Market Report: BG flares up as takeover rumours swirl

A round of bid talks and hopes of growth boosted BG as the FTSE 100, higher in the previous two sessions as recovery hopes drove sentiment, fell back last night.

The stock was 18p higher at 1191p after Goldman Sachs said that, against a backdrop of lower production growth for European oil majors as a whole, BG and Royal Dutch Shell stood out as among the few that were primed not only to deliver improvements in production, but also to boost cash flow in coming years. BP, up 2.3p at 633p, is also attractive, "with the strongest expected free cashflow, good leverage to crude prices and an attractive valuation", the broker said, reiterating its "buy" view on BG and BP, and its "conviction buy" view on Shell, which was 6.5p lower at 1951p.

Around BG, Goldman's assessment was supplemented by deal rumours, with speculators revisiting theories of takeover interest from the American oil giant ExxonMobil. India's ONGC was also mentioned as a potential bidder, with the rumour mongers taking their cue from reports of discussions within the Indian government regarding the foundation of an sovereign wealth fund to hasten the acquisition of foreign energy assets. Others spoke of interest from the mining sector, and commodity heavyweight BHP Billiton, which fell by 13.5p to 2206.5p as mining issues ran out of steam, was mooted as a possible suitor.

Elsewhere, the rumours continued to flow around Wellstream, the oil services group, which rallied 37p to 579p. Italy's Saipem was once again singled out as the most likely bidder, though ENI was also mentioned, with speculators paying little attention to some sceptical analyst comment. Chatter around the power plant operator Drax, down 6.3p at 370.5p, began to ebb, however, with rumours of interest from Centrica, up 1.9p at 298p, fading away. The transport group Arriva had more luck, rising by more than 4 per cent, or 31p, to 708p after Germany's Deutsche Bahn confirmed rumours it was behind the recently announced bid approach.

Overall, the FTSE 100 was 2 points lower at 5,642.62, while the FTSE 250 was 4.32 points behind at 10,004.18. Volumes thinned, with traders balancing share deals with punts on the horses at Cheltenham. There was good news on the debt front, with official figures showing that the Government borrowed less than expected in February, suggesting that the Chancellor of the Exchequer, Alistair Darling, may undershoot his borrowing target for this financial year. The figures for January were also revised down.

The banks fell back amid a bout of profit taking, with Royal Bank of Scotland retreating to 42p, down 1.55p, and Lloyds losing 1.82p to 55.5p. The weakness came as Citigroup strategists switched their view on global financials to "neutral" from "overweight". HSBC was also behind, losing 11.8p to 681p after analysts at FBR Capital Markets turned cautious, revising their stance on the stock to "market perform" from "outperform".

"HSBC's valuation now appears relatively full, in our view," FBR said, revising its target price to 724p, compared with 800p previously. "Trading at only an 8 per cent discount to Asian peers (which are likely to experience higher growth in the medium term), HSBC appears fairly valued," they added. In the wider sector, Barclays was 6.5p weaker at 352.9p.

On the upside, the pharmaceutical group GlaxoSmithKline stood out, rising by 47.5p to 1,272p as traders bought in on the news that Novartis had handed back American rights over VR315, seen as a generic version of GSK's lung drug Advair, to British partner Vectura.

"Given Novartis' decision not to pursue development in the US, the market will assume that the probability of a successful registration of a generic product in the US has reduced," Panmure Gordon said, highlighting the fact that Vectura, down 15.25p at 48.25p, was a smaller company with limited development expertise in US generics.

Legal & General was 0.4p behind at 82.95p after ING reiterated its "sell" view on the insurer ahead of full-year results next week. "We anticipate that the company will offer some guidance on its thoughts on how to sell more capital-light products with higher margins," the broker said, keeping its target price unchanged at 52p. "The credibility of this road map is likely to be key for the short-term performance of the shares, which we continue to view as overvalued."

Further afield, the Lloyd's of London insurer Lancashire was in focus after Morgan Stanley initiated coverage with an "overweight" stance, saying that book value growth was set to drive the shares. "The market in our view still underestimates its potential due to its short history and earnings volatility," the broker explained, setting a 588p target price on the stock, which fell by 1.8p to 461p last night.

"In contrast, we believe it offers unique exposure to specialised insurance risks that are largely uncorrelated to equity markets, and find the current valuation compelling... Historically, the shares have tracked book value, for which we forecast CAGR [compounded annual growth rate] of 14 per cent over the next five years."