Market Report: BA soars as Qantas deal stokes takeover talk

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Could British Airways be the next UK blue-chip company to be taken over? That was the theory being bandied around the Square Mile by Collins Stewart yesterday and it pushed shares in the carrier 9p better to a fresh high of 519p.

The broker believes the planned takeover of Australia's Qantas Airways by a consortium led by Macquarie Bank could spark a wave of consolidation across the industry. It said: "The Qantas deal creates a precedent. There are clear parallels between Qantas and BA. We believe BA is clearly in the frame and a prime candidate for an approach."

However, even without a bid, Collins Stewart believes the airline's shares offer great value. "You should buy BA irrespective of the takeover angle, because it is underpinned by sold and improving fundamentals", it told investors yesterday. The price Macquarie plans to pay for Qantas implies a valuation of more than 750p a share for BA, according to the broker. On top of this, it believes BA has additional strategic value because of its Heathrow slots and access to the new Terminal 5. Collins Stewart values these slots alone at £2.5bn or 230p a share.

Probably the biggest barrier to a takeover of BA is the company's pension fund deficit. But, once this has been resolved, the airline will become more vulnerable to a predator.

Elsewhere in the FTSE 100, British Energy added 12.5p to 512.5p after JP Morgan told its clients that the electricity generator is being undervalued by the market and slapped a 560p price target on the stock.

London's index of leading shares closed 35 points better at 6,228 with the mining group Xstrata featuring as the best performer, up a whopping 136p at 2,513p, after Morgan Stanley named it as its top pick in the sector. The US broker said: "We believe consensus estimates need to be upgraded by at least 25 per cent to account for higher commodity prices and the growth in the business with the completion of the Falconbridge acquisition." According to Morgan Stanley, the near 30 per cent discount to peers at which Xstrata trades means its stock offers "exceptional value". Antofagasta rose 14.25p to 529.5p, Rio Tinto improved 67p to 2,850p, Anglo American put on 52p to 2,517p and BHP Billiton added 17p to 950p.

Rentokil Initial rose 7p to 168p amid rumours of a 200p-a-share bid for the support services group from a private equity firm. The speculation meant that 47 million Rentokil shares change hands yesterday, more than twice the volume on an average day.

ITV put on 1p to 112p as Goldman Sachs argued that the broadcaster's current valuation implies too pessimistic an outlook for advertising revenues at the company's flagship ITV1 station.

Premier Oil gained 14p to 1,261p on the back of a bullish drilling update from its Blackbird field offshore Vietnam. Analysts estimate that a discovery could hold up to 80 million barrels of oil. Fellow explorer Soco International put on 31p to 1,432p after similarly upbeat news from its very own project in Vietnam. The company said that preliminary test results of an appraisal well had yielded more than 14,000 barrels of oil per day.

Peter Hambro Mining soared 111p to 1,001p after Russia's environment agency said the group's key asset in the Amur region had not breached licence agreements. Shares in the gold miner have lost a third of their value over the past two weeks after comments from Russian authorities led to fears that the company could lose its licence.

Among smaller companies, Avon Rubber, off 0.5p at 153.5p, saw Brian Duckworth, a non-executive director at the tyre-maker, pick up 25,000 shares at 154p.

Biofuels, which produces biodiesel from vegetable oils, fell 3p to 39.5p as the company's interim results showed that it continues to be loss-making and to suffer from difficult market conditions. Given the debt burden Biofuels carries, analysts believe it will soon have to raise fresh capital. However, they warn that the City is unlikely to ride to the group's rescue unless market conditions improve. Numis Securities said: "We view [Biofuels] equity as an out-of-the-money option."

Zotefoams dropped 8.5p to 104p after the manufacturer of block foams warned that the recent weakness of the US dollar would negatively impact its profits.

Finally, Eurovestech, the internet and technology investment company, rose 0.5p to a fresh all-time high of 19.25p after unveiling an interim pre-tax profit of £3.7m against a loss of £500,000 for the same period last year.