Market Report: SmithKline back in merger spotlight

TAKEOVER PERMUTATIONS involving SmithKline Beecham lengthened as another of the year's much vaunted drug mergers broke down. Earlier this year the drugs giant planned a deal with American Home Products. But when Glaxo Wellcome galloped over the horizon with takeover promises Smithkline ditched AHP, which absorbed its rebuff by going on to arrange a $35bn link with the Monsanto chemical group.

Now the AHP/ Monsanto deal has collapsed, the stock market, still flustered by the subsequent break down of the Glaxo/ SmithKline deal, immediately latched upon the possibility of SmithKline and AHP rekindling their affection. Mind you, any such proposal from SmithKline could face a hostile reception at AHP, which was not best pleased when it was left at the altar by SmithKline's acceptance of the Glaxo embrace.

SmithKline shares rose 24p (after 42p) to 640p; on Monday they gained 37.5p on rumours the group's chief executive Jan Leschly was about to resign, clearing the way for Glaxo to resume its interest. It was largely a personality clash between Mr Leschly and Sir Richard Sykes, his Glaxo counterpart, that killed the mega merger.

The market's persistent interest in SmithKline could indicate a desperate longing that the deal should be resurrected - if only for the fat fees the City would pocket. But the interest may be deeper. The merits of a Glaxo/SmithKline deal are there for all to see and there is more than a sneaking suspicion that Glaxo, 6p easier at 1.655p, remains anxious to put the merger to bed.

Footsie, after its heroics of the past two days, was subdued, falling 47.5 points to 4,990.1. The drop below 5,000 was disturbing, creating a debate over whether the market had experienced a dead cat bounce or was merely taking a breather.

The market was perplexed by a downturn in Tokyo, and New York offered little encouragement. Still, lower interest rate hopes remain and sterling's more subdued display is also helping sentiment. Government stocks were firm, achieving gains of around three-quarters-of-point. Supporting shares were resilient with the mid cap index up 21 to 4,389.7 and the small cap managing a modest 1.8 gain to 1,846.1.

Volume was once again above the one billion level with Granada's placing, through BT Alex.Brown, of its BSkyB stake swelling the figure.

Granada shares rose 28p to 770p as the placing of the 6.5 per cent stake to institutional investors went through at 404p. Granada sold the shares to Alex.Brown at 385p. The leisure group retains an indirect 4.3 per cent holding in BSkyB and has, surprisingly, agreed to hang on to the shares for 30 days. BSkyB was ruffled by the prices in the Granada deal and slumped 42p to 414p.

Royal Bank of Scotland was given a whirl, up 17p to 669p as stories of a takeover bid from Halifax, the former building society, resurfaced. Halifax shaded 8p to 781p.

Utilities, strong recently on their safe-haven appeal, lost ground as some switched into more active shares. Thames Water, for example, sunk 53p to 1,085p.

Imperial Chemical Industries retreated 31p to 524p, ruffled by a profits warning from Hoechst, the giant German chemical group.

The P&O shipping line put on 25p to 535p with Panmure Gordon and SG Securities positive. PG is looking for an 850p price.

Reuters, the information group hit hard by worries of a financial recession, firmed to 461.5p. Michael Savage at Collins Stewart describes the shares as "ludicrously cheap" and suggests they "should be bought aggressively".

Other analytical observations had a mixed response. Schroders said buy BOC after meeting the company; the shares fell 15.5p to 730p. CSFB offered buy advice on BAA, the airports group, putting a 710p target on the shares. Profit estimates were downgraded and the shares fell 9p to 647p.

Merrill Lynch was cutting jobs and forecasts; it lowered its Centrica recommendation pushing the shares down 1.25p to 117.75p. Still Tate & Lyle won an upgrade, coming off the sell list. The price fell 10p to 307p.

Rentokil Initial, ahead of US presentations, jumped 13.5p to 336.5p. National Power fell 7p to 552p after its Pakistan associate became the subject of a government probe. St James Place, the insurance group, rose 20.5p to 221.5p after a trade above the then market price re-awakened talk of a Prudential Corporation bid. Galen, the health care group, crashed 155p at one time after returning to market after its failed merger talks. The shares were suspended in July so, in effect, they had to bear the three-month bear run in one hit. They closed 100p off at 337.5p. Eidos, the computer games group, put on 42.5p to 660p ahead of tomorrow's launch of its latest product - Tomb Raider 3. Emerald Energy fell 0.5p to 7.5p as it delayed for further tests the results of its Colombian exploration.

SEAQ VOLUME: 1.04bn

SEAQ TRADES: 59,843

GILT INDEX: 110.02 + 0.80

DELTA, the electrical group that has long been a takeover favourite, charged 20.5p higher to 126.5p as aggressive engineer TT emerged as a 1.37 per cent shareholder. In the past five years Delta shares have fallen from 579p.

The group lost pounds 22.5m in its last year and looks ripe for a take over. Whether TT will bid or is merely hoping to encourage a predator remains to be seen.

DEALINGS are due to start on AIM today in the shares of National Building Materials, the result of a merger between interests of Ennstone, run by Vaughan McLeod, and the old stone mason, Drings of Bath.

A placing at 5p raised pounds 3.15m. Since arriving on AIM two years ago Drings has had an uncomfortable time. Its shares hit 4p, but were around 2p when they were suspended for the NBM deal.