Market Report: DS Smith offers paper profits as bid talk returns

PAPER GROUP David S Smith wrapped up an impressive performance yesterday amid strong talk of a bid.

The shares jumped more than 6 per cent to close 8.5p higher at 141p in pretty hefty volume as whispers of a strike returned.

The boys in dark glasses were convinced that after months of on-off speculation, DS Smith is about to fall to a predator. They pointed to a cash-rich group in the US, where paper stocks have been rocketing, as a possible bidder, but did not rule out the arrival of a UK or European player.

A takeover of DS Smith at a tasty premium to the current price would no doubt please its long-suffering shareholders, which include the active investor PDFM. Shares in the paper group have been torn to shreds as low prices, lack of demand and the strong pound hammered the company's profits. This triple whammy sent the stock into freefall. Over the last 12 months, DS Smith has fallen from a peak of 220p, underperforming the market by a whopping 60 per cent, and shareholders must be looking for a way out.

The market was in buoyant form, putting together a nice little rally on the back of Wall Street. The FTSE 100 closed 81.4 higher at 6,484.8 after the Dow reacted well to a batch of interest rate-sensitive economic data.

The blue-chip index was also propped up by a flurry of takeover whispers. The rumour mill was given added grist by talk of major purchase of sterling in the foreign exchange markets. According to dealers, the buyer could be a major UK company eager to replenish its coffers ahead of a major deal.

The Lemsip maker Reckitt & Colman was again mentioned as a possible target. The stock rose 19.5p to 734.5p in good turnover. Unilever, up 3p to 587.25p after starting a round of City presentations, is still the favourite bidder, although Colgate of the US could also have a pop.

Another mooted big deal resurfaced. Shell flared 6.75p higher to 489.75p as traders pointed out that it could have bought pounds to bid for BG, up 3.5p to 385.75p. The oil group could also target Centrica, up 2.75p to an all-time high of 136.75p after HSBC upgraded to "add". BP Amoco, Shell's arch-rival, moved 23.5p higher to 1,165p, shrugging off suggestions of a European competition probe into its Arco acquisition.

In the bid-free zone, Rio Tinto soared 82.5p to 1,065.5p and Billiton jumped 11p to 211p as rising hopes of a pickup in metals demand prompted a leading broker to go positive on the stocks. Fellow miner Lonmin firmed 22.5p to 523.5p.

The Hong Kong bank Standard Chartered was well bid after a bullish note from Goldman Sachs and rose 51p to 1,122.5p. Goldman's optimism also helped Invensys to a 10.75p rise to 320p. Merrill Lynch is also a fan and is targeting 375p in the medium term.

Lloyds TSB cashed in a 16p advance to 857p after HSBC went bullish. The market is still expecting the bank to unveil a mega-deal.

Diageo frothed 25.5p higher to 697.5p after selling its Spanish brewery Cruzcampo to Heineken. ABN Amro likes the stock and believes that it is undervalued.

Profit-taking accounted for several FTSE 100 fallers. Vodafone shed 32p to 1,298p after hitting an all-time peak. The boys in the know still like the stock and expect a rebound soon. Catering giant Compass also ran into profit-taking and fell 10.5p to 646.5p.

Allied Zurich lost 11p to 759.5p on a meatier story. There are fears that the insurer might have been hit by the recent sell-off in the bond markets. A crisis meeting has apparently been called for the end of the month to take stock of the situation.

The smaller indices ended in positive territory, with the FTSE 250 closing 20.5 higher at 5817.5 and the SmallCap finishing up 6.1 to 2,608.9.

The oil explorers were excited by increased forecast for oil production and mutiple bid talk. Lasmo climbed 6.25p higher to 128p amid hopes that the French giant Elf could have a go if it fails to buy Norway's Saga.

If that does not happen, Lasmo is expected to complete its merger with Monument Oil & Gas, up 2.5p to 54.25p, very shortly, unleashing a wave of bullish notes.

An alternative story was that Elf might go for British Borneo, 5.5p better at 170p.

A recent positive recommendation on Enterprise Oil, 4p higher at 416p, also underpinned sentiment in the sector.

The logistics group Ocean delivered a 47.5p rise to 1,050p - an all-time high. Forthcoming results are expected to be very good and there is also some vague talk of corporate action. Pilkington rose 3.5p to 98p on continuing takeover speculation.

The predicted sell-off of its car hire business left the transport group Arriva 4p higher at 406p. Coca-Cola Beverages hit a sticky patch as fears over demand for the black stuff sent the stock 6.5p lower to 114.5p.

A profit warning from PC parts maker Datrontech unsettled rival computer services Computacentre, which fell 417.5p. Datrontech itself plunged 4p to 20p after saying that interim profits will be half of market expectations, currently at pounds 4m, due to poor demand in the PC market.

However, hard disk maker Calluna hardened 2.25p to 16.5p on optimism about Thursday's results.

The money-counting machine maker Money Controls added 21p to 142.5p after announcing a bid approach.

SEAQ VOLUME: 969.6m

SEAQ TRADES: 66,265

GILTS INDEX: N/A

THE UNREGULATED market, Ofex, is soon to be boosted by a tasty arrival. Lancaster Publications, the publisher of the UK edition of adult men's magazine Penthouse, is planning an pounds 8m float by the middle of the summer.

The company and its broker, Griffiths & Lamb, is seeking to raise pounds 1m before the listing.

The money will be used to improve the quality and content of the magazine in a bid to boost its circulation.

PRESTIGE Publishing, an Ofex-traded minnow, is about to be bought by a merchandising company.

The publisher is talking about a reverse takeover with an unnamed group of entrepreneurs. The bidder want to use Prestige - whose shares were suspended in November at 15.5p - as a springboard for a new venture; insiders believe they own rights to sell merchandise linked to a major entertainment brand and want a quoted vehicle to exploit them.