Marks & Spencer shares were in demand on word its board briefed a City bank about robust sales and a plan to capture more of the groceries market. Takeover speculation lifted Shire, while both Reckitt Benckiser and Xstrata rallied as their own expensive acquisition plans went askew.
Overall, though, Britain's top stocks struggled to make much headway.
The FTSE 100 Index closed lower by 10.9 at 5681.2, breaking a five-session winning streak. The broader FTSE 250 inched up 1.9 to 9197.1, aided by De Vere bid news and a broker tip on Quintain Estates.
Across the Atlantic, mining sector merger news helped the Dow Jones Industrial Average edge up 15 to 11004 -- recouping about half of Friday's decline.
World markets are expected to be stuck in a holding pattern until at least Thursday night, when a United States interest rate decision is due. Everyone forecasts the Federal Reserve to hike by a quarter point, to 5.25 per cent, and deliver a statement signalling that further increases may be needed to fight inflation.
For an overview of world markets, click here.
Marks & Spencer headed the FTSE leaderboard, up 12p to 578p after its senior management gave an briefing to French investment bank SocGen ahead of a first half trading update due July 11. The meeting led SocGen to believe that M&S is trading well, and may be ready to remortgage some of its property early next year.
"There is every indication that (the first quarter) trading will exceed market expectations in both general merchandise and food, albeit against easy comparatives," the broker's team told clients. "We understand the summer sale will start one week later this year, on Thursday, 20 July. This augurs well for both sales growth and margins in Q1. Further out, a series of initiatives are building a platform for sustainable growth over the medium term."
SocGen reported that M&S's sales momentum is "gathering pace", led by womenswear, and that there are some encouraging signs in "problematic" childrenswear thanks to a new girls' range.
For food, M&S management reportedly sees scope to grow its market share to 5 per cent, from 3.8 per cent currently. That would entail opening between 400 and 600 new stores -- either in the standalone Simply Food format, or as part of BP forecourts. Management also talked about doubling the size of the Home business to a £1 billion unit, following an overhaul of the range and pricing.
SocGen added that M&S could offer "clarification" of the property strategy in the final fiscal quarter. "We anticipate a partial securitisation of the £4 billion assets to unlock capital and improve returns," the broker told clients. It repeated "buy" advice.
Track M&S shares here.
Shire, the maker of hyperactivity and attention deficit treatments, climbed 16p to 770.5p to lead the blue chips on speculation that Switzerland's Serono could be planning a £5.5 billion offer for the group. Neither company would comment.
"We believe Shire is in a good position in any potential takeout discussion, although the company expressed more interest in acquisitions rather than being acquired," wrote analysts at JP Morgan.
The broker's team calculated that, if Shire were to be bought at its 52-week high of 945p, it would be 5 per cent dilutive to Serono's earnings excluding any possible cost savings. Every additional 5 per cent premium would represent a further 2 per cent dilution, it said in a clients' note.
For detailed information on Shire, click here.
Cillit Bang maker Reckitt Benckiser added 26p to £19.22 after it lost out to Johnson & Johnson for Pfizer's over-the-counter medicines business. The US group was named the winner in an auction for Pfizer Consumer Healthcare with a bid of over $16 billion, topping offers from Reckitt and GlaxoSmithKline (down 12p at £14.74).
For detailed information on Reckitt, click here.
Miners climbed after Phelps Dodge agreed a combined $40 billion takeover of Canada's Inco and Falconbridge, potentially creating the world's third-largest miner with a $58 billion market capitalisation. The latter pair had agreed in October to combine their operations, and had both been approached independently by rival bidders.
Xstrata, which launched a hostile takeover for Falconbridge in May, was ahead 17p to £19.55.
Phelps agreed to pay a 23 per cent premium on Inco’s share price as of Friday, and a 19 per cent premium on the hostile Teck Cominco offer for Inco. It also trumped Xstrata's Falconbridge offer by 18 per cent.
If Xstrata to match the Phelps bid it could still build a deal that would boost earnings per share by 10 per cent, according to analysis from UBS. The Swiss firm's cash offer could also be the more attractive to shareholders than Phelps' bid, which will give them cash and an equity stub in the enlarged group.
UBS's main concern was whether Xstrata could match Phelps's price tag and make the deal accretive to its net present value, given Xstrata's synergy estimates are the more conservative of the two.
Other specialist metals stocks were buoyed by the news, with platinum miner Lonmin up 47p to £27.46 and copper firm Antofagasta gaining 6p to 406p.
A weaker rand also helped the miners, many of whom book costs in the South African currency and sell their output for dollars. The rand has tumbled to its lowest level since January 2004 after official data released Thursday showed South Africa's current account gap widening to 6.4 per cent of gross domestic product, a 24-year record.
BHP Billiton was ahead 3p to 997p and Anglo American added 30p to £21.38. Every 10 per cent change in the rand moved their earnings per share by 1 per cent and 7 per cent respectively, according to analysis from UBS.
The currency moves had the opposite effect for SABMiller, which sells beer for rand and books the profit in dollars. Shares fell 37p to 923p, the FTSE 100's worst performer.
Track today's trading by industry sector here.
