UK/Euro Financial Market Daily Evening Briefing 01-02-2006

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London

London shares close above 5,800 as M&A talk fuels banking rally

The FTSE 100 closed above the 5,800 level today as M&A talk once again provided strong support to the blue chip index, while reassuring results from Boeing and Time Warner pushed the DJIA higher, said dealers.

At the close of trade, the FTSE 100 was 41.3 points higher at 5,801.6, with the broader indices also in positive territory.

Volume was strong, with 3.6 bln shares changing hands in 361,566 deals.

In New York, US indices put in a mixed performance with strong quarterly earnings performances from Boeing and Time Warner countering a slump in the shares of Google as a shock tax payment hit profits.

The DJIA was up 30.7 points at 10,895.8, while the Nasdaq Composite dropped 6.13 to 2,299.69.

On the economic front, the ISM index fell to 54.8 in January from 55.6 in December. The consensus forecast of estimates was for the index to slip to 55.4.

Spending on US construction projects increased 1 pct in December, stronger than the 0.2 pct gain expected.

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Crude futures edged lower after the Energy Department reported a rise in crude inventories and a bigger-than-expected jump in gasoline stocks for the week ended January 27.

However, continued concern that exports out of oil-rich Iran could be disrupted by rising tensions between western nations and Iran relating to its nuclear program was putting a floor on any pullback in prices.

Crude for March delivery was last down 37 cents at 67.55 usd in New York trading.

Back in London, banking stocks surged on speculation that Wells Fargo of the US or BBVA of Spain are set to make a bid for high street bank Lloyds TSB.

"People are piling in, scared of missing the next takeover," one London based dealer said.

"There is talk of either BBVA or a large US bank making a bid at around 700 pence per share and with so many of these rumours coming true in the past few weeks, no-one is playing this one down," he added.

"Bear in mind it is now run by the Americans, so a US bidder is more likely," another dealer pointed out, referring to the recent appointment of Terri Dial as executive director of UK Retail Banking at Lloyds. Dial spent 28 years at Wells Fargo, most recently as head of Retail Banking Operations.

However, some analysts were sceptical of a deal.

"We think it is highly improbable," said Mark Thomas, UK banks analyst at Keefe Bruyette & Woods. "We don't think management wants to sell, and there are factors against each of the US banks named as possible bidders."

Lloyds jumped 25-1/2 pence to 535, Northern Rock was up 41 at 1,082, Standard Chartered took on 28 at 1,423 and Barclays rallied 13-1/2 pence to 614-1/2.

Fund management group Amvescap was lifted 8-1/2 pence to 522 as UBS raised its price target to 640 pence from 530.

UBS said it has increased its EPS forecasts for Amvescap following the Power Shares acquisition, adding that it is also more confident that management can deliver margin improvement.

Away from financials, mining stocks moved higher, supported by recent positive comments from UBS, with Rio Tinto set to release full year results tomorrow.

Rio rose 50 pence to 2,917, Xstrata was up 50 at 1,627 and BHP Billiton gained 11-1/2 pence to 1,050.

Back on the M&A front, shares in Unilever moved up 8 pence to 599 amid speculation that the Anglo-Dutch consumer products company is an attractive target for private equity bidders.

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While some traders see the sheer size of Unilever (market cap 17 bln stg) as a potential obstacle to a bid, others highlight the massive resources available to private equity bidders.

The attraction of Unilever appears to be that each of its assets could be sold in its own right, making a break-up by private equity a lucrative opportunity.

One trader at a London-based merger arbitrage brokerage said: "Credit spreads on Unilever's debt blew out this morning by 7 basis points; that is a significant move."

ITV spiked 3-1/4 pence to 111-1/2 as the credit derivatives team at Credit Suisse highlighted the likelihood of a private equity bid emerging for the UK commercial broadcasting group.

In a report to clients today, Credit Suisse argued that ITV's credit default swaps are currently pricing in very little leveraged buyout risk, yet the broker believes there is a strong chance of a private equity bid re-emerging, with a depressed share price providing a strong entry point.

According to Credit Suisse's estimates, a private equity bidder could make an offer of 140 pence per share for ITV and still achieve an acceptable internal rate of return of 18 pct for its investment.

On a more negative note, Cable & Wireless extended yesterday's sharp falls, sliding another 4-1/2 pence to 97-3/4.

Following yesterday's profit warning from the UK telecoms group, UBS cut its rating to 'reduce' from 'neutral', lowering its price target to 96 pence from 130. Credit Suisse downgraded the stock to 'neutral' from 'outperform', noting it sees potential downside to 90 pence.

Tesco dipped 3 pence to 315 amid vague speculation that the UK supermarket group was planning a major acquisition, with Ahold the rumoured target.

According to a trader at a French investment bank, there is talk that Tesco could be planning to team up with US private equity company Kohlberg Kravis Roberts (KKR) to bid for Ahold.

However, traders said Tesco subsequently denied the story to analysts at Citigroup Smith Barney.

Among the midcaps, GCAP Media dropped 6-1/2 pence to 246 as Morgan Stanley downgraded the stock to 'equal-weight' from 'overweight' with a reduced price target of 300 pence from 400.

