Market Report: British Aerospace soars on the back of US tie-up talk

BRITISH AEROSPACE defied gravity yesterday as a storm of positive rumours sent the buying orders flying.

The defence giant soared 18.5p to 441.25p in a day marked by a welter of takeover talk.

BAe chipped in with whispers that a mega-tie up with one of its US or European rivals is closer than ever. Dealers keep talking of the high- level meetings between officials from the US Pentagon and their European counterparts to broker a huge deal in theconsolidation-hungry arms sector.

BAe would be a great fit with its US competitor Lockheed Martin, but a much-discussed merger with France's Aerospatiale Matra or Germany's DASA cannot be ruled out.

The aerospace bulls were given further impetus by talk that the Office of Fair Trading is set to clear BAe's purchase of the Marconi electronic business from GEC by the end of next week. Completion of the deal will transform BAe in the world's third largest defence group after Boeing and Lockheed. Seller GEC shed 22.5p to 652p amid vague talk that its huge disposals programme has been slowed down by a lack of buyers.

The thawing of the diplomatic frost between the UK and Libya was the third item of good news for BAe. The North African country could be one of its largest markets, if it is allowed to sell its products to Colonel Gaddafi's army.

The icing on BAe's cake came from Smiths Industries. The smaller aerospace group, 24p higher to 901.5p, has given analysts an upbeat assessment of its current trading, and industry experts believe that BAe will also benefit from ebullient markets.

The defence company had to fight off a determined attack from BG for the leadership of the blue-chip leader board. The gas producer flared 16.25p higher to 397.25p on revived rumours of a bid. The new story is that the French oil giant Elf could use a BG acquisition as a poison pill against the hostile offer from rival TotalFina. Shell, up 10.75p to 533p, has been mooted as a potential BG predator and could still put together an offer. If Elf fails to acquire BG, the market is betting on a strike at oil explorer British Borneo, up 7.5p to 242p.

The FTSE 100 was unimpressed by all this takeover excitement and finished off 40.1 points at 6,557.3. The Bank of England's decision to leave rates unchanged generated little interest, but a weak Wall Street and a plunging bond market did most of the damage.

Turnover, at over 1.4 billion, looked high but was boosted by a gigantic 142 million shares traded in Telecom Eireann. Punters were not deterred by the Irish telecom operator's decision to be priced in euros and the stock surged 0.71 euros to 4.61 euros on its first day of trading.

Marks & Spencer was also in good form, putting on 15.5p to 398p on ongoing praise for its Autumn/Winter collection and whispers of a merger with Sainsbury, down 2p at 415.25p, or Tesco, down 1.75p to 169.5.

The demise of the Sears clothes shops , finally bought by Arcadia, up 18p to 244.5p, for pounds 151m rids M&S of a competitor. It also leaves Sears' owner Philip Green with a lot of cash. He could spend it on troubled Storehouse. The Bhs and Mothercare retailer shed 4p to 124p after a gloomy trading statement, but cunning dealers see a bid as imminent and refuse to sell. Mooted predator Debenhams lost 16p to 400.5p in sympathy. Food retailer Somerfield plummeted 17.5p to 227.5p as broker SG went from "buy" to "sell", citing worries over trading.

Among the falling blue chips, transport group Stagecoach closed 8.25p at 212.75p after being rammed by bears who fear another expensive acquisition.

Powergen suffered a 19.5p blackout to 680p amid talk that a US buy is near, while Scottish Power shed 17.5p to 566p after buying back 50,000 shares for just 553p.

The undercard once again outperformed the big boys. The FTSE 250 finished 11.1 better at 6,073.2 - its fourth consecutive record close - while the Small Cap went 10.1 higher to 2713.2. Both indexes were awash with bid speculation. Glass maker Pilkington toasted a 3.5p rise to 100p in hefty volume as cash-rich funds such as KKR and Hicks, Muse were said to be circling.

Computer group Parity did even better, advancing 17.5p to 235p. The new management is looking for acquisitions but could be spiked by an offer from a US group.

Trafficmaster accelerated 29p to 460p on whispers that it is to sign up a large carmaker, possibly Mercedes or Audi, for its traffic control gizmos.

Shire Pharmaceuticals shot 26.5p higher to 602.5p on whispers of a bid from a major US corporation. Brent International's agreed 118.5p-per-share bid from Germany's Chemetall excited the chemical sector.

Old chestnut Croda rose 17p to 300.5p. US giant Dow, Germany's Henkel or Switzerland Ciba could all bid. Laporte, up 33.5p to 780p, is still mooted as a target for Swiss company Clariant, while BTP, 12.5p higher at 463p, is also a sitting duck.

Manchester United scored a 3p victory to 211p as investors linked with leisure group ENIC, up 0.5p to 70.5p, were said to be stakebuilding.

Amid the fallers, PizzaExpress burnt 47.5p to 825p on vague talk of difficult trading. Sellers boarded coach operator National Express after the shock departure of its finance director and the stock crashed 46p to 1,003p.

The minnow Bakery Services rose 50 per cent to 3p. Shareholder Diggle Investment fanned the takeover rumour flames by upping its stake to 10.2 per cent.

A stampede of retail buyers sent Just Group, the owner of the TV characters Jellabies, 4p higher to 14p, while household product maker Armour Trust, results today, flushed 3.5p higher after revealing that a major acquisition is close.

Computer tiddler Riva jumped 8.5p to 47.5p after unveiling a bid approach, while AIM-listed telecoms equipment producer BATM confirmed plans to move to the main listing and soared 147.5p to 1347.5p.

Wallpaper maker Vymura firmed 2.5p to 106.5p. After the close, a company owned by investor Trevor Hemmings launched the expected 110p-per share bid.

SEAQ VOLUME: 1.43bn

SEAQ TRADES: 77,413

GILTS INDEX: 105.51 -0.62

TULLOW OIL, the Irish oil and gas explorer, drilled a 10p advance to 67p yesterday on whispers of a bid. Punters in the republic are saying that the loss-making Tullow might have caught the eye of a European rival. The company has a series of interesting fields in Pakistan, Bangladesh and Senegal and could be useful for a oil group seeking geographical diversification. Moreover, Tullow's shares are cheap, having plummeted from last year's high of 161.5p.

LANDS IMPROVEMENT, a real estate minnow, is believed to be close to a significant disposal. Insiders are convinced the firm is about to sell a large parcel of land in Hertfordshire to a rival. The deal could be worth up to pounds 8m, a sizeable sum for a group with a market value of pounds 31m. The proceeds could be used to pay for a recent pounds 10.75m acquisition of a Buckinghamshire industrial estate from transport group Jacobs. Lands' shares closed up 2.5p at 125p.