Market Report: BA shares take flight on merger dividends

British Airways was the stand-out riser as the FTSE 100 firmed up last night, leading the blue chips as traders moved in to capitalise on the upside from the merger with Iberia.

The catalyst was a new "buy" note from Citigroup, whose analysts raised their target price for the stock to 280p to reflect the merger, the estimated synergies and the potential value of the American Airlines joint venture. Citi also factored in BA's and Iberia's stakes in other companies, including the 15 per cent interest in Flybe, which could be disposed of or floated to yield gains for the combined group.

"Our new target price assumes that the merger with Iberia goes ahead and we assume a 50 per cent probability of the American Airlines joint venture gaining anti-trust approval, suggesting there could be further upside to out target price should unconditional approval be granted by the US Department of Transportation and [the] European Commission," the broker said. "Our old target price of 250p only assumed a 50 per cent probability of the merger happening."

Looking ahead, the broker also raised the prospect of BA, which gained 5.8p to 212p, trading in its interest in Iberia for BMI, which is controlled by Lufthansa. BMI would give BA the chance expand at Heathrow, while Iberia would boost Lufthansa's Star Alliance grouping.

On the other hand, if BA sits back and Virgin Atlantic swoops on BMI instead, the latter could potentially triple its slots at Heathrow, "a situation that BA could do without", according to Citi. "We believe that the fate of BMI is so important to BA ... that it could consider relinquishing its stake in and relationship with Iberia in return for BMI," the broker suggested.

Overall, the FTSE 100 touched a session high of 5373.94 before relaxing to 5322.36, up 9.36 points, while the mid cap FTSE 250 index rose by 20.11 points to 9195.95. Traders welcomed official figures confirming a significant moderation in the pace of job losses in the United States, with the latest non-farm payrolls report revealing that the American economy lost 11,000 jobs last month, compared to estimates of about 130,000. As a result, the unemployment rate in the world's largest economy fell from 10.2 per cent in October to 10 per cent in November, boosting recovery hopes.

The news sparked gains for the US dollar, which in turn depressed metals prices, hitting sentiment around shares in the mining sector. Randgold Resources was amongst the weakest, declining by 4.3 per cent, or 222p, to 4973p, as gold prices came off recent highs. Xstrata, the target price for which was raised to 1400p from 1300p at Nomura, was 3.4 per cent, or 38p, behind at 1066p, while Fresnillo, the Mexican silver miner, fell to 865p, down 2.4 per cent, or 21.5p. The Eurasian Natural Resources Corporation bucked the trend, however, gaining 6p to 921p after Nomura raised its target for the stock to 1080p.

Over in the oil & gas sector, Royal Dutch Shell rose by 18.5p to 1853.5p and BP added 2.3p to 584.7p, as crude prices turned positive in response to the US jobs report. Like the majors, explorers and producers such as Cairn Energy and Tullow Oil also gained ground, rising by 56p to 3138p and by 12p to 1267p respectively.

Elsewhere, the speculators were back in action around International Power, which rose by 1.9p to 286.1p amid renewed chatter regarding the possibility of a takeover approach from GDF Suez, the French energy giant. GDF was said to have lined up the funding for a possible 400p per share bid, with one rumour anticipating an approach before Christmas. Traders, although wary of dismissing the speculation, played down the chances of a bid materialising before the New Year.

Further afield, Morgan Stanley supported sentiment around Wolseley, the construction materials group which rose by 20p to 1250p after the broker revised its target for the stock to 1610p, up from 1590p previously. The broker said that while gross margins appeared to be at risk in the short term, the "shares are not expensive on a long-term view". Morgan Stanley did express a preference for Travis Perkins, however, helping its stock rise by 5.5p ahead at 807p.

On the second tier, IMI was amongst the strongest of the mid cap stocks, rallying by 22p to 534p after Evolution weighed in, raising its target price for the stock to 700p. "We have finally worked it out," the broker proclaimed. "The UK engineering sector is set to close the valuation gap on the US and European peers and IMI will lead the way." Other engineers, including Cookson at 427.3p, up 7.9p, and Charter International at 749p, up 11.5p, also rose as recovery hopes took root.

On the downside, the wireless chipmarker CSR was more than 4 per cent, or 17.2p, weaker at 402.8p after the Royal Bank of Scotland reduced its estimates and switched its stance on the stock to "hold" from "buy".

The housing sector was also held back last night, with investors moving out following updates from Berkeley, down 16p at 876p, and Bellway, down 6p at 758p. Traders said that while the news on trading was positive, sentiment remained weak owing to the shortage of mortgages.