Tullow Oil surged to a record high after Merrill Lynch said the explorer’s recent successes made it a takeover target.

Tullow has surged 34 per cent in a week on news from Ghana of the largest offshore find in its history. There was further good news on Monday, with drill partner Heritage Petroleum releasing reserve data from its Ugandan prospect significantly higher than Tullow’s own estimates.

Merrill analysts argued that the City was undervaluing the Ugandan field at about 100p per share. Using Heritage’s figures, it reached a valuation of 442p apiece – a figure it chose not to adopt without further drill information. However, using more cautious assumptions, the broker still saw consensus forecasts as too low by up to 50 per cent.

“The company’s M&A profile has been transformed, with Tullow now boasting relatively large equity stakes in two potentially world-scale developments,” Merrill told clients. Shares rose 57½p to 504½p as the broker set a 560p target.

The wider market erased an early rally ending barely changed, with the FTSE 100 index off 0.9 at 6,649.3. A weak Wall Street triggered by a rise in bond yields proved more unsettling than hawkish minutes from the Bank of England.

Lloyds TSB was the favourite subject in trading chatrooms, with rumours circulating that it could be a takeover target for Société Général. Lloyds peaked at 590p in early deals before slipping back to close ahead just 2p at 576½p as investors judged that the French bank, regularly mooted as a bid target itself, was unlikely to be keen on buying exposure to the UK retail market.

Other banking rumours looked to be more credible, albeit less exciting. HSBC rose 8½p to 933½p on speculation that it could be planning an offer for Alpha Bank, Greece’s second-largest lender. And Royal Bank of Scotland added 3p to 648p amid talk that it was poised to buy Sempra Commodities, the energy and metals trading arm of San Diego utility Sempra Energy.

Property stocks also attracted some hot money, with Hammerson ahead 13p at £15.16 on renewed talk of interest from a US real estate trust.

Segro, known until recently as Slough Estates, gained 1½p at 772p having traded as high as 687½p at the open. Shares have rallied from a nine-month low over the past couple of weeks as speculation revived that the real estate developer could be a target for either British Land, off 17p at £13.83, or Dubai investor Economic Zones World. Yesterday’s tale was that the pair could work together to carve Segro up.

Miners were helped by rising metals markets and a Goldman Sachs note raising metals price forecasts. Vedanta was the top performer, up 53p at £16.24.

Man Group firmed 13½p at 625½p after reporting another strong week for its flagship hedge fund, which is up 15 per cent over the past 12 months. As well as boosting performance fees, the performance should give marketing of new products a lift, analysts said.

Supermarkets were under pressure after J Sainsbury followed Tesco in reporting disappointing quarterly sales and a tougher outlook. Analysts at JPMorgan saw this as evidence not only that consumer spending on nonfood items has slowed, but that grocery prices looked set to fall for the first time in more than a year.

“The inflation fillip the sector has enjoyed recently is about to end,” it said, advising clients to avoid all European food retailers. Tesco hit a three-month low, down 6½p at 428p, while Marks & Spencer lost 12p at 658p and Wm Morrison eased 8½p at 292¾p. Sainsbury’s, with attention focused on its shareholder register rather than its earnings, added 2½p at 583½p.

Among the mid-caps, Ladbrokes gained 5½p at 439½p as theories about a private equity buyer refused to die down. Vague bid speculation also lifted the oil services firm Wood Group by 6½p to 323½p.

- New York:A surge in Treasury yields rattled Wall Street, forcing stocks to give up early gains and drive down the Dow Jones industrial average. At the close, the Dow was down 146.00 points at 13,489.40.

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