European shares end up as M&A talk buoys utilities

A fresh flurry of merger and acquisition talk around firms such as Scottish Power boosted European shares yesterday, outweighing a weaker Wall Street and oil stocks pressured by a lower crude price.

European stock markets consolidated earlier in the day, entrenching last week's four per cent in gains the main pan-European index, but market commentators expect further buying with shares generally seen as good value.

The pan-European FTSEurofirst 300 index posted an unofficial close of 0.3 per cent up at 1,225.2 points.

"Generally we think European equities are still quite cheap at these levels and we expect strong support to come in from further positive earnings and more M&A speculation," ABN AMRO European strategist Rolf Elgeti said.

"Oil stocks across Europe are weaker and this is because of the crude price falling but also because of milder-than-expected weather forecasts in the US," he said.

Scottish Power surged 3.4 per cent after sources close to the matter said it was in talks over a possible bid from Germany's E.ON. The Sunday Times newspaper reported rival utility Scottish & Southern Energy plc had appointed investment bank CSFB to advise it on a possible merger.

The speculation boosted hopes for sector consolidation and other utility shares shone with British Energy up two per cent, Severn Trent up 2.2 per cent and Northumbrian Water up 2.2 per cent. The rise in the UK utility stocks pushed the FTSE 100 0.7 per cent higher.

US crude futures slipped to trade just above $59 a barrel, pulling the DJ Stoxx Oil and Gas index down 0.9 per cent with Total falling 0.8 per cent, while Italy's ENI lost 0.5 per cent and Britain's BP shed 0.4 per cent.

Italian oilfield services equipment maker Saipem fell two per cent after it reported that its order book was flat, overshadowing a rise in third-quarter net profit.

Although hurting oil producers, the lower crude price could help soothe inflation nerves and fears that interest rates could rise more sharply than expected, dealers said.

"T-shirt weather in New York and many other parts of the US has led to a slide in gas prices and more modest oil prices. The natural gas price fell 12 per cent last week and the oil price remained around $60. This should take the edge off the inflation pressures that have concerned central banks," Barclays Stockbrokers said in a research note.

Still, the dollar hit new two-year highs against the yen and neared an 18-month peak versus the euro on expectations of higher US interest rates, and this could depress sentiment.

Ryanair was among the weakest European stocks in the session, losing 4.3 per cent after the low-cost airline reported a 16.5 per cent rise in second-quarter net profit but said it remained cautious in its outlook for the traditionally quieter winter season.

"Today's fall... is as much about profit taking as it is to do with the cautious outlook statement," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers. "When oil prices do eventually return to more normal historical levels, Ryanair should prove to be in better shape than ever."

Also on the losing side was German pharmaceuticals trader Celesio, which fell 3.4 per cent after Deutsche Bank cut it to "hold" from "buy" with a price target of €72.

Shares in KPN fell 1.2 per cent despite the Dutch telecoms firm meeting expectations with its earnings and raising its outlook. Commentators said the stock was down because KPN had not commented on takeover speculation after Telefonica's £17.7 billion bid for Britain's O2.

"A lot of people were hoping for statements on their long-term future - be it predator or prey," asset manager Gert Jan Geels of Eureffect said.