Market Report: Merger speculation gives Friends Provident a lift

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The prospect of further mergers and acquisitions in the insurance market strengthened Friends Provident and led to rallies by several of its rivals yesterday. JP Morgan, whose analysts upgraded Friends from "neutral" to "overweight" on cost and valuation grounds, stoked the hopes in a new note to clients.

"As the UK life insurance new business falls in the slowdown, [insurers] that have relatively fixed expenses will struggle to manage within their allowances," the broker said, adding: "Mergers and acquisitions could attract synergies and maintain scale. We estimate non-expense synergies on a Friends takeover, along with potential disposals, could add 21p to our [embedded value per share]." By the close of trade, Friends was up 1.9p at 117.8p.

The remainder of the insurance sector was also buoyed by hopes of deal activity. Admiral gained 35p to close at 884.5p, RSA Insurance was up 2.9p at 134.8p, Prudential added 13.5p to 657.5p and Aviva was up 12.5p at 620p.

Overall, the FTSE 100 closed up 11.1 points at 6,069.6, while the FTSE 250 was up 23.1 points at 10,057.3. On the FTSE 100, weakness in the price of crude affected Tullow Oil, which was down 12.5p at 897.5, and Cairn Energy, which lost 56p to close at 3,315p.

Mining shares had mixed fortunes. Anglo American gained 84p to 3,470p after UBS raised its target for the stock to 4,000p from 3,800p. Xstrata, whose target price was raised to 5,000p from 4,500p by UBS, was also up, adding 7p to close at 4,016p. Vedanta Resources fell 2p to 2,596p and BHP Billiton was down 13p at 1,959p as metals prices relaxed. Elsewhere, Barclays slipped 3.5p to 387.25p as traders noted a change to consensus figures on the bank's website, which said the estimate for its pre-tax 2008 profit was £5.876bn, down from £6.356bn. The estimate for earnings per share was also lowered from 58.4p, to 53.9p. Its pre-tax profits for 2009 are now expected to come in at £7.140bn, compared to earlier estimates of £7.5bn.

Much of the rest of the banking sector was also weak after a note from Credit Suisse spooked investors. The broker said it was too early to buy British banking shares and downgraded Lloyds TSB – which lost 8.75p to 384.75p – from "neutral" to "underperform". Credit Suisse also cut its target price for the stock from 460p to 345p.

Alliance & Leicester, whose target price was cut to 390p from 440p, fell 5.5p to 421.75p. Royal Bank of Scotland, which was upgraded to "neutral" but had its target price cut from 350p to 285p, fell by 3.25p to close at 238p.

The supermarket group Morrisons rose by 5.75p to 291p after Credit Suisse upgraded the stock from "neutral" to "outperform". The broker also raised its target price for the stock to 340p from 320p, saying: "After the accelerated share price recovery of 2006 to early 2007, we have not had an 'outperform' rating for more than a year, but just recently, and even without further upwards earnings revisions, we think the shares have begun to look better value after minus-8 per cent relative underperformance versus the All-Share index over the last three months."

Tate & Lyle, on the other hand, fell 10.5p to 457.25p after attracting some bad broker sentiment. "It faces pressure in all areas of the business as commodity and energy-related costs weigh on the business and net debt remains flat [year-on-year] as the four-year capital expenditure programme is completed," said Goldman Sachs, reducing its target price for the stock to 465p from 495p.

On the FTSE 250, easyJet was strengthened by the fall in the price of oil. News of a purchase by its chief executive Andrew Harrison, who picked up 187,452 shares in the airline for 264.75p each, also boosted the carrier, whose price rose by 17.25p to 291.75p.

Aberdeen Asset Management rose by 3.75p to 136p after the hedge fund Toscafund increased its stake in the company to 16.12 per cent. Tosca, which was part of the Virgin-led consortium that tried to buy Northern Rock, overtook Lansdowne Partners, which holds 10.46 per cent of the company, to become Aberdeen's biggest shareholder last month.

Northgate, the commercial vehicle rental group, was down 18.5p at 570p after Citigroup downgraded the stock from "buy" to "hold". The broker also cut its target price for the stock to 640p from 870p. Citi said that, while the company had a strong track record and dominant market positions, its high debt, exposure to the struggling Spanish construction industry and high operation gearing had "driven a sharp de-rating" in the stock.

"With many cheap shares across the market and financial leverage out of favour, we see few catalysts to drive the shares higher," the broker added.

On AIM, Central African Mining was up 1.25p at 53p after Credit Suisse said the stock was still on its list of its "top picks" in the sector.