Market Report: Direct Line bid rumours spread further

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ANALYSTS may be sceptical, but a rumour that Royal Bank of Scotland is about to receive a bid for its hugely successful Direct Line insurance operation refuses to go away.

In a dull stock market Royal Bank shares edged ahead 4p to 519p as speculation continued about the future of the insurance side developed by Peter Wood.

Union des Assurances de Paris, now state-owned but soon to be privatised, is the name in the frame. The French group has made no secret of its desire to develop its British operations, an indiscretion that has provoked a crop of rumours linking it at one time or another with a vast array of British groups.

Direct Line has slid quietly into the conjecture in the past few days. Royal Bank is under no pressure to sell its lusty offspring and any deal would command a price that comfortably exceeded pounds 1bn.

There is a feeling that the insurance arm has grown too large for Royal Bank, which could be encouraged to take the view that funds from UAP, another buyer or even a flotation, could be better used to expand its core banking business.

HSBC and Standard Chartered were also in form, largely reflecting the strength of the Hong Kong share market. But Standard, after its bruising 1986 encounter with Lloyds Bank, is never completely free of takeover speculation and some observers are convinced Lloyds will, in the fullness of time, return with another bid.

In excited trading HSBC surged 43p to 1,099p and Standard 16p to 1,431p.

Other banks were weighed down by worries about the looming banking profits season. But profit gains should be impressive as bad debts are reduced. Lloyds starts the ball rolling on Friday; pounds 1,050m is expected against pounds 801m. The shares eased 14p to 625p.

Royal Bank was not the only share influenced by an unlikely takeover yarn.

British Aerospace, still basking in the perceived success of its pounds 800m Rover sale to BMW, lost altitude as it produced a pounds 250m provision against aircraft leasing costs. The market had expected a pounds 100m provision and BAe shares promptly dived.

Then a rumour surfaced that Honda, the Japanese group that still owns 20 per cent of Rover, planned a bid for BAe to thwart the BMW deal. With vague talk of a trading pact with General Electric Co thrown in for good measure, the shares ended 22p higher at 575p. They were 444p ahead of the Rover announcement on Monday. GEC rose 5.5p to 349.5p.

Insurances were still ruffled by the surprise sale of 46 million Prudential Corporation shares by an unidentified institution. Pru fell 6p to 356p against the 354p placing price.

The rest of the market spent most of the day in negative territory.

Futures selling did much of the damage and towards the close shares gave further ground as it became clear that US interest rates were being nudged higher.

The FT-SE 100 index closed 16.1 points lower at 3,475.4, and the FT-SE 250 index lost 6.4 to 4,146.4.

Supermarket shares remained depressed on price war worries. Kwik Save slumped 28p to 577p and J Sainsbury 9p to 361p.

Vickers, the engineering group, was at one time 10p higher, closing 7p better at 190p. Its Rolls-Royce cars division provided the inspiration. The latest car registration figures showed sales of the luxury car last month had jumped from 48 to 82. But Babcock International fell 2.5p to 37p on rights issue rumours.

Beers were flat following the downbeat Vaux Group shareholders' meeting. Vaux lost 7p to 296p and Bass 11p to 549p.

Scottish & Newcastle retreated 20p to 553p. Uncertainties over its planned pounds 80m German holiday village contributed to the weakness.

The new breed of pub retailer, seen as beneficiaries of the cut- price beer war, was again strong, with Regent Inns up 14p to 247p and JD Wetherspoon 9p to 420p.

Worries that the Monopolies and Mergers Commission will descend on the power generators got the upper hand, leaving National Power 5p down at 481p and PowerGen 6p to 558p.

Airtours, up 15p to 585p, continued to climb ahead of expected US presentations; Euro Disney gave further ground, off 10p at 365p.

RJB Mining again displayed the market's growing enthusiasm for what is left of the British coal industry, improving 8p to 398p; Waverley Mining, which has led a pounds 7m rescue restructuring at the Monktonhall Colliery, Midlothian, went to 66p, up 2p.

Properties produced a flurry of gains following a positive review from SG Warburg. British Land improved 9p to 456p, Burford 9p to 115p, Chesterfield 10p to 650p and MEPC 6p to 543p.

The FT-SE 100 index fell 16.1 points to 3,475.4 and the FT-SE 250 index 6.4 to 4,146.4. Turnover was 785.1 million shares from 38,949 bargains. The account ends on 11 February with settlement on 21 February. Gilts eased.

Bristol Scotts, recent subject of shareholder unrest, jumped 40p before settling 32p higher at 140p. The flurry was accompanied by talk the leisure group, with greyhound racing and restaurant interests, was planning a significant acquisition, probably a property portfolio. Its last deal was the pounds 1.1m disposal of two Overton restaurants in London's West End.

Dealings on the 535 market are due to start on Monday in the shares of Winchester Multimedia, a new group put together by former Storm Group executive Gary Smith. The company has just completed a pounds 1.5m cash raising exercise at 60p a share. It is involved in the planned production of a feature film, Rainbow, and has children's animation projects.

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