Shares in Paragon, the buy-to-let mortgage lender, soared by almost 31 per cent after it confirmed that it is in takeover talks.

While the company did not name its potential suitor, it is understood that it is in discussions with Blackstone, the US private equity group.

In a statement, Paragon said today it has “entered exploratory discussions with, and is providing certain due diligence access to, the parties concerned.”

While the group's shares closed up 26 p to 110p, they are still a long way off last year's price when they reached 760p and far from their 10-year peak of £12.04 in March 2006.

Paragon, which has a loan book of £10.4 billion, has been hit hard by the credit crunch as the cost of funding rose, squeezing profitability and restricting the amount of new business.

The company was the first UK mortgage lender to launch a rights issue to shore up its finances, raising £287 million in February.

Last week, in a trading update, the company indicated that profits for its third quarter had been in line with its first-half average, consistent with analysts' expectations, and also suggested that operating performance of its loan book remained positive.

Analysts suggested that an offer for the company could be pitched below fair value, with shareholders likely to prefer an immediate bid rather than risk waiting to see if the company recovers.

Justin Bates, an analyst at Daniel Stewart, suggested that bidders could make an opening offer of between 100p and 115p per share, valuing the company at between £299 million and £344 million, equating to a 44 to 51 per cent discount to its net asset value.

He added that he expected any buyer to use the company as a vehicle to write new business, particularly at a time when yields are rising for landlords.

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