News Column

MARKET COMMENT: Drug Sector "M&A Excitement" Keeps UK Stocks Positive

June 20, 2014

Jon Darby

LONDON (Alliance News) - UK stocks are modestly higher Friday, buoyed by pharmaceutical and medical-product shares, following confirmation that Shire received multiple takeover approaches from a US company, continuing the merger and acquisition jostling within the sector.

By mid-morning Friday the FTSE 100 is up 0.2% at 6,823.44, and the FTSE 250 is up 0.5% at 15,765.40, while the AIM All-Share is fractionally lower at 784.38.

Shire is leading the FTSE 100 higher after US pharmaceutical research and development company AbbVie Inc Friday confirmed that it made three indicative takeover approaches to Shire, all of which have been rejected by the British drug maker.

In a statement, AbbVie said it had first approached Shire in early May, and that its latest offer was GBP46.26 a share in cash and shares, valuing Shire's share capital at GBP27.2 billion. Shire shares jumped at the open to trade closer to that valuation, currently quoted up 12% at 4,190.00.

Heightened merger and acquisition speculation has kept stocks in the pharmaceutical and medical equipment sectors on their toes for weeks. Speculation has been largely driven by US companies looking for overseas takeover targets with the aim of utilising lower tax rates abroad.

Fellow FTSE 100 listing Smith & Nephew has been the focus of similar attention and is also receiving a boost from the latest news to trade up 1.9%, while in the FTSE 250, BTG is up 3.4%.

"A bit of M&A excitement has been just the ticket to enliven trading on what may otherwise have been something of a lacklustre end to the week," said IG analyst David Madden

Without the focused merger and acquisition boost, major European markets are underperforming their London counterpart, with the French CAC 40 and the German DAX both close to flat.

The pound remains near its strongest level against the dollar in more than five years, despite an increase in UK government borrowing. Currently the pound trades at USD1.7060, while against the euro it is a little higher at EUR1.2530.

In May, public sector net borrowing was GBP13.3 billion, GBP0.7 billion higher than in May 2013, when it was GBP12.6 billion.

"While a rise in borrowing is unwelcome, it would appear that markets are more focussed on the economic recovery, as CBI data showed industrial order books reach an eighteen-year high yesterday," said CMC markets chief market analyst Michael Hewson.

UK industrial order book activity has reached its strongest level since December last year, data from the Confederation of British Industry showed Thursday. About 34% of firms reported order books were above normal, while 23% said they were below normal, giving a balance of 11%, the highest since the eighteen-year high reached in December.

Investors in TSB, Lloyds Banking's spun-off high street bank, are currently enjoying a 13% gain on the stock's first day of trading. Following the IPO pricing of 260 pence, TSB now trades at 294.33 pence. The stake of TSB sold was increased at the last minute to 35% in response to strong demand. Given that European Commission rules demand that the rest of the high street bank is sold by the end of next year, however, it was always in Lloyds' interest to ensure the first sale was a success.

"Perception is everything, so a good performance on day one puts the shares in a commanding position for future trading," says IG's Madden.

Sainsbury's made the latest chess move in the UK supermarket price war Friday, announcing a joint venture with Danish discount grocery retailer Netto. Sainsbury's said it will bring 15 Netto stores to the UK starting this autumn, in a move designed to retain market share in the UK that has fast been getting snapped up by the growth in discount retailers such as Aldi and Lidl.

The continued competition sees the supermarkets underperforming Friday, with Sainsbury's down 0.4%, Tesco down 0.7%, and Morrison down 0.2%.

The price of oil has remained stable over the morning session, although traders will have one eye on any further news flow from Iraq in the afternoon after US President Barack Obama sent 300 advisors to the country. Brent oil trades at USD114.90 per barrel, towards the top of its recent range.

With a relatively empty afternoon data calendar, Iraq may well become the major focus for the markets, although the Eurozone consumer confidence for June will provide some interest. The index is expected to rise to minus 6.5 in the month from minus 7.1 in May.

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Source: Alliance News

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