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The Times: Rolls-Royce gleams after GE’s talks with Airbus falter

EXTRACT: Shell, which owns 33 per cent of Woodside, would benefit both by owning a better quality investment and sending a clear signal that it did not intend to bid for either company, Cazenove continued.

June 13, 2007
Bryce Elder

Rolls-Royce outperformed a weak market trend on hopes that the engine maker was set to increase its market share.

According to the trade press, negotiations between General Electric and Airbus to supply alternative engines for the latter’s new A350 Xtra Wide Body family of jets have stalled, leaving Rolls the only supplier. Airbus plans to make 13 of the twin-engined jets per month.

Merrill Lynch repeated “buy” advice in response. “If GE does not offer an alternative engine, this would hand Rolls-Royce an exclusive position on the aircraft without having to pay the higher participation fees typical for an exclusive contract,” it told clients.

The wider market buckled under a weak banking sector, with the FTSE 100 index erasing most of the previous session’s rally to end lower by 47.10 at 6,520.40. HBOS, down 39p at £10.39, was the sharpest faller after cautioning on its share of the mortgage market.

Bid rumours provided the main distraction. ICI rose 5½p at 523½p on talk that it could be vulnerable to companies other than Akzo Nobel, its mooted suitor for the best part of a year. BASF and PPG Industries were both suggested as potential bidders.

Shares in the chemical group were also supported by research from Merrill, which argued that Akzo “has the ability to acquire any of its major rivals”. ICI may also turn predator with a bid for Finnish peer Kemira, and could afford to give about £2 billion back to shareholders if deals do not emerge, the broker said. It was also positive on Johnson Matthey, which rose 30p at £16.95 as Merrill set an £18.50 price target in new coverage.

The day’s most original bit of matchmaking came from Cazenove, which examined the logic of BG Group merging with Woodside Petroleum, its Australian peer. The broker said that it was floating the idea to keep shareholders “more fully appraised of the key merits, complexities and risks of such a potential merger”.

Cazenove argued that the combination would create a gas industry leader that would carry much lower risk than if the two companies continue to invest independently in exploration outside their usual territories. Shell, which owns 33 per cent of Woodside, would benefit both by owning a better quality investment and sending a clear signal that it did not intend to bid for either company, Cazenove continued.

However, with BG continuing its share buyback programme yesterday, there was no chance that it could be in merger talks and shares closed down 4½p at 767p in tandem with the market trend. Shell ended down 33p at £19.44.

Among the miners, Rio Tinto drifted 32p at £35.65 amid talk that it could counter-bid for Alcan, the Canadian aluminium maker facing a $28.4 billion (£14.4 billion) hostile offer from Alcoa.

Property stocks and housebuilders rebounded, having been sold off in recent days on interest rate worries. Bovis Homes gained 30p at 977p as Evolution Securities said the stock had reached “fire sale levels” ahead of the sector’s trading statement season.

Great Portland Estates rose 4p at 671p after Lehman Brothers added the property developer to its “buy” list after a meeting with management. Whereas the market has been anticipating a 10 per cent fall in commercial property values across the board, rents in Central London should remain more robust than City offices, Lehman argued. About four fifths of Portland’s portfolio is in the West End.

The Currys owner DSG International was ahead 2.3p at 168.9 on the back of a recommendation from Cazenove.

Upgrading to “outperform”, it told clients that a 25 per cent share price drop since November was already pricing in material earnings downgrades and not attributing any value to its option to buy control of Eldorado, Russia’s biggest electronics retailer. New York: Stocks fell as bond yields rose to their highest in five years, prompting concerns about higher borrowing costs. The Dow Jones industrial average closed down 130.00 points at 13,295.00.

http://business.timesonline.co.uk/tol/business/markets/article1923988.ece

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