European stocks higher on M&A, utilities dominate

Acquisitions propelled European stocks higher yesterday as Suez and Gaz de France outlined a deal to create Europe's second-largest energy utility, offsetting Vodafone's warning of slowing mobile revenue growth.

"We are convinced that M&A will continue... it is not over yet and our guess is that it has only just started," said Franz Wenzel, senior investment strategist at Axa Investment Management in Paris.

The pan-European FTSEurofirst index of 300 leading shares was up 0.3 per cent at 1,363.53 points at the unofficial close to touch a new four-and-a-half-year high.

Across Europe, London's FTSE 100 gained 0.3 per cent, and Frankfurt's DAX added 0.8 per cent, while Paris's CAC 40 was up 0.3 per cent.

The German utility RWE rose almost two per cent on a report that Britain's National Grid Plc is set to conclude deals to buy two of its Dutch gas network businesses.

Shares in National Grid closed slightly lower after they agreed to buy US natural gas distributor KeySpan Corp. for around $7.3 billion in cash.

"Merger talk among utilities has been dominating markets for days and you cannot say when this will end," said Guenter Senftleben, an equity strategist at Bankgesellschaft Berlin.

Shares in Gaz de France slipped 2.5 per cent and Suez tumbled six per cent after the companies outlined a government-brokered "merger of equals" seen as a lightning French response to designs on Suez by Italy's Enel.

"All in all, we welcome the deal, as the new Suez/GDF entity should create value," said Bertrand Lecourt, analyst with Dresdner Kleinwort Wasserstein, in a research note.

"However, we would expect short-term pressure on Suez's share price. Firstly, we believe that the group is likely to lose its 'bid premium', as the announced merger acts as a strong signal that the French government will fight hard against a foreign hostile bid," said Mr Lecourt.

"Secondly, Suez's 'power price upside story' could be diluted. Investors who bought Suez to gain valuation upside via increase in power prices will now have exposure to regulated gas assets," he said.

Italian oilfield services contractor Saipem soared 11 per cent after it bought engineering unit Snamprogetti from parent Eni for €680 million.

The British glass maker Pilkington gained 1.4 per cent after Nippon Sheet Glass Co. Ltd. (NSG) said it would buy the remaining 80 per cent of the company for £1.8 billion in cash.

"There are two stories driving the market. The first is valuation related. Second, based on this phenomena that European companies are still very cash rich... the stock markets are very positive," said Axa's Wenzel.

He also cited the gap between corporate cash flow yields, which he estimated at around five to eight per cent, and much lower borrowing costs.

"That invites companies to buy the neighbour."

Money supply growth and loans to the private sector accelerated unexpectedly in the eurozone in January, according to official data released yesterday. Analysts said this strengthened the case for interest rate increases beyond the expected rate hike on Thursday and limited the market's potential gains.

Shares in British mobile phone giant Vodafone dropped three per cent after the company warned of lower growth prospects, casting a pall over the telecoms sector.

"Vodafone is representative of the whole telecom sector," said Mark Sheikh, analyst at KBC Asset Management.

"They're in some of the most competitive markets, Japan, the US, Germany and the UK, and getting close to full penetration levels, so it's not as easy to get growth," he said.

Deutsche Telekom, BT Group, Telecom Italia and France Telecom all lost around one per cent.

Among companies reporting earnings, Britain's Pearson, the world's largest educational publisher, rose 1.6 per cent after its 2005 pre-tax profit topped expectations.