City talk: Investors blow smoke at Gallaher

Markets

The FT-SE 100 took a breather, with a 51-point fall on Friday, reawakening fears for a market which has looked dangerously overheated for months - though the fact that the Dow recouped an earlier 88-point loss, to close virtually unchanged, will be a calming influence tomorrow.

So it was a poor time for Gallaher, the tobacco company, to come to the market. Its shares opened at 282.5p and slid to 275.5p at the close - well below earlier indications of a starting price of 310p. It looks as if US investors will continue as heavy sellers of the stock, leaving plenty of scope for bargain hunters.

Japanese stockbroker Daiwa has issued a "buy" note for GKN. While the company's shares have come off on sterling's strength, the Meineke case and its growing exposure to the car industry, medium-term prospects still look very positive. Daiwa estimates pre-tax profits of pounds 400.8m this year, rising to pounds 414.6m. At these levels, shares trade at 9.7 times current- year earnings - hardly demanding.

The fact that United News & Media has had to pull out of the Movie World development on the outskirts of west London, with its partner Warner Brothers, may not knock the share price. But it raises questions about the group's grasp of, first, how to extract the maximum from a joint venture; second, of whether it understands how to work alongside foreign partners; and third, whether it has sufficient resources to manage external projects such as this. It shouldn't affect earnings in the long term, but it takes the shine off the company's projection of a bright, multimedia leisure future.

As Chancellor Gordon Brown's mini-Budget draws near - probably some time towards the end of June - machinations over the windfall tax continue. The latest to stick its neck out is Yorkshire Water. The company that drew scorn for having to use a fleet of 700 tankers to bring in water during the drought of 1995 has offered the Treasury a deal. Yorkshire wants a measure in Ken Clarke's last Budget to be dropped. The company says the proposal, which would reduce the value of tax allowances for long-term investment, could cost it pounds 7m a year. In return, it seems it would be prepared to accept a windfall tax of some kind.

The evidence is mounting that a tax aimed at the electricity and water companies would have the most widespread acceptance. Outside those two sectors, there is still plenty of confusion. The sooner the Chancellor decides on what and how companies are to be taxed, the better. Further delay will only send investors the wrong signals.

A belief that the Monopolies Commission will end recommended retail prices in the electrical goods sector has already damaged the share prices of Dixons and Kingfisher. However, there is a contrary view: strong retailers, such as Dixons, will benefit from any further price pressure on smaller independents and weaker chains, with further consolidation likely in the sector.

Still on the retail front, one of the weaker performers, Laura Ashley, further annoyed the market with a cautious trading statement.

Rumbling down the runway is Debonair, a new no-frills airline, which expects to float its shares on Easdaq - the European stock market for start-up companies. Debonair, based in Luton, has entered the European airline fray at a good time: Brussels has shaken up the market, with deregulation and liberalisation allowing smaller companies to capture a slice of the business.

Like EasyJet and Ryanair, whose shares were recently floated on Nasdaq and soared to a 40 per cent premium, low-cost carriers could have a glowing future. Debonair expects to float before the summer break; watch out for further details.

Finally, Amersham International shot up 92.5 pence to 1,392.5p in response to reports in Sweden that the company may merge with Pharmacia Biotech to create a pounds 1.25bn company.

Amersham confirmed it is in talks with Pharmacia & Upjohn over a possible merger of the two companies' life science businesses. A link-up has been widely mooted for some time, with analysts describing the synergies as extensive.