Market Report: GSK boosted by talk of mega-merger with rival

One of the major market disappointments over the past five years or so has been GlaxoSmithKline. Formed by the merger of Glaxo Wellcome and SmithKline Beecham in 2000, the shares have consistently underperformed the market and still stand at a substantial discount to their pre-merger combined value. The word in the market is that the company could be considering another mega-merger to create some value for shareholders, this time with the Swiss rival Novartis.

Although GSK shares closed up only 3p to 1,457p, traders said recent strong newsflow, such as the $566m (£305m) acquisition of CNS and the FDA approval of its influenza vaccine in the US, has put the group in a stronger bargaining position than it has been in for some time. One trader said: "GSK might be an integral part of UK plc but if it wants to keep up with its global competitors it should be thinking about a blockbuster deal."

Not surprisingly, a bout of profit-taking hit the smaller rival Shire Pharmaceuticals after the shares rose 15 per cent on Monday, on news that the Food and Drug Administration in the US has given initial approval for its NRP104 attention deficit disorder treatment. By the close, the shares were 47p worse at 961p. Even so, a raft of brokers are still bullish on the group's prospects. Goldman Sachs, Deutsche Bank and Collins Stewart published bullish notes on Monday, with the latter giving the shares a price target of 1,300p.

Hanson shares have recovered strongly since hitting 620p in early June, and the word in the market is that the rumoured takeover approach by the Mexican rival Cemex could be back on the cards. The shares added 16.5p to close at 751.5p yesterday, near a new high. Worries over the US housing market appear to have subsided for the time being and investors hope the group's US aggregates business will tempt a bid. Traders also noted strong institutional buying yesterday. Meanwhile, another four acquisitions by Wolseley on Monday for £110m helped shares in the plumbing group add 45p to close at 1,211p, a three-month high.

A good day of trading for the blue-chip stocks was underpinned by demand for investment management and banking stocks. The FTSE 100 closed 41.8 better at 6,072.7, 58 short of a high for the year.

Another buyout story doing the rounds yesterday was that management is considering an audacious bid to take the broadcaster BSkyB private. The speculation comes on the heels of a $19.2bn buyout bid for the US operator Cablevision, with one trader saying: "The feeling among bankers and managers is these assets perform better in private hands, and there has certainly been a growing trend in recent months for broadcasters to abandon the public markets." Shares in BSkyB nudged 1.5p firmer to 549p by the close.

With unconditional trading due to begin today on Home Retail Group, the retail arm of GUS, the broker Dresdner Kleinwort initiated coverage of the stock with a "buy" recommendation and a 470p price target. In a note to clients, Dresdner said the demerger stock overhang represents a "rare value opportunity in a pricey sector". The shares closed 2p firmer at 412p.

The bidding frenzy in the water sector shows no sign of slowing down, and speculation that a bid is imminent for Northumbrian Water Group sent the company's shares flying, up 23.75p to 315.25. The shares were also given support by a sector review from the broker UBS, which upgraded its recommendation on them from "neutral" to "buy".

The emergency power supply group Aggreko, 11.25p firmer at 357p, hit a five-year high after the broker Merrill Lynch upped its estimates for the group and changed its recommendation from "reduce" to "buy". The US investment bank said: "Aggreko deserves to trade at a significant premium to 'normal' plant hire companies given its market leading position in the niche power, temperature control and oil-free air rental space and stronger returns profile through the cycle."

Surprisingly, 32Red's 53 per cent fall from the high of 174p in February makes it one of the best-performing online gambling stocks, although the shares fell 8p to 83.5p yesterday. With the turmoil surrounding the rest of the sector showing no sign of improving, traders said 32Red should weather the storm better than most, thanks to its lack of exposure to US gamblers.