Miners, Shire deal hopes lift FTSE

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Back in London, Shire was in demand on hopes it is close to agreeing a settlement with generic drug makers challenging its top-selling Adderall XR medicine.

A US court yesterday extended the deadline for pre-trial documents to be submitted in the case between Shire and Impax Laboratories, pending settlement negotiations. Impax and fellow drug maker Barr Laboratories have been trying to win the right to make copycat versions of Adderall XR, a treatment of attention deficit disorder, which accounts for more half of Shire’s sales and profits.

“With no guarantee of rapid generic approval, it seems in the interest of both Shire and both generics to agree a deal before court cases start,” commented analysts at UBS.

They reckoned an agreement to hold fire beyond 2007 would allow Shire to get to market its its next-generation treatment, NRP104, before generic Adderall XR arrives. Such a stay would also give the UK firm an opportunity to jack up prices, putting upside risk to current-year earnings forecasts, the Swiss broker told clients.

Shares climbed 23p to 845p. The gain would have been sharper had Shire management not indicated to Deutsche Bank analysts last week that a settlement deal was looking possible.

WestLB reckoned the shares -- up 12 per cent since Deutsche Bank’s note was published -- have already discounted half the value of a settlement without reflecting the risk and expense involved in getting NRP104 out of the lab. It downgraded Shire to “neutral” from “buy”.

Track Shire shares here.

Basic resources stocks provided the backbone to the British market rally after consensus-beating results from Vedanta Resources. The Indian miner of zinc, aluminium and copper said third-quarter underlying earnings totalled $264.6 million, up 46 per cent sequentially and at the top end of market expectations. As well as benefiting from higher commodity prices, Vedanta has been ramping up its production.

Merrill Lynch moved its share-price estimate on Vedanta to £12 from £10 and kept a “buy” rating. Shares jumped 42p to £10.52.

Kazakhmys, Kazakhstan’s biggest copper producer, jumped 45.5p to 861.5p and BHP Billiton was ahead 38p to 1025.5p.

Rio Tinto added £1.03 to £28.90. UBS said it lifted a share-price target on Rio to £33.50, “as we believe upside risks exist to consensus earnings as spot commodity prices continue to surprise on the upside.”

The broker also argued that the City is underestimating Rio’s potential for cash returns. It forecast dividends for this year and next of $1 a share and $1.13 respectively, and said Rio could still afford to buy back $4.7 billion of its own shares by the end of 2006.

Track today’s biggest movers by industry sector here.

DSG International, the electronics retailer formerly known as Dixons Group, climbed 3.75p to 174.25p in continued reaction to yesterday’s better-than-feared Christmas trading statement. Fiscal first-half profit to November dropped 20 per cent for the owner of PC World and Link stores, but this was overshadowed by news that same-store sales over the festive period were up 2 per cent.

“2005 may prove to be the nadir,” said SocGen in a note raising its rating on DSG to “hold” from “sell”. It argued that shares will be supported by a cash generation and by international growth, possibly via acquisition.

(Despite DSG sitting on a cash pile of £200 million, it has not bought back shares for a while. That has led to speculation the group could be sizing up a foreign purchase.)

For detailed information on DSG, click here.

Lloyds TSB was caught by a short squeeze in mid-session on a story that Warren Buffett has been building a stake in the lender. Talk of bid interest was also being reheated, with Citigroup, a Lloyds partner in the UK, the name mentioned this time around.

Stock-watchers have long speculated that Lloyds TSB may be a target for a US predator looking for a foothold in the British market. However, it is generally thought that nothing will happen before the probable flotation of Standard Life, Lloyds’ mutual life insurer, which is expected to take place during the second half.

If a Standard Life float is successful, it could ultimately pave the way for a sale or spinoff of Scottish Widows, which would erase Lloyds’ £3 billion pension deficit and make the group a much tidier takeover target.

However, it ought to be noted that Lloyds shares have a habit of outperforming the market in January, as investors look for stocks likely to benefit from restructuring in the coming year (the lender is two years into a rebuild of wholesale banking and Scottish Widows). Over the last couple of years, the shares have gone on to return less than FTSE 100 index through February to July, even accounting an above-average dividend yield.

Lloyds TSB shares closed up 13.25p to 516p, having jumped as high as 522p earlier.

For detailed information on Lloyds TSB, click here.

There was also bid speculation on International Power, up 14p to 276p. RWE was suggested as a possible predator.

On a more fundamental tack, Enterprise Inns inched up 23p to 951.5p after it said both earnings and cash generation in the first quarter have been in line with expectations. The pubs operator said its business performed well through the festive season, and also in the critical restocking period at the beginning of January.

Shell was among the FTSE 100 fallers, with the “B” shares losing 21p to £19.20. That followed Merrill Lynch bumping the stock off its “buy” list in favour of BP.

The Wall Street broker recommended being more selective in the oil sector for 2006. It told investors that Shell “is paying the price for chronic underinvestment over the past five years, which although now being addressed via higher re-investment levels will prove to be a drag on earnings, profitability and shareholder distribution relative to BP until at least the end of the decade”.

BP closed the day up 4p to 663p. Oil prices inched higher towards $66 a barrel amid worries about supply from Iran, Nigeria and Russia, as well as a new warning of new al Qaeda attacks on the US. Weekly data showing an increase in US fuel reserves was ignored.

