Utilities M&A lifts European stocks to 41/2-year high

European shares hit a four-and-a-half-year high yesterday, led by utilities, after Germany's E.ON trumped Gas Natural's bid for Spanish utility Endesa with a €29.1 billion ($35 billion) offer.

But European markets shed some of their gains after a surprisingly large rise in US leading economic indicators, which heightened the prospect of more rate rises from the Federal Reserve.

The US Conference Board's January index of leading indicators rose 1.1 per cent to a record 140.1.

New York's three benchmark stock indexes were in the red as the European trading day was drawing to a close. The FTSEurofirst 300 index of leading European shares closed 0.3 per cent higher at 1,350.26 points, having peaked at 1.355.88 - its highest since August 2001. Stocks that rose outnumbered those that fell by eight to seven.

Endesa shares rose 8.1 per cent to €27.55 after cash-rich utility E.ON launched its €27.50 per share cash bid, exceeding Gas Natural's unsolicited €22 billion offer.

"We struggle to see Gas Natural outbidding in cash... but the market will hope for that," Dresdner Kleinwort Wasserstein said in a research note.

"We do not rule out Endesa going a touch above E.ON's bid," the investment bank said.

E.ON shares rose 2.2 per cent, while Gas Natural fell 0.2 per cent.

"The deal looks interesting from a strategic point of view because the Spanish market offers stronger growth rates (than Germany)," said Nils Machemehl, an analyst at MM Warburg.

Utilities across Europe gained, with France's Suez up 1.8 per cent, Finland's Fortum up 4.6 per cent, Britain's Centrica up 0.4 per cent and Germany's RWE up almost two per cent. The DJ Stoxx utility index advanced 2.5 per cent and was Europe's top sectoral gainer.

"It's all about the E.ON bid. There's value for the whole sector after that," one trader said.

At the other end of the spectrum, telecoms stocks were weaker, with the sector index down 0.8 per cent. After several downgrades in the sector on Monday, Bear Stearns yesterday cut its earnings per share forecast for Vodafone Group by 11.7 per cent for fiscal 2007.

Bear Stearns said the lowered estimate reflected Vodafone's acquisition of Turkish mobile phone firm Telsim, a closer examination of its South Africa operations and weak key performance indicators in the third quarter of this year.

Credit Suisse said European telecom sector valuations still looked unappealing, with a prospective 2006 free cash flow yield of eight per cent, below that of energy, chemicals, steel and paper. Vodafone was down 1.8 per cent, Deutsche Telekom lost 0.8 per cent and France Telecom fell 0.6 per cent. On the corporate earnings front, Barclays Plc, Britain's third-biggest bank, was the first major listed British bank to report 2005 results. Its shares were up 0.2 per cent after its profit just beat analysts' average forecast.