Hot gossip fails to warm up shares

Market Report

DIAGEO, the wine and spirits giant, had a hungover look as worries grew that LVMH, the French luxury goods group, was planning another cut in its shareholding.

Bernard Arnault, the Paris-based financier who created the sprawling LVMH empire, has in the past sold off shares in the drinks behemoth to raise cash to develop LVMH. So confirmation that talks are going on which could lead to LVMH buying the Sanoft beauty business sent alarm bells ringing among Diageo followers.

The spirits group, taking in such brands as Johnnie Walker scotch whisky and Smirnoff vodka, was formed by the merger of Grand Metropolitan and Guinness. LVMH once had 24 per cent of Guinness but its stake was reduced ahead of the merger, an event which did not please Mr Arnault.

LVMH now has 10.84 per cent of Diageo and Mr Arnault is a director of the spirits group. He would, no doubt, like to realise some of his involvement, particularly as the distribution and marketing association between Diageo and LVMH's Champagne and Cognac brandy interests no longer needs the support of a shareholding.

Although well below their 778p high, Diageo's shares have held up relatively well. But with the LVMH story swirling around they were the worst-performing Footsie constituent, falling 31.5p in busy trading to 615.5p.

Zeneca, the drugs group, provided the other hot story. In volatile trading the shares rose 73p to 2,587p, accompanied by stories that the proposed merger with Astra was about to be scuppered by a hostile bid, possibly from SmithKlein Beecham. Doubts about the feasibility of the Anglo-Swedish merger have been growing and the market is clearly receptive to any suggestion of a counter-offer. SB, which has been involved in unsuccessful takeover talks with Glaxo Wellcome and American Home Products, rose 17p to 787p.

Merck, the US drugs group, is also thought to be unhappy about the alliance as its marketing link with Astra is a casualty of the deal. It is not expected to mount a bid but could attempt to unsettle the relationship. It is said to be likely to demand a high ransom for allowing its marketing link with Astra to unravel. Astra has an agreement to buy the Merck involvement in their joint venture in 2008, but any merger by the Swedes before then could require heavy compensation.

Tarmac, after the surprise collapse of its deal with Aggregate Industries, fell 12.25p to 101.75p; Aggregate lost 2.25p to 68.75p.

Elsewhere on the merger front Sears gained 6.5p to 259p on high-street entrepreneur Philip Green's conditional offer. Newcastle Utd's mystery suitor left the shares 6.5p down at 98.5p.

Footsie, after a struggle, ended with a 22.6-point gain at 5,557.1, with telecoms constituents contributing most of it. Supporting shares remained under pressure, and government stocks moved ahead.

Drink and restaurant shares gave ground as worries about Christmas spending cast a shadow. Bass slumped 34.5p to 755p.

Pearson, the banking and media group, recovered from Monday's weakness as the signalled trading statement was more positive than expected. The shares rose 48p to 1,110p. Pearson's comments helped Reuters, 17p higher to 540.5p, and Reed International, 12.25p to 442p.

Telecoms rejoiced from the relatively lenient mobile phones review. Vodafone topped the Footsie leader board with a 42p gain to 945p; Orange rose 25p to 638p and BT 21p to 881p. Even Cable & Wireless, on the hunt for a new chief, managed a 13.5p gain to 706.5p.

House of Fraser, the department store chain, was unloved, tumbling 2.5p to 53.5p, a new low. The market was unsettled by stories that the group is having a particularly disappointing Christmas. Marks & Spencer was another casualty of the festive shopping malaise, off 12p to 396.25p. The MFI furniture chain, despite a pounds 26m half-time loss, rallied 4p to 30p.

Alpha Airports rose 4p to 49.5p on talk that the Harrods stake is about to change hands. Lopex, the marketing group, gained 6p to 47p as Incepta, the City public relations group, lifted its stake to 26.9 per cent. Southwind, a company run by Incepta chairman Bob Morton, has just over 3 per cent.

Healthcare group Oxford Biomedica added a further 1p to 13p following its genes link with Rhone-Poulenc Rorer. Reunion, the miner, softened 5p to 42.5p after announcing a pounds 505,000 placing with institutional investors. They are being offered shares at 50.5p.

Rumours that Premier Oil plans a write-down of its exploration and production assets knocked the shares 2p to 17p. Cox Insurance was the day's worst performer, slumping 45 per cent to 186.5p after a profits warning. Analysts now expect year's figures of around pounds 17m, down from the earlier pounds 28m.

SEAQ VOLUME: 806.9 million

SEAQ TRADES: 63,764

GILTS INDEX: 115.16 +0.82

SHIELD DIAGNOSTIC, raising pounds 2.3m through an institutional placing at 470p, appears to have upset one big shareholder. A trade of 149,000 shares went through at 468p a few hours after the call was known. The shares were sold at 25p, even 30p, below the then price. One suggestion was that an institution took exception to the placing because it understood that Shield would not need more cash. The shares ended at 510p.

ACORN, a high-yield fund, is being launched to capitalise on the slump in small company shares, which have underperformed by 40 per cent in two years. With many tiddlers offering high-dividend yields Acorn, to be quoted in London and Guernsey, will specialise in shares such as Leeds, the textile group, now offering a return of around 16 per cent. Peter Webb and John McClure of Eaglet investment group will be Acorn's advisors.

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