Market Report: SmithKline succumbs to market worries

SMITHKLINE BEECHAM was on the market's sick list yesterday amid niggling worries over its products and corporate strategy.

The stock was hit by a bout of selling and dropped 24p to 770p - one of the largest fallers in the FTSE 100.

SB-sceptic traders were divided into two camps. One band of bears believes that SB's anti-diabetes blockbuster Avandia could be about to hit a snag. A few weeks ago the company firmly denied rumours that the drug was responsible for the death of one patient. However, some market watchers are still convinced that, even if the drug is safe, the recent bad publicity will help rival compounds to eat into its market share.

This would be a major blow for SB: Avandia is by far its most important drug and any shortfall is sales would seriously damage the pharma group's financial health.

Another school of bearish thought pointed to SB's corporate future. Since the merger with rival Glaxo Wellcome collapsed on a personality clash, between Glaxo's boss Sir Richard Sykes and his SB's Jan Leschly, SB has stated that it wants to go it alone. And despite recent talk of a tie-up with Novartis of Switzerland, it has so far stuck to its word.

True, Mr Leschly's expected retirement over the next year or so could trigger a Glaxo deal, but further delays in the long-awaited UK merger could prompt Sir Richard to look at US players such as American Home Products or Bristol Myers Squibb.

The market's dwindling faith in SB was highlighted by a series of rare switches into Glaxo, unchanged at 1,681p. Dealers said the "sell-SB-buy- Glaxo" trade is very unusual because SB has long been seen as the better of the two and some market players said they had not seen such a deal since the merger talks over a year ago.

The rest of the market had a somnolent day as most big players sat on the sidelines ahead of today's important US producer prices figures. The FTSE 100 ended a mere 7 higher at 6260.6, while the midcap settled 14.5 lower at 6109.3 and the SmallCap edged 1 higher to 2855.7.

Roguish trades were still prominent. After Wednesday's farce in Vodafone AirTouch, 9p lower to 1226p, it was the banks' turn to be hit by dealers unable to type the right price. Bank of Scotland was sent soaring by the day's first trade: 200 shares at 799p compared with a 739p close on Wednesday. The Scottish lender eventually finished 9p higher at 748p after a WestLB Panmure upgrade. Woolwich did even better, soaring 147 per cent in midafternoon thanks to a deal at 841p, compared with a price of around 345p. The former building society rapidly lost that gain and closed just 0.75p higher at 340.75p.

Oils were on fire thanks to a rally in the crude price to above $22 per barrel. Shell, 16p higher to 518p, was also boosted by a positive analyst visit to its Egyptian operations.

BP Amoco followed suit with a 27p rise to 1172p, while the gas and oil group BG flared 8.25p higher to 384p. However, BG's former unit, Centrica succumbed to profit-taking after good interims and lost 8.25p to 162p. A deal with a telecom provider, maybe Energis, 15p lower at 1600p, is still on the cards.

Cable & Wireless rang up a 28p rise to 720p after a strategic alliance between C&W-controlled Hong Kong Telecom and US computer group Cisco. Persil-to-Vaseline group Unilever spun 12.5p higher to 600p after Goldman Sachs put it on its recommended list and ahead of an analysts' presentation next week. Goldman's bullishness also helped Cadbury Schweppes, 8.5p better at 424.5p. United Utilities surged 16.5p to 721.5p on vague talk of a US deal and a rebound from recent weakness.

Bid talk swept the midcap. Pharmaceutical group Medeva surged another 11.5p to 175.5p on rumours of an offer from rival Elan, down 25p to 2,125p. SkyePharma firmed 1.75p on talk of an imminent deal with a drug giant. Supermarket chain Somerfield firmed 11p to 220p on continued whispers of a merger with Wm Morrison, 10.25p lower to 159.5p.

Some hot money is chasing Independent Insurance, 8p higher to 288p. There is talk that the same cunning investors who bought Guardian Royal Exchange before it was bought by Sun Life & Provincial, up 1.75p to 483.5p, are fuelling talk of a bid for Independent.

Renewed whispers of booming sales sent discount retailer Matalan 72.5p higher to 1170p, while Highland Distillers firmed 1.5p to 361.5p amid speculation that the long-awaited 400p-per-share bid from investment vehicle Edrington is around the corner.

Disappointing interims sent savaged engineer Spirax-Sarco, down 59p to 595p and TV producer Flextech, 74.5p lower to 981.5p. Housebuilders were still dogged by rate concerns. Bryant was the worst hit, crumbling 10.5p to 151p.

Tech stocks did all the running among the minnows. Computer games maker Rage Software roared 4.25p ahead to a record 34.25p, with over a third of its shares changing hands, despite denying a bid approach. Punters are expecting a deal with Japanese publisher Imagineer to develop a racing game. Braver dealers talked of the possibility of a hostile takeover or even of stakebuilding by Microsoft.

Software wonderstock Baltimore soared another 117.5p to 1,315p on hopes that Monday's results will bring further deals. Merrill Lynch is apparently trying to drum US investors support ahead of Baltimore's Nasdaq float. The other computer superstar, BATM jumped 215p to a best-ever 2,660p on hopes of new deals and good results.

The George Soros-backed investment trust African Lakes rose 9.5p to 73.5p after raising pounds 17.7m through a placing. The money could be spent on US deals to boost its African Internet site. Durlacher, the broker with stakes in many Internet companies, surfed 400p higher to a record 3,925p. Software group Recognition Systems beamed 8.75p higher to a yearly peak of 37.5p after a deal with German IT group Syskoplan.

Seaq Volume: 1bn

Seaq Trades: 71,657

Gilts Index: 104.06 - 0.29

KEEP AN eye on software group Pegasus, up 27p to a yearly peak of 358p. Computer services specialist Electronic Data Processing, 1.5p higher at 69p, has bought a 7 per cent stake which could be used as to launch a bid.

Although EDP is slightly smaller than Pegasus, it is believed to have toured the City looking for funds. Any bid will probably have to pitched at around 400p per share, valuing Pegasus at some pounds 24m.

THE AUTHORITIES looking after the London indices never cease to disappoint. The latest blunder comes in the FTSE 250. The current reserve list for the index - which groups the companies earmarked for midcap inclusion at the next review - features Electronics Boutique. This would be excellent news for investors in the computer games shops chain - were in not for the fact that EB is already in the FTSE 250.

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