Corus drifted 2.25p to 428.5p even after European rival Arcelor accepted a $32.2 billion bid from Mittal Steel. While analysts saw the merger as the next stage in a ten year cycle of industry consolidation, some argued that the UK firm may not be obvious prey and will need to find its own emerging markets partner.
"There is some $60 billion on the global steelmakers’ balance sheet to spend in cash. This could acquire circa 8-10 per cent of the global asset base even before possible further equity deals," Credit Suisse told clients.
According to industry analysts, Corus could now look at merging with Russia's Severstal, which was courted by Arcelor management before Mittal made its knockout offer. The UK company has also been rumoured to be talking to Everaz, a story Russia's biggest steel producer has denied.
"Severstal has proved it is both willing and able to enter some form of merger transaction with a western steel producer," said Credit Suisse, which reckoned Severstal would be a better geographic fit for Corus than Everaz. "Corus has said for some time it would like links with low cost assets, and would be prepared to use its equity and London listing to facilitate any such tie up in the future."
For more on Mittal's Arcelor deal, click here.
National Grid faded 3.5p to 596.5p after the energy regulator Ofgem released its initial transmission proposals starting April 2007. The headline was a proposal that Ofgem would demand real price cuts of 2.5 per cent from National Grid, 15 per cent for Scottish Power and 4 per cent for Scottish & Southern Energy.
Ofgem said it would allow a cost of capital at 4.8 per cent after tax, compared with 4.8 per cent currently. It also specified that National Grid could only recover £279 million of its £831m pension deficit through customer bills.
Dresdner Kleinwort Wasserstein analysts, who had been forecasting an cost of capital at 4.6 per cent, said that decision could reduce its sum-of-the-parts estimate for National Grid by about £200 million, or 7p per share.
Moreover, Ofgem said it would block National Grid from including £358 million overspend on its gas transmission network in its regulatory asset value. If that decision stands, it would reduce DKW's sum-of-the-parts estimate by a further 13p, the broker said.
Updated proposals from Ofgem are expected by September 2006 with final proposals expected in early December 2006.
SSE was down 13p to £11.16 and Scottish Power lost 7.5p to 576p. UK gas and electricity transmission represents about a third of National Grid's asset base, compared with 7 per cent and 3 per cent respectively.
Read Ofgem's statement here.
Hotel operator De Vere firmed 33.5p to 848p, leading the FTSE 250 gainers after it agreed to a £723.5 million takeover from AHG Venice. Private equity firm Permira said it was considering a counterbid.
De Vere, which first announced it was in takeover talks on March 23, said the AHG Venice offer was worth 825p per share. Permira urged the hotelier’s shareholders to take no action on the AHG offer.
Read De Vere's statement here.
Stanley Leisure rose 7.5p to 642.5p after finally confirming it was in merger talks with fellow gaming operator London Clubs International to create a £700 million, 50 casino group. LCI shares ended unchanged at 107p.
Stanley said that the deal, if concluded, would work by a share-for-share exchange on the basis of 1 new Stanley share for every 6 London Clubs shares. The nil premium talks had been heavily rumoured and highly anticipated.
A merger would be aimed at creating a UK market leader with the scale to capitalise on the licences coming available from the 2005 industry deregulation. But there are few synergies beyond the cost of a few desks in head office: there is no national brand to roll out, and risk management has to be done on location inside the premises.
DKW estimated in an internal e-mail that the combined group is likely to end up with about 36 per cent of the UK casino market, or 28 per cent in London. But it noted competition issues in London, Manchester, Southend, Brighton and Blackpool, which could force the enlarged company into divestments.
The deal "potentially requires the bid premium to be stripped out of at least one company unless the market believes that the combined entity will then be a more attractive vehicle, noted DKW. But "multiples are already rich, synergies limited and it is possible the two companies would obtain more 2005 licences independently," it said..
For The Times' story about the merger, click here.
In the small caps, ISoft took on 2.5p to 88.5p after the Sunday Times picked up on last week's rumour that BT could make a bid for knackered health-care software provider.
BT, the largest IT services partner on the NHS's £12.4 billion Connecting for Health programme, has been reported in the trade press to be close to switching its clinical software subcontractor in London -- replacing IDX with Cerner. Meanwhile, ISoft is providing IT upgrades in two English regions, working with US partners Computer Sciences Corp and Accenture.
"While we can never say never, we think that such a move is unlikely," said ABN Amro. "With a review of its software partners underway, speculation regarding BT and ISoft is perhaps inevitable. However, If BT buys ISoft we believe that it would create a significant conflict of interest that is likely to hinder existing customer relationships."
ABN saw Acenture being especially concerned that BT may end up monopolising the key iSOFT resources. This may to lead to significant revenue disruption, particularly if Accenture walks away," it said.
ABN rated ISoft shares at around 28p on a standalone basis.
Read the Sunday Times story on ISoft and BT here.
On broker watch:
Citigroup started Debenhams with a "buy" stance and 220p target.
Lehman Brothers strategists cut the UK banking sector to "negative" from "neutral".
Deutsche Bank lifted Group 4 Securicor to "buy" from "hold".
Cazenove started coverage of Carphone Warehouse with an "underperform" rating.
And Merrill Lynch moved Quintain Estates to "buy" from "neutral".
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