PRUDENTIAL proved the talking point among large caps as the company’s stockbroker suggested that it should merge its UK insurance operations with those of Resolution, its FTSE-100 rival.

With the Pru conducting a review of its UK insurance operations, UBS yesterday weighed in with its own deliberations. Roger Hill, analyst, says the most likely outcome is that the Pru, which has already announced cost-cutting measures at its first-half results, will opt for a slimmed-down UK business focused on annuities.

But Mr Hill raised eyebrows yesterday by suggesting that the Pru could sell the entire business to a third party for shares in an enlarged group, with such stock distributed to its shareholders, leaving it as a more focused play on international markets.

Although Mr Hill concedes it is not the only possible candidate, he cites Resolution, which already has a track record as a consolidator, as “the obvious partner”.

On the basis of UBS’s current £7 billion valuation of Pru’s UK operations — which exclude its Egg business — and Resolution’s £4.2 billion market capitalisation, Mr Hill calculates that Resolution could offer shares plus £2 billion in cash or debt, creating a £9.2 billion company that would be 55 per cent owned by Pru. Mr Hill helpfully even suggests a name: PruSolution. However, although UBS sees merit in such a link, if terms could be agreed, he puts the probability of it happening at just 20 per cent. Pru improved 3p to 640½p, with Resolution 2½p dearer at 619½p.

The FTSE 100 closed 10.9 points ahead at 6,166.1, with British Airways, 13p better at 462p, enjoying the best rise. Apart from an easing oil price, the flag carrier benefited from bullish noises on European airlines from Citigroup. The US broker is now using a forecast of $60 a barrel for Brent crude, down from $70 previously, which raises its average 2007 earnings forecast for European carriers by over 9 per cent.

Standard Chartered gained 39p to £14.64, on suggesestions that Istithmar, Dubai's state-owned investment group, could raise its stake to as much as 20 per cent, from 2.7 per cent currently. That move could renew hostilities with Temasek, the state-owned Singaporean investment vehicle which is Chartered’s biggest shareholder, with a 12 per cent stake. Last year, Temasek missed out to the Dubai fund in the battle to buy P&O, the ports operator.

Smith & Nephew put on 6¾p to 514p on a raised 575p target from Deutsche Bank. That increase followed strong third-quarter results from Stryker and Johnson & Johnson, its US orthopaedics rivals, which showed underlying quarter-on-quarter sales growth for reconstructive products of 9 per cent. On those grounds, Deutsche expects Zimmer, which files figures on Wednesday, and S&N, which reports on November 2, to tell of similar trends.

The broker kept earnings forecasts unchanged, but believes S&N’s shares could be due a rerating of between 10 per cent and 15 per cent.

Reckitt Benckiser firmed 14p to £22.00 ahead of today’s third-quarter results.

• NEW YORK: Shares on Wall Street extended their recent rally and the Dow Jones industrial average crossed 12,100 for the first time. The index closed at 12,116.90, up 114.50 points.

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