Prospect of a BAT demerger stirs up insurance sector

MARKET REPORT

A frisson of excitement among insurance shares enlivened a dull, uninteresting session with most blue chips once again taking guidance from New York.

Lord Cairns, chairman of the giant BAT Industries, was credited with prompting the insurance activity.

He told the yearly shareholders' meeting that the group had an "open mind" over whether it should split into two - financial and tobacco.

He said BATs had "no sacred cows" and added: "If and when we are confident that change in our corporate structure would both improve the prospects for our two business streams and create better value for our shareholders then we would not hesitate to propose it."

Although giving little away, Lord Cairns' tentative comments seemed to some observers to edge further along the demerger road than anything indicated by BAT in the past.

It is widely believed that BAT would like to beef up its financial side before committing itself to any deal. Hence the stock market interest in insurances with Legal & General edging ahead 5p to 400.5p in often brisk trading. Commercial Union was another caught in the BAT speculation, improving 5p to 661p.

Stories of a BATs swoop on L&G, CU or another insurance target have often swept through the market in the past.

There is little doubt the industry is aware of its vulnerability. The creation of Royal & Sun Alliance Insurance is the most prominent defensive move yet as the insurance industry regroups to ward off the threat of predatory strikes.

Besides BAT, up 4.5p to 523.5p, Alliance, the German group, and an assorted collection of other overseas insurers are thought to be circling the industry.

Footsie ended 18.8 points lower at 4,369.7. A sell-off in the futures market and hesitancy in New York were largely responsible. The market is resigned to an interest rate increase soon after the election. GDP figures strengthened the dearer money fear.

Waters splashed higher with Merrill Lynch making optimistic noises and signs Deutsche Morgan Grenfell had waded into the sector. Windfall taxes, hosepipe bans and the prospect of tougher regulatory and environmental regimes did not dampen the enthusiasm of Merrill analyst Andrew Wright. He expects waters to rise after the election and says: "Once the political fog of the election has cleared the shares are going to do well."

He puts a 750p target on United Utilities, up 13p at 671.5p, and also 750p on South West Water, down 2.5p to 670p. Wessex Water is given a Wright price of 425p; the shares rose 9p to 384p. Severn Trent was also higher, up 13p to 761.5p.

Whitbread, the leisure group, fell 10.5p to 763.5p following the sale of 13 hotels to Regal Hotels for pounds 64.5m. Regal, raising cash through a placing and open offer of ordinary and preference shares as well as the issue of a debenture stock, held at 56.5p. Last year it paid pounds 122m for 67 Granada hotels. The Regal chain is now 95.

Hambros, the merchant bank, gave up 8p to 237p, reflecting its involvement in the Lanica/Co-op affair.

Yorkshire, the chemical group, eased after admitting it was being hurt by sterling's strength and pressure on prices. The shares fell 30p to 212.5p.

Ennex International jumped 5.5p to 24.5p; the shares were 8.75p in January. The Irish minerals group has acquired an option on a zinc deposit in Kazakstan. If exercised it will issue 30 million shares and warrants to subscribe for 15 million shares at 30p.

Dragon Oil, another Irish resources company, had a busy session. It has Far Eastern interests and earlier this year said it had made a significant gas discovery in Thailand. The shares firmed to 2.75p.

Pan Andean Resources improved 5p to 60p. Talks are due to take place in Houston next week between the company and the partner in its Bolivian venture, the Australian BHP group. In October Pan Andean shares crashed from 135.5p to 33.5p in a day when it disclosed its Chapare well in central Bolivia was not commercial.

Bruntcliffe Aggregates, where the Bardon gravel group, which is planning a merger with Camas, has 22.7 per cent, held at 29.5p. Bodfari, an unquoted North Wales gravel group, has increased its stake to 8.49 per cent.

Grosvenor Inns, the Slug & Lettuce chain, added 11p to 206p. Enterprise Inns' take over of the unquoted Discovery Inns earlier this week has awakened interest in the remaining quoted pub chains.

Taking Stock

rTLG, formerly Thorn Lighting, brightened 7.5p to 112.5p. Trading was busy, arousing thoughts that Wassall, the conglomerate with a 4.1 per cent stake, was flexing its corporate muscles. Wassall acquired its shares at around 93p. TLG floated in November 1994 at 116p. Its shares reached 181p before splintering to 93p as profits failed to match expectations.

rStruggling Epic MultiMedia gained 3p to 17.5p. The shares touched 105p last summer. In February it closed down most of its publishing arm and four of its five executive directors quit. But it seems to have clinched an intriguing deal with Abbey National. The bank has awarded it a contract for up to 200 hours of multimedia training, its largest investment in such an area. First course will be available in the summer.