FKI bid torque tightens a notch

Bid speculation gripped the engineering sector yesterday, with FTSE 250 conglomerate FKI being the main beneficiary.

FKI's shares shot up 14% before settling 6.75p - or 5% - higher at 137p as rumours of a takeover approach from a private equity group circulated.

Analysts were not surprised by the tittle-tattle, given the backdrop; yesterday Novar - up 5p to 151p - received a £625m offer from Melrose - off 2p at 130.5p, and a couple of weeks ago American group UTC made a move for fire protection group Kidde, which remained unchanged at 165p.

Given the cash-generative nature of its five main operations and the potential to sell-off non-core operations, there is little doubt that FKI is an attractive acquisition target for a venture capitalist, even with debts of about £350m. FKI's market capitalisation last night was £800m.

However, this strong performance also owed something to fundamentals. On Wednesday, Fenner, the world leader in conveyor belts, announced full-year results that showed there had been a significant improvement in its US industrial markets in the second half of the year.

According to sector watchers this is good news for FKI's material handling business, Logistex, which makes postal and airport baggage systems. Logistex produced about 30% of group sales last year. But margins are around 3%, and any pick-up in US demand will see that figure improve. Analysts note margins at Logistex have been as high as 10%.

In the wider market, leading shares closed at their highest since June 2002, when the FTSE 100 was trading at more than 5,000. Supported by another drop in the oil price and the growing conviction that interest rates, in the UK at least, have peaked, the FTSE 100 ended 42.4 points up at 4,776.9, with telecommunications leading the advance.

BT gained 6p to 199.25p after second-quarter results topped expectations, while Cable & Wireless rose 3.25p to 119.25p as brokers upgraded in the wake of Wednesday's impressive interims; mm02 climbed 3.25p to 107.5p.

However, the FTSE 250's Virgin Mobile, down 1.25p at 189p, failed to join the party after figures from its network provider, T-Mobile, suggested that trading has been tough for pre-pay operators. Virgin reports half-year figures next week.

The FTSE 250 advanced 40 points to 6,535.7 and the FTSE Small Cap index improved 8.2 points to 2,662.6. Market turnover was good, with about 3.2bn shares changing hands. That figure was swollen by heavy trading in Abbey National , up 16.5p to 639.5p on volume of 102m shares, ahead of its takeover by Banco Santander today.

In the bond market, the benchmark 10-year gilt closed at 102.390, yielding 4.693%.

Hays, now a focused recruitment firm, was the best-performing blue chip stock; its shares climbed 6.25p to 127.5p on talk that it is having trouble buying back stock.

Following the demerger of its mail business DX Services, 0.25p lighter at 306.75p, Hays started its buyback programme last Friday, purchasing 2m shares for cancellation. The company has said it will seek to buy back at least £200m of shares - the equivalent of 10% of the stock. But since Friday, shares have been hard to find; its brokers only managed to pick up 300,000 on Monday, 1m on Tuesday and just 144,861 on Wednesday.

Reuters, the news and financial information group, was another strong performer. Its shares were marked 12.25p higher at 389p after Deutsche Bank placed the stock on its European focus list.

Elsewhere life assurer Prudential gained 7.5p to 426p after revealing a 92% take-up for its controversial £1bn rights issue. The outstanding stock, some 27m shares, was quickly placed in the market by the company's broker at 419p.

Housebuilder Crest Nicholson was one of the top performers in the FTSE 250. Its shares rose 10.25p to 347p, lifted by takeover speculation after Heron International, the property group controlled by Gerald Ronson, declared the purchase of a further 1.5m shares, taking its holding to 23.4%.

Crest was also aided by its financial adviser, Swiss bank UBS, upgrading the stock to buy. Crest is due to issue a full-year trading update next week.

Luminar, the UK's largest nightclub firm, firmed 0.75p to 498p on talk that next week's interims will top expectations.

Close Brothers , up 2p to 695p, was again a talking point after Numis Securities said it had placed its profit forecasts under review. Analyst Justin Bates is concerned that proposals by the London Stock Exchange, unchanged at 387p, to extend its combined SETSmm trading system to small-cap stocks could hurt its market-making arm, Winterflood Securities. Last year Winterflood generated 28% of group operating profits, says Mr Bates.

Among small caps Severfield Rowen, which is providing the steel extrusions for Terminal 5 at Heathrow, gained 22.5p to 510p on rumours of a broker upgrade. Dart Group rose 15.5p to 311.5p on hopes it will be added to the Small Cap index at next month's review.

Lodore Resources, the shell company looking for deals in the oil and gas industry, made a strong debut. Placed at 5p, its shares closed at 10.25p.

Jarvis down in the dumps

Jarvis, the heavily indebted road, rail and construction group, sank further yesterday after its biggest shareholder revealed it had dumped most of a 25% holding following Monday's news of an £80m cash outflow and loss of a £260m schools project.

In a stock exchange filing, US vulture fund K Capital Partners revealed that it had sold a total of 34.5m shares - or 24% of the company - since Monday's warning.

Traders reckon that K Capital has lost around £14m from its investment in Jarvis, which it started to amass in May when it acquired a 12.7% stake of the company's previous biggest shareholder, fund management group M&G.

The fund then doubled its stake in July as the Jarvis share price fell below 25p on concerns that the company could go bust. Jarvis, 33p before Monday's warning, closed 2.5p lower at 10.5p.