Market Report: Redrow gains as merger rumour strikes builders

The market rumour mill was in overdrive around Redrow, the housebuilder, which swung to a session high of 242p, up almost 20 per cent, yesterday.

Traders said the prospect of a merger between HBOS and Lloyds TSB had sparked talk of similar activity in housing issues, which, like their peers in the banking sector, have registered heavy losses since the onset of the credit crunch.

"Everyone is trying to find the next deal, and Redrow is in focus because of rumours of a merger with Barratt Developments," said one trader, highlighting the weakness in Barratt, which was down 7.55 per cent, or 10p, at 122.5p.

The sceptics played down the speculation, attributing the surge to the takeover rumours around Washington Mutual, the troubled Seattle-based savings-and-loans giant. Tosca Fund, the London based-hedge fund which is Redrow's single biggest share holder with around 27 per cent of the company, owns 6 per cent of the American bank.

Recent concern about WaMu's health had hit Redrow as the market worried about the impact on the company's largest shareholder. Hopes of a takeover of WaMu, it was said, had put those fears to rest.

A third theory suggested that, instead of a possible takeover by Barratt, or a possible takeover of WaMu, the surge was down to Lehman Brothers, which had a long position in the house builder. Traders speculated that Lehman had called in any Redrow stock lent out to short sellers, who had been forced to close their positions.

One trader said: "If this is because of Lehman, Redrow should fall back in the next few days as the shares are sold back into the market."

The talk kept Redrow firm throughout the day and at close, it was up 8.37per cent or 17p at 220p.

The FTSE 100 closed below the 5,000-point mark for the first time in more than three years, down 113.2, or 2.3 per cent, at 4,912.4. The FTSE 250 was also weak, down 99.3, or 1.2 per cent, at 8,309.8. The market dived in the final hours of trading following early losses on Wall Street, where leading financial stocks slumped after a spike in the inter-bank lending rate.

HBOS was the weakest on the senior index, down 19.18 per cent or 34.9p at 147.1p, as the market awaited the outcome of merger discussions with Lloyds TSB, which was flat at 279.75p. "The shares reflect the nervousness about the deal, because we have few details and also the belief that HBOS will be sold at a significant discount to its price last week," said one market source, adding: "If it happens, it [the deal] will go a long way in removing uncertainty from the sector."

Barclays was up 3.17 per cent or 9.75p at 3,17.75p after confirming plans to acquire Lehman's North American investment banking and capital markets businesses. The deal, which will be funded via a £600m issue, was welcomed by Cazenove, which said: "This acquisition has the potential to be transformational for Barclays.

"The risks of the transaction are substantially lower than if an entire business had been acquired."

Elsewhere, parts of the mining sector rebounded as investors went bargain hunting and Ferrexpo was up 6.9p, to 168.2p, and Lonmin gained 91p, to 2,633p. Anglo American, at 2,049, was down 209p as traders dismissed rumours of a possible approach from Vale, the Brazilian mining giant.

UBS raised its target price to 1,100p from 1,085p for Admiral, the insurance group which gained 2p to 859.5p.

On the second tier, DSG International was up 5.56 per cent, or 2.75p, at 52.25p following market rumours of a possible capital injection from private equity investors. There was also speculation, mentioned before, of a possible sale of the company's European units.

Positive broker comment from Cazenove took Inmarsat to 477.25p, up 22.5p. Highlighting the recent weakness in shares, the broker said: "We believe this has left Inmarsat looking very attractive again in valuation terms.

"The company should be seen as defensive in terms of exposure to the macro economy and is a geared play on the US dollar."

Among smaller companies, Highland Gold Mining gained 61.47 per cent, 1,6.75p, to 44p after announcing a change in the chief executive's suite: Valery Oif, who was nominated by Roman Abramovich's Millhouse investment vehicle, has taken over from Henry Horne, who will stay as a full-time adviser to the company until February 2009.

Fellow gold miners Randgold Resources, up 138p, 7.67 per cent, to 1,938p, and Avocet, up 16 per cent, or 16p, to 116p, were also firm.

Arbuthnot, which published a note on the sub sector earlier this week, maintains a "buy" rating on both. "We believe the downside is already priced in and that now is a good time to buy gold stocks," said analyst Tim Dudley.