Market Report: HK group pockets pounds 176m from Somerfield merger

THOSE chaps at Dairy Farm must be feeling pretty pleased with themselves. At the beginning of the year, the Hong-Kong based food retailing group, part of the Jardine Matheson empire, was sitting on a large stake in supermarket group Kwik Save which was rapidly diminishing in value.

Dairy Farm wanted out, but wanted a better price for its shares than the market was prepared to pay.

Their response was to broker a merger with Somerfield, the rival supermarket group, in February. The deal, which lifted shares in both companies, got the thumbs up from the regulators earlier last week and was declared unconditional last Friday.

The merger left Dairy Farm with an 11 per cent holding in the new, enlarged Somerfield. But not for long. Yesterday, the Hong Kong group, acting through SBC Warburg, placed all its shares with institutional investors, at a price around 333p.

Analysts said the main interest was likely to have come from US value investors as well as UK tracker funds, which have to have a holding in Somerfield now that it is part of the FTSE 250 index.

The result is that everybody is happy. Dairy Farm pockets a cool pounds 176m for its trouble, while investors no longer worry about an overhang of stock in the market. Indeed, Somerfield shares put on 7.5p to 345.5p yesterday - almost pounds 1 higher than they were when the merger was announced.

The Somerfield activity was one of the few bits of hard news on a trading day which was otherwise soggy with old rumours.

Traders attempted to dress up the old story of consolidation in the defence industry. Rather than wheel out the old one about a merger between British Aerospace and GEC, both stocks were instead being pushed as potential predators in the US.

The argument runs something like this: The US government's decision to block the merger between aerospace groups Lockheed Martin and Northrop Grumman means both will be looking for partners elsewhere.

Meanwhile, the European defence industry is expected to present a proposal for consolidation to the French, German and British governments by the end of the month. Even though every indication is that the report will be a damp squib, some continue to hold out hopes for a positive statement.

GEC finished the day at 469p, up 21p, while British Aerospace put on 52p to close at 2015p.

Ladbroke was the best-performing stock in the Footsie, rising 22p - or 6.5 per cent - to close at 358p on renewed speculation that the group is reviving its merger plans with the Hilton hotel group. Analysts think Tuesday's collapse of Hilton's merger with US group Circus makes a deal with Ladbroke more likely.

Despite all this rumour, the Footsie hardly responded, making little progress towards the 6,000 mark until a strong opening on Wall Street - a response to the previous day's fall - lifted the index to 5983.7, up 36.7, at the close.

Among the blue chips, drinks groups Allied Domecq and Diageo moved ahead after ABN Amro rated both as a buy.

The broker reckons that Allied Domecq, up 1p at 587p, is good value even if it fails to find a merger partner for its drinks businesses. Meanwhile, the argument that the market has yet to recognise the full merger benefits residing in Diageo lifted the shares 12.5p to 725p.

Meanwhile, Bass put on 41p to 1145p. Bristol Hotel, in which the hotels group has a 32 per cent stake, announced a merger with rival US outfit FelCor Suite Hotels. The deal values Bass' stake at $390m.

British Telecom gave up some of its recent gains after unveiling its latest price cuts. An SBC Warburg downgrade also helped knock the shares down 25p to 656p.

Profit-taking also hit Orange, down 2p at 410p, and Vodafone, 14p lighter at 582p.

Bluebird Toys, fending off a hostile 101p bid from Ron Brierley's Guinness Peat Group, enjoyed a 6p rise to 113.5 after revealing it had received other offers which could lead to a counter-bid for the Polly Pocket to Plasticine group. GPG was unchanged at 34p.

Software group Misys, which just missed out on a place in the Footsie earlier this month, steamed through the pounds 30 mark for the first time after giving analysts a positive update. The shares were up 100p at exactly 3000.

Other midcap favourites were engineering group Glynwed, which stormed up 33p at 294p after unveiling a bullish set of results.

The same factors helped television group Flextech, 29p up at 535p, and construction group Taylor Woodrow, 8p better at 237p.