Market Report: AstraZeneca catches chill after UBS downgrade

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The Independent Online

Few punters would have bet AstraZeneca would end up underperforming the FTSE 100 this year, but that is on the cards after a forgettable past two months have seen the shares lose 18 per cent against a flat market.

If analysts at UBS are right, there could be more downside to come as the broker cut its forecast to "reduce" and slashed its price target from 3,400p to 2,700p. The Swiss broker believes that negative clinical trial news, due in the first quarter of 2007, could see the pharmaceutical giant extend its 5 per cent discount to its peers to 20 per cent. The broker also believes the chances of an offer for the company from either GlaxoSmithKline or Novartis, the two most likely sources, are not promising.

In stark contrast, no one seems to be writing off the chances of a bid for Shire Pharmaceuticals. In comparison to AstraZeneca and GlaxoSmithKline, Shire's pipeline is performing strongly and its market capitalisation of just £5.1bn makes it an easy pill for either of its larger rivals to swallow. AstraZeneca shares fell 22p to close at 2,892p, Glaxo shed 2p to 1,338p while Shire climbed 34p to 1,065p.

Reports that Prudential has turned down an approach for Egg, its online banking subsidiary, from Citigroup, encouraged buyers. A positive note from the brokers Merrill Lynch, which set a price target of 740p on the shares, also buoyed the stock. For once, it was not being pushed as a takeover target, but consolidation chat is still firmly in the frame as the shares firmed 8.5p to 694.5p.

The second half of 2006 has been a miserable time for shareholders of British Energy, half a penny better at 477.5p. Compared with recent news flow, last week's relegation from the blue-chip index was a minor footnote. The word in the market yesterday was that the Government has found a buyer for its 65 per cent stake in the business. However, analysts dismissed the talk, saying a UK trade buyer is unlikely and that the shares should continue to rally in the absence of any more bad news.

Elsewhere in the utility sector, International Power rose 13p to 386.75p as speculation about a bid from the German utility giant RWE gathered momentum.

The broker JP Morgan believes there is plenty of good news already priced into Resolution, the life fund manager. It initiated coverage with an "underweight" recommendation and a 600p price target. The shares were the worst blue-chip performers, closing 15p lower at 637.5p.

In the wider market, merger and acquisition news drove the FTSE 100 better for most of the session before a late-afternoon bout of profit taking saw most of the day's gains erased. The blue-chip index closed 7.4 firmer at 6159.8.

Rentokil Initial shareholders enjoyed a rare day near the top of the mid-cap leader board, closing 3.5p better at 161.5p after the broker Cenkos Securities changed its stance from "sell" to "buy" and upped its target price to 190p from 140p. In a note to clients, the broker said: "The share has been toxic, and a former darling of the FTSE 100 has become synonymous with chaos ... that said, management appears to be getting to grips with its own cost base, while corporate action is clearly changing the mix of the portfolio."

Consolidation talk is thriving among the second- line pubs and brewers. Greene King, fresh from excellent first half numbers, is thought to be lining up a merger proposal with the rival Wolverhampton & Dudley. Both stocks powered on to new highs yesterday, with Greene King adding 39p to 1,111.5p and Wolverhampton & Dudley firming 50p at 1,790p. Evolution Securities believes if Wolverhampton & Dudley converts its property into a Real Estate Investment Trust the shares could be worth 2,800p.

In the small caps, African Consolidated Resources appears to have run into a bit of local difficulty in Zimbabwe, where the Ministry of Mines has served the company notice that it intends to cancel the title to the Marange Diamond fields. The announcement appeared to go almost unnoticed by investors as the shares fell only 0.5p to 9.5p.

Despite results that were little better than forecast, the struggling information technology group iSoft closed 6p firmer at 46.75p as it confirmed takeover talks are ongoing. Some investors believed accounting investigations and a raft of profit warnings would have put any potential bidders off, but it appears an offer could still be made for the group.

Finally, traders are looking out for more buying in ACM Shipping. The ship broker came to the market last week at 162p and added another 11.5p to 187p yesterday.