks were in demand again as the retirement homes group McCarthy & Stone was subject to vague bid speculation. The stock is a niche player in a market that remains ripe for consolidation, and added 19.5p to 820p.

Smaller mining stocks have been a bit left behind by the surge in the large caps, but there was a raft of good news stories in the sector for traders feeling brave enough to get stuck into. Thor Mining added 0.25p to 4p as it confirmed it would start a feasibility study on its MolyHil tungsten and molybdenum projects in the Northern Territory of Australia, due for completion in December. Copper Resources was well bid, adding 8.5p to 99.5p as dealers reported US hedge funds buying the stock aggressively. A statement released after the market shut confirmed improved reserves at its Kinsenda Project. Finally, Zambezi Resources closed a penny firmer at 16p. Initial drilling results indicate the potential for sulphide bodies at its Cheowa copper and gold project in Zambia.

Competition for the National Lottery is about to become serious, with traders saying Chariot Lottery is due to start advertising on 17 April. Traders have been buying the stock since it came to the market at 115p in early February, and talk of a marketing and advertising campaign sent the stock 9p higher to 191.5p.