European shares rise amid bank consolidation hopes

European shares closed slightly higher yesterday with the market's focus on a possible merger between Italy's Banca Intesa and Sanpaolo, which fuelled talk of more sector consolidation.

Takeover speculation also lifted Anglo-Dutch steel firm Corus, and some analysts saw M&A activity underpinning equities while others said a US-led economic slowdown would hurt stocks by denting corporate profits.

Higher oil prices limited market gains as a storm brewed in the Caribbean with the potential to reach the Gulf of Mexico next week - raising worries over US production already trimmed by an outage in Alaska.

The FTSEurofirst 300 index of leading European shares closed unofficially at 1,359.64 points, up 0.13 per cent on the day and 0.11 per cent for the week. "Investment sentiment continues to run ahead of economic sentiment, having so far fully anticipated the more adverse news items. There is no other way to explain how, in a week in which there was clearly a flow of bad news, stock prices managed to resist all assaults," German bank HVB said in a note.

The main piece of bad news was an unexpectedly steep fall on Tuesday in the German ZEW economic expectations indicator, which dropped to its lowest level in more than five years.

"The danger is growing of downward revisions to corporate earnings due to distinctly weaker economic growth expectations," said HVB.

But Citigroup said European profits looked well supported. "Equity valuations are still appealing... We think investors are too cautious. Overall, we expect a 15 per cent return from European equities in 2006."

And ABN Amro said "a compelling set of fundamentals should be sufficient to see equities rally from current levels."

"We believe M&A activity will again provide a catalyst in driving equity returns," ABN Amro said.

Yesterday investors bet that a planned merger between Banca Intesa and Sanpaolo IMI would trigger a wave of bank deals.

Banca Intesa closed 0.8 per cent higher after 126.5 million shares had changed hands, more than five times the average daily volume over the past 30 sessions.

San Paolo IMI shares finished up 3.5 per cent, having risen as much as 6.3 per cent to a five-year high earlier in the day.

Assuming a merger of equals at 3.3 Banca Intesa shares for each San Paolo IMI share and net synergies of around €800 million, the new entity would trade at 9.8 times 2008 earnings, "...a discount to European banks, leaving room for upside in our view, considering the growth and restructuring opportunities," Goldman Sachs said in a note.

"We consider a possible deal as a positive one for the whole domestic sector," said Kepler Equities, recommending investors accumulate Banca Intesa shares.

"The Italian sector is going to be trading on a premium for the next three to six months; I don't think this consolidation story is anywhere near over," said David Dodds, investment analyst at SVM Asset Management in Edinburgh.