Speculators circle Whitbread

Rumours of a break-up for Whitbread, the leisure conglomerate that owns the Premier Lodge hotel chain and Costa Coffee, resurfaced yesterday after some unusual activity in the options market.

According to traders, City speculators were snapping up Whitbread out-of-the-money call options - something they would only do if they believed the underlying stock was about to enjoy a big run.

Several private equity groups have been linked to a bid for Whitbread over recent months. The last whisper was that the billionaire Reuben Brothers and the Swiss bank UBS had been crunching the numbers on a possible break-up bid.

In order to prevent that happening, and to keep the City happy, Whitbread has been returning large chunks of cash to shareholders; £400m has already been paid via a special dividend and earlier this month Chris Rogers, finance director, announced plans to buy back £400m worth of shares over the next two years - £150m more than previously envisaged. However, such moves might not be enough to ward off a bid, especially as the conglomerate structure of Whitbread lends itself to a break-up.

Whitbread closed 7p higher at 948.5p, valuing the company at £2.4bn.

In the wider market, leading shares closed higher, lifted by slim gains on Wall Street and a good performance from the heavyweight telecoms stock Vodafone. Its shares rose 2.5p to 152.5p after US bank Morgan Stanley said next week's analyst day should be positive.

The final scores showed the FTSE 100 up 9.4 points at 5,347.4, with Next the top performer, rising 38p to £14.90 as traders closed their short positions ahead of this morning's half-year figures. This time last year, short-sellers were left nursing badly burned fingers after Next surprised the market with a better-than-expected set of numbers.

Elsewhere, the FTSE 250 climbed 29.8 points to 7,863.1, while the FTSE Small Cap index eased 1.1 points to 3,130.5. In the bond market, the 10-year gilt closed around 104.630, yielding 4.178%.

Back among the blue chips, the cigarette maker British American Tobacco improved 17p to £11.72 after another push from the US bank JP Morgan. The analyst Michael Smith expects US appeal court rulings on the Engle and the Price class-action lawsuits to go in the industry's favour. "Resolving these two claims would leave only the department of justice case as a significant concern, a case which we see as likely to be settled before the end of 2005, with the costs passed through to the smoker in a modest price-per-pack increase," he said.

The building materials group Wolseley, 13p stronger at £11.63, was also in demand after Citigroup Smith Barney predicted further growth in the US construction market. But HBOS fell 11p to 849p as technical analysts warned that the stock had broken a key support level and could now fall by 50p-60p.

MFI was the FTSE 250's standout feature as its shares closed above the level at which they were trading before last week's massive profits warning. The word in the City's dealing rooms was that several big shareholders have told John Hancock, the furniture group's chief executive, that he must unlock the value of its Howden joinery business. MFI shares rose 5.5p to 121p.

Elsewhere, rumours of a 435p-a-share bid saw Laird Group, the mobile phone handset antennae specialist, which reported solid half-year figures on Tuesday, rise 19.75p to 364.75p - a year high. The stock was also supported by a UBS "buy" recommendation and a raised target price of 420p. GCap Media eased 2p to 293p after the same broker said it would be prudent for the radio company to cut its dividend.

Among the small caps, oil and gas exploration company Regal Petroleum was one of the main talking points. Its shares fell 8p to 126.5p amid talk that private investors were being forced to sell stock after margin requirements on their CFD positions had been increased by a nervous US spread-betting house.

Regal shares have endured a torrid time this month. They have fallen 40% following a profits warning and more recently after claims, which have been vigorously denied by the company, that it does not own its Ukrainian gas project, which is arguably its only valuable asset.

Regal was not the only stock to be hit by forced selling yesterday. Computer games company SCi Entertainment, down 8.75p to 477.5p; serviced office group Regus, off 1.25p at 97.75p; and software developer Innovation Group, 1.75p cheaper at 27.75p, all suffered as the same spread-betting house increased margin requirements.

Pursuit Dynamics, the fluid-processing firm, bucked the trend. Its shares, which hit 244.5p early on, bounced back to close 3.5p higher at 253.5p thanks to rumours that the firm will announce a big oil industry contract.

Elsewhere, the online payment group Neteller fell 48.5p to 790.5p amid talk of Morgan Stanley placing 2.7m shares at 785p for a US client, while Actif Group, which owns the licence for Elle clothing, rose 0.37p to 2.87p after value investor Peter Gyllenhammer announced an 8.6% stake. Finally, vague merger rumours saw the biotech company Pharmagene hold steady at 24p.