Morgan Stanley attributed the downgrade to a cut in its forecasts to take account of lower revenues from the inventory cut, an ongoing hit to revenues from near-term poor listener trends, and extra XFM launch costs.

Finally, EMI Group rose 11-1/2 pence to 266 as rumours circulated once again about a merger with Warner Music Group.

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Diary of Events

For a diary of key UK financial events this week, click here

UK Small Cap Report

For a summary of today's trading on the smaller indices, please click here

Amsterdam

Amsterdam shares close higher led by Wall Street, takeover rumours

The AEX closed 5.20 points or 1.15 pct higher at 455.70 after trading in a range of 449.86-456.17. Government bonds traded lower while the euro stood at 1.2089 usd compared with 1.2142 usd yesterday.

Takeover rumours determined much of the day, with a dealer commenting that mergers and acquisitions-fever ruled today.

Index heavyweight Unilever buoyed the AEX. The stock closed up 2.08 pct to 58.95 eur, coming off earlier highs with 6.6 mln shares traded, after a UK newspaper speculated that the Anglo-Dutch company is a takeover target of multiple private equity funds.

More takeover rumours seeped into the market in the afternoon, this time surrounding Ahold. The stock surged 4.57 pct to 6.64 eur amid speculation the UK's Tesco and the US private equity fund KKR were preparing bids on Ahold's US and European operations.

Hagemeyer led gainers, jumping 6.14 pct to 3.11 eur, amid investor bullishness that was initially triggered by an upgrade to 'buy' from 'hold' by Rabo Securities, dealers said.

The only decliner on the AEX was KPN, which lost 1.51 pct to 7.83 eur.

Paris

Paris shares close up; CAC touches 5,000 pts for 1st time since Aug 2001 The CAC-40 index finished up 51.40 points or 1.04 pct at 4,999.39, having touched exactly 5,000 points for the first time since August 2001 late in the session. Volume for the day was 5.0 bln euro.

Among CAC-40 stocks, 34 closed higher and six closed lower. On the Matif, February CAC-40 futures were trading up 42 points at 5,004.

Arcelor rose 0.33 or 1.14 pct at 29.23 as investors watch the developments stemming from Mittal Steel's hostile bid for the steelmaker. Today, French Industry Minister Francois Loos said the government is opposed to the offer, the first time a government official has stated a clear position since the 18.6 bln eur bid was announced last week.

Analysts question what governments can actually do to block a deal if shareholders are in favour and doubt the existence of a white knight counterbid.

Speculation of a bid by TF1 for ProSiebenSat.1 pushed TF1 shares up 0.18 or 0.69 pct at 26.26, their highest level since summer 2004.

Now that Axel Springer has abandoned its offer to buy ProSiebenSat.1 in the face of regulatory opposition, dealers said TF1 stands a good chance of buying the German broadcaster.

TF1 confirmed today it is still interested in a possible deal with ProSiebenSat, while analysts noted that Haim Saban, the main owner of ProSiebenSat, sits on TF1's board of directors.

Alcatel headed CAC-40 gains, up 0.36 or 3.32 pct at 11.21, ahead of tomorrow's full year results, while France Telecom fell 0.08 at 18.64 before tomorrow's earnings release - the operator has already warned the market that tough competition will prevent results from meeting previous forecasts.

The leading blue chip decliner was Thales, down 0.72 or 1.81 pct at 39.09 after the group was forced to restate its earnings statements from 2003 to 2005 to reflect delays in the launch of a contract to operate radio systems for the London Underground.

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Frankfurt

German shares close higher led by Commerzbank, Volkswagen

The DAX 30 index was 52.38 points or 0.92 pct higher at 5,726.53 after moving between 5,643.40-5,733.56 so far this session.

The MDAX was at 8,164.48, up 160.40 points or 2.00 pct, while the TecDAX was at 690.60, up 17.96 points or 2.67 pct.

The DAX futures contract was at 5,736.0, up 40.5 points or 0.71 pct, while bund futures were at 119.93, down 0.50.

Commerzbank was the top performer, adding 1.01 eur or 3.61 pct at 29.99 as it profited from a Financial Times Deutschland report that its online broker unit Comdirect Bank AG has seen customer numbers booming in January.

Deutsche Bank gained 1.31 or 1.48 pct at 89.69. It announced it would hike full year 2005 dividend to 2.50 eur/shr from 1.70 eur/shr. Deutsche Bank earlier on was already a major gainer on a Financial Times report that its unit DB Real Estate's troubled property fund Grundbesitz-Invest is set to be devalued by only 3 pct, far less than previously expected.

Hypo Real Estate was up 3.05 pct at 55.34.

Volkswagen ended higher 1.25 or 2.56 pct at 50.05 amid market talk German automaker is to sell its Europcar rental business to financial investor Apax for some 3 bln eur -- significantly higher than the 2.5 bln eur the market was expecting VW to get for the unit, dealers said.

On the downside, ThyssenKrupp wallowed at the bottom, losing 0.31 or 1.47 pct at 20.75. A spokesman for ThyssenKrupp denied a report in WirtschaftsWoche claiming that the German steel conglomerate is mulling bids for rivals Corus Group PLC and Salzgitter AG.

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