Heavy trading lifts Barclays as markets bet on Citigroup bid

Shares in Barclays, the UK's third largest bank, surged by as much as 12 per cent yesterday, as market rumours of a potential 700p a share bid from Citigroup, the US banking giant, swept the City.

Rumours of a bid have been doing the rounds among brokers for most of the week. However, a report published by the share trader website, www.mergermarket.com, yesterday morning sent the share price into overdrive.

Before 9am, Barclays shares had reached 535p, a 12 per cent rise for the day, and a 23 per cent rise since the stock hit 11-month lows of 434p at the end of last month. However, the stock came back sharply later in the day as questions about the likelihood of a bid began to surface.

The shares closed at 500p, up 18.75p, giving the company a market value of £32.4bn.

Speculation over takeovers in the UK banking sector has been rife since Santander Central Hispano, Spain's biggest bank, confirmed two weeks ago it was making an offer for Abbey National. Rumours have also been circulating at the smaller end of the UK banking sector, that Northern Rock may make a bid for Bradford & Bingley.

While many analysts were quick to dismiss the likelihood of an imminent bid for Barclays, others pointed out that Citigroup has been on the hunt for a European acquisition and that Barclays would be the best UK fit.

Guy de Blonay, the manager of New Star Asset Management's financial fund, said: "The US banks have a lot of cash, and they want to diversify into Europe. Abbey National was the trigger and Barclays and Lloyds TSB are on the cards to be looked at by some of the gigantic operators from outside Europe."

Two days ago, as Barclays announced its interim results, John Varley, the deputy chief executive made a convincing speech to analysts and the media, arguing that Barclays had the "self-confidence" to remain independent. Analysts who remained unconvinced of a bid in the pipeline highlighted that Matt Barrett, the group's flamboyant chief executive, is now on holiday.

Dealers also pointed out that Barclays bought back some of its shares only yesterday, a move it would have been unable to carry out without making a statement, if it was in talks over a potential bid. Analysts said the chances of Citigroup going hostile were very slim.

One explanation offered for the potential red-herring rumour was that hedge funds had started talks of a bid in the hope of making some short-term gains on the stock. However, several hedge funds were yesterday closing short positions on Barclays' stock in the belief that, even if there is no bid yet, there is likely to be one imminently.