Scottish & Newcastle ‘prey not a predator’

Back in London, Scottish & Newcastle added 11.75p to 512p after Merrill Lynch raised its rating to “buy” from “neutral” and set a 540p share-price target.

“With its £4.4 billion market cap and high free float (89 per cent), S&N remains a viable target for any of the brewing heavyweights, at the right price,” the Wall Street broker told clients.

Merrill also highlighted Scottish & Newcastle’s dividend payout, which is the highest in the sector. On trading, the broker reckoned S&N is outperforming its peers in the UK through improved use of its scale.

The call came a day ahead of results from BBH, Scottish & Newcastle’s Russian joint venture. For a full preview of this and the rest of the week’s news, click here.

Elsewhere among the risers: BAA inched up 1.5p to 780.5p, extending gains after last week’s bid approach. According to the Sunday Times, top shareholders in the airports operator will accept a bid from Ferrovial if the Spanish builder offers over 900p a share.

Analysts at JPMorgan reckoned that a Ferrovial-led consortium could afford to pay anything up to £10.30 per BAA share and still come out with an earnings-neutral deal. That figure was based on the assumption that the Spanish company would be able to make synergies from BAA’s five-year, 11 billion-euro construction programme.

Read the Sunday Times report on BAA here.

As one bid prospect heated up, another cooled down. P&O’s general meeting today rubber-stamped the group’s $6.8 billion agreed takeover offer from Dubai Ports World. Singapore’s PSA, the only rival bidder, announced on Friday that it would not be raising its approach.

P&O shares were up unchanged at 516.75p after its stock-holders voted 99.5 per cent in favour of DP World’s 520p-a-share deal.

For detailed information on P&O, click here.

So who will be next?

Lloyds TSB added 3p to 552p as takeover rumours refused to die. The lender has been suggested ad nauseam to be a target for BBVA, Citigroup and Wells Fargo over recent weeks, months and years respectively.

Deutsche Bank today repeated its long-held view that Lloyds is “the most likely of the large UK banks to be taken over.” The German broker moved its takeout valuation model forward a year, to 2008, which yielded a potential bid price of 750p per share.

“We continue to believe that Lloyds TSB is attractive as a standalone entity and recognise that recurrent bid speculation is likely to act as a floor in the share price,” Deutsche said. It retained “buy” advice on a target price raised to 580p from 550p due to an improving outlook at the Scottish Widows asset management unit.

Track Lloyds shares here.

Just don’t hold your breath for the bid, Fortis Private Investment Management told investors.

The bank (nee Dryden Wealth Management) argued that both Lloyds TSB and Barclays are “likely to attract foreign interest at some point, but not until global industry consolidation properly takes off” in next couple of years. Any deals before then may not provide the instant returns shareholders are hoping for, it reckoned.

“Nil-premium mergers might be the solution to the problem of the low (price-to-earnings ratios) of potential US bidders, the giant price tags of UK banks, and the maturity of the UK market, even if it is a profitable one, compared to emerging markets,” said Fortis in its morning email to clients.

The Fortis team favoured Standard Chartered -- “half the cost of a Lloyds TSB while offering three times the growth”.

Standard Chartered shares rose 9p to £14.64, while Barclays was ahead 9.5p to 651.5p, helped by tips from Morgan Stanley and US weekly magazine Barron’s.

Morgan Stanley recommended investors raise their holdings of UK banks to take advantage of stabilised markets and weak sector valuationsm, with Barclays its preferred pick. Meanwhile, Barron’s (Americans read it, apparently) said Barclays shares could rise up to 20 per cent as investor fears ease about loan quality and profit growth.

Track Barclays shares here.

As for other takeover candidates, Fortis was keener on the utilities than the lenders. It picked both Scottish & Southern Energy and Scottish Power as possible M&A plays.

The bank also highlighted Inchcape: the car dealership is only valued at 13.3 times earnings, makes 85 per cent of its profit abroad and is exposed to fast-growing Asia, it highlighted.

Inchcape took on 79p to £23.72. Scottish & Southern added 6p to £11.38 and Scottish Power gained 0.5p to 597p.

Track Inchcape shares here.

Yell led the FTSE 100 for much of the session, jumping 20.25p to 570p. One theory going around was that the directories publisher may be a takeover target for a US internet company.

It seemed a questionable story, particularly given overhanging uncertainty about a Competition Commission review, which is due to give its preliminary verdict on Yell’s core UK market as soon as April.

For more on Yell, click here.

Second-liner JJB Sports jumped 13.25p to 185p, with the move exaggerated by a shortage of available stock. The squeeze was triggered by gossip that private equity group Permira has approached Peter Cowgill, executive chairman of more successful rival JD Sports, to lead a possible offer for the disappointment-prone sportswear retailer.

JD Sports denied that Mr Cowgill had not been approached. Permira would not comment.

For detailed information on JJB, click here.

Back to fundamentals. Boots changed hands at 707.5p as the shares traded without a 200p special dividend, and after a 39-for-58 consolidation took effect. Anyone on the register by last Friday will be receiving their cash on February 24.

Calculations on Boots’ share consolidation were made mind-bendingly complex because, while the swap was designed to be neutral to earnings per share, the price was set six weeks ago when the press release came out. Between then and last Friday, the shares had moved from 610p to 684p.

Citigroup processed the figures and came out with an implied ex-dividend price for Boots of 723p -- indicating Boots shares were trading weaker today irrespective of the payout. The London Stock Exchange’s own computers arrived at an ex-div price of 710.5p. So today’s apparent decline could have been profit taking. It could equally have been confusion.

Richard Ratner, Seymour Piece’s retail guru, recommended the former course of action. Cutting his rating on Boots to “underperform” from “hold”, he noted that, if the merger with Alliance Unichem goes through, the group dividend will likely be halved to 22.3p a share.

Mr Ratner also saw shares as expensive -- at 16 times next year’s revised earnings if the Alliance union is blessed, and 18.4 times if Boots stays a spinster. “At this level, we prefer to take the risk of someone else appearing, rather than continue to hold the stock,” he told clients.

For detailed information on Boots, click here.

SkyePharma was among the best-performing second-line stocks, up 2.5p to 43.75p, after Ian Gowrie-Smith, its founder and chairman, bowed to shareholder pressure and brought forward his retirement.

For more on Mr Gowrie-Smith’s exit, click here.

Among the small caps, Instore dropped 10.5p to 45.75p after its second profit warning in less than a month.

The retail group, which operates Poundstretcher stores, said profits for the year ending February would be “substantially below” market expectations after distribution costs topped forecasts and both sales and margins disappointed.

Track Instore shares here.

On broker watch:

Lehman Brothers cut the weighting of UK retail stocks in its suggested portfolio and removed DSG International from its recommended list.

Credit Suisse initiated coverage of the UK real-estate stocks, rating British Land and Slough Estates “neutral”; Brixton, Land Securities and Capital & Regional “outperform”; and Liberty International “underperform”.

Altium cut Mouchel Parkman to “add” from “buy”.

Dresdner Kleinwort cut Sainsbury to “reduce” from “hold”.

And Merrill Lynch moved Workspace Group to “buy” from “neutral”.

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