Market Report: TSB flies high on Continental bid hopes

TAKEOVER speculators descended on TSB Group again yesterday. In brisk trading the shares rose 6p to 148p as rumours of a Continental strike swirled around.

The renewed interest in TSB, encouraged by some busy option activity, coincided with HSBC's arrival in the FT-SE share index. The banking twosome managed to inject a little life into a drab stock market, weighed down by interest rate fears.

Now HSBC - the Hongkong and Shanghai Banking Corporation - has effectively completed the acquisition of Midland Bank, TSB is seen as the only realistic takeover target.

Its shares have turned in a strong performance against the market, often advancing on forlorn days when the market is in retreat. The price is only 7.5p below its year's high.

Overseas bankers are known to be keen on the UK retail banking market and could, some believe, decide to pounce at a time the banking authorities, by clearing HSBC's takeover of Midland, have shown themselves more receptive to banking takeovers. Deutsche Bank and Credit Lyonnais are regarded as the most likely Continental predators.

But it is not only takeover talk that is encouraging TSB. There are also suggestions that it is in talks to sell its troublesome Hill Samuel merchant banking and insurance operation.

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Barclays, down 4p to 316p, was one party thought to be interested. There are said to be sources within Lloyds which would like to pursue Hill Samuel. But many think Lloyds, which failed to win Midland, is unlikely to be tempted.

Hill Samuel has had an unfortunate time under the TSB banner, suffering extensive bad debts which have savaged the group's results.

But the merchant bank is being pulled round and the group should, after sinking into the red last year, produce profits of pounds 230m this year.

HSBC, it could be argued, also helped the sentiment surrounding TSB. Keen Far Eastern buying pushed the 75p shares up 7.5p to 348.5p and the Hong Kong dollar shares 8p to 359p.

According to Seaq 20 million 75p shares were traded. Unusually, for a Footsie stock, turnover of the HK dollar shares was not available - it will be published from today.

The Hong Kong bank's elevation to Footsie has created strong demand from fund managers who feel bound to increase their presence in HSBC and the banking sector in general. Some fund managers could have decided, for the time being, not to compete with the Far Eastern interest and settled for 'proxy' buying of other bank shares.

A profit upgrading by James Capel, the stockbroker owned by HSBC, also contributed to the strength of the shares. Capel has lifted its prediction by pounds 250m to pounds 1,400m.

With HSBC still needing a few more Midland shares to complete its takeover there was a little activity in the remnants of its shares with the price advancing 15.5p to 482.5p.

Footsie started the account with a 12.5-point fall to 2,478.3 in pathetically thin trading. Worries that the Bundesbank will increase German interest rates when it meets on Thursday almost destroyed any appetite for investment. Interest rate-sensitive stocks were particularly weak.

Even utilities felt the pressure. North West Water sank 10p to 421p following suggestions that it is in line to buy the water meters division ABB. The deal, it was suggested, would be financed by a convertible bond.

P & O had to contend with stories of a big stock overhang. An attempted placing of two million shares lingered for an uncomfortably long time. The shares fell 10p to 388p.

Fisons rebounded after Friday's decline, recovering 16p to 205p. But Glaxo Holdings felt the weight of bearish US comment, falling 20p to 690p.

Wellcome ignored the MFI flop - only 44 per cent subscribed - edging forward 3p to 878p. Courtaulds continued to feel the impact of the Barclays de Zoete Wedd profit downgrading, falling another 11p to 502p.

County NatWest took its forecast axe to the conglomerates, downgrading almost every one. S G Warburg cut its forecasts for Forte and George Wimpey.

Thorn EMI, however, enjoyed support from Hoare Govett which put a buy recommendation on the shares, lifting them 9p to 803p.

Sears also bucked the downward trend. Indications that it might be prepared to sell its flagship Selfridges department store lifted the shares 1p to 82p.

There was gloom on the beer pitch following an 5.8 per cent production fall in April.

Shares made a depressing start to the account. The FT-SE index, at one time down 17.1 points, finished with a 12.5 fall to 2,478.3. The FT 30- share index lost 13.4 points to 1,890.3. Turnover remained subdued. At one time it looked like being the lowest this year, but late activity left it at 349.3 million shares with 18,488 bargains

A beer switch from Scottish & Newcastle into Whitbread is suggested by Kleinwort Benson. Analyst David Thompson believes Whitbread is the 'best placed for recovery when it does come' because of its southern spread. Whitbread 'A' shares, which have had a difficult time this year, lost an early gain, settling for a 2p fall at 442p. Scottish fell 7p to the same price.

A director share sale contributed to a subdued performance by Kingfisher, the B&Q and Woolworths retail group, yesterday. On Thursday Ronald Goldstein sold 650,000 shares at 470p. The price fell 9p to 456p. Mr Goldstein, a non-executive director, retains more than 4.5 million shares. Kingfisher is expected to produce profits pounds 35m higher at pounds 242m this year.