For more news on the natural-resources sector, click here.

It was day six on the decline for Vodafone, off 2.25p to 121.25p as worries grew that its quarterly performance figures will disappoint.

The numbers, due next Tuesday, are expected to show the effects of regulatory and competitive pressure in Vodafone’s core European markets. JP Morgan and Lehman Brothers today became the latest in a long line of brokers to warn that weakness in Germany, Italy and Britain may put consensus forecasts at risk.

But UBS remained upbeat, arguing that recent gossip of a sales warning looked overcooked. “We do not expect a particularly positive response to this set of (figures), but the reality is that the termination rate cuts and the additional competition in Italy and Germany have been well flagged and baked into November company guidance,” it said.

Cazenove agreed, up to a point. Its analysts forecast quarterly revenue growth of 6.5 per cent, compared with Vodafone’s latest guidance that sales through to March 2006 would be “in the middle” of a 6 per cent to 9 per cent range. It was therefore “marginal” whether a formal reduction of guidance would be required, Cazenove told clients.

Track Vodafone shares here.

BT Group was also being dragged lower amid worries about quarterly performance figures, due on February 9. BT shares have dropped in recent days after a profit warning from France Telecom turned attention on the former incumbent operators, whose sales are being eroded by local-loop unbundling and the increasing popularity of internet telephony services.

Morgan Stanley cut its rating on the European telecoms sector to “in-line” from “attractive” this morning. It was concerned that the sector will need to invest more on networks just to keep pace with “capital-lite” internet technologies such as Skype and the new-entrant media companies.

The latest challenge to BT’s core market came today from Tesco (down 1.75p to 313.25p), which said it would sell an internet phone service through 350 stores. The supermarket’s accompanying blurb claimed “rock bottom prices” on national and international calls, and made a pitch to take internet calling into the mass market.

However, Investec argued that such threats should not worry BT shareholders yet: “Whilst France Telecom’s many woes ... are likely to hit BT at some point, such fears are already well known to the market, and are not going to hit BT’s third-quarters excessively. Indeed, versus its EU peers, with no mobile business to contend with and more of a corporate focus, BT’s strategy looks more secure,” it told clients.

For detailed information about BT, click here.

Concern about British Airways pension deficit continued to weigh on the airline’s shares, which were down 5.25p to 316p. Cazenove cut BA to “in line” from “outperform”, arguing that strike action and increased costs are likely to be the focus of investor attention through the summer as management addresses the problem.

BA’s gross liabilities are more than three times greater than the airline’s market cap, with the pension hole currently standing at about £2 billion. Cazenove anticipates that, to close this deficit, management will have to cut benefits for its highly unionised workforce and risk strike action, as well as stumping up one-off cash contributions in the region of £500 million.

“While the resolution of the pension problem should in our view act as a significant share price catalyst as it removes a strategic roadblock for the group, getting there could provide some share price turbulence,” Caz said.

Read more about BA’s pensions problem here.

Computacenter led the mid-cap fallers, down 13.75p to 241.25p after it said talks over a possible management buyout had been terminated. The reseller and services firm had revealed in November that it was weighing up an approach led by Sir Peter Ogden, co-founder and non-executive director.

Computacenter also said that that its 2005 annual pre-tax profit should be “materially ahead of market expectations” and in a range of £32 million to £34 million, thanks to “unusually strong demand” at the year-end.

Those reassuring words on trading helped lift Dimension Data, which resells and installs network equipment from the likes of Cisco. Shares in the South African firm were up 3.25p to 46p.

Back on the downside, Kesa Electricals ran back 5p to 258.5p after a downbeat trading statement. The Anglo-French electricals retailer forecast year to end-January 2006 results towards the lower end of current market expectations.

For detailed information about Kesa, click here.

Among the minnows, Bartercard nearly doubled with a gain of 9p at 28.5p after signing a deal with four Australian banks.

Commonwealth Bank of Australia, National Australia Bank, St George and Westpac Bank all agreed to use Bartercard point-of-sale transaction systems for its cashless trade exchange. That should mean fewer vouchers to fill out for the group’s 25,000 Australian users.

Read about last year’s controversial Bartercard flotation here.

On broker watch:

UBS added BAT to its Top 20 list of recommended European stocks. The firm also raised Tate & Lyle to “neutral” from “reduce”, and made the opposite call on Invensys.

Merrill Lynch rated both Greene King and AGA Food Service “neutral” in new coverage.

Numis cut Whitbread to “add” from “buy”.

Insinger downgraded Pipex to “hold” from “trading buy”.

Williams de Broe cut Severn Trent to “sell” and upgraded AWG to “buy”. Both shares were formerly rated “hold”.

British Airways and Barclays were both upgraded to “outperform” from “underperform” at Credit Agricole. The house also cut Standard Chartered to “underperform” from “outperform���.

Teather & Greenwood cut Enterprise Inns to “hold” from “buy”, went to “sell” from “buy” on Premier Oil and started coverage of Intertek with a “sell” rating.

Austin Reed was upgraded to “underperform” from “sell” at Seymour Pierce.

And ING downgraded LogicaCMG to “hold” from “buy”.

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