European shares up on M&A

European stocks rose yesterday led by Linde, which clinched a deal to buy rival BOC, Vodafone, on hopes of a special dividend, and Generali on a capital restructuring.

But analysts at Lehman Brothers and JP Morgan warned that the party may be over soon as interest rates looked set to rise further and credit analysts at WestLB foresaw a widening of corporate bond spreads especially for telecoms and utilities.

US factory orders fell 4.5 per cent in January, fresh data showed, but Wall Street's leading stock market indexes were higher as the European trading day ended. The pan-European FTSEurofirst 300 index ended unofficially with a gain of 0.6 per cent to 1,350.16 points, rebounding from the two-week low of 1,335.1 it hit last Friday.

"Again it's all driven by mergers and acquisitions activity, and telecoms are in the limelight," said Simon Jeffries, head of sales trading at ING Barings.

The market had stalled in the last few sessions after hitting a string of four-and-a-half-year highs but is still up almost six per cent this year on robust earnings and waves of M&A activity.

"We think the coming weeks and months will see slower cross-border flows," Lehman Brothers said in a portfolio strategy note. "We are concerned that Continental European equity markets may now retrace by up to five per cent."

JP Morgan was also cautious, saying in a strategy note: "Historically, an environment of rate tightening and currency strengthening led to European P/E multiple derating."

JP Morgan's economists expect the European Central Bank (ECB) to raise interest rates to three per cent and that the euro will strengthen to 1.25 against the dollar.

"We would look for the next (ECB) move to be in June and for rates to be above three per cent by year end," Credit Suisse said. The ECB tightened by 25 basis points to 2.5 per cent last week.

Linde surged 7.5 per cent on news of its $14.4 billion agreed acquisition of BOC, which will take it to top spot in the industrial gases market alongside Air Liquide. BOC shares, which have rallied in anticipation of a deal, were flat.

"We regard the deal as rational from a regional and product view, but think that Linde achieved this repositioning at a full price. We continue to prefer Air Liquide," DrKW said in a note.

Air Liquide's share price eased 0.4 per cent. Europe's biggest bank HSBC Holdings advanced 1.5 per cent after it reported a pre-tax profit of $21 billion, above the average of analysts' forecasts and a record profit for a UK bank.

"The reporting earnings season is bringing increasingly more positive than negative surprises," said Charles Dautresme, S&P Equity research strategist, in a note.

Also in financials, Generali shot up 7.3 per cent to a five-year high after Italy's top insurer announced a €1.8 billion share buyback.

DrKW said in a note that the "welcome capital restructuring and an ambitious strategic plan announcement more than offset" Generali's slightly weaker than expected 2005 results.

Vodafone advanced 3.5 per cent to 125.12 pence, adding to Friday's eight per cent jump on news the UK mobile phone company was in talks to sell a controlling stake in its Japanese unit.

"It is sensible for Vodafone to look to exit Japan as soon as possible. Market revenues are structurally ex-growth," JP Morgan analysts said in a note. Newspapers said Vodafone plans to pay a £5 billion special dividend if it sells the stake.

"If the deal succeeds we can easily see upside to a 10-20 per cent market relative premium," Citigroup said. That would take Vodafone's share price to 149-163 pence, Citigroup said.

Vodafone was the most traded share in Europe by far on a volume twice its daily average over the past 30 sessions.

The DJ Stoxx European telecoms sector index rallied 2.8 per cent, bolstered also by BT, which gained 5.1 per cent after The Business Online said that a consortium of private equity firms including Blackstone, Macquarie Bank and Kohlberg Kravis Robers, is mulling a £25 billion bid.

"We view the prospect of a private equity bid for the entirety of BT as improbable, although not impossible, given that the company has already in effect asset stripped itself," Goldman Sachs said in a research note.

KPN jumped 6.2 per cent to €9.44 after the Dutch telecoms group's chief executive told a magazine that the share is undervalued and worth more than €9.