M&A helps push European stocks to four-month highs

European stocks closed at their highest in more than four months yesterday, propelled by heavyweight mergers as oil hovering around $61 a barrel provided a boost.

A rally in heavyweight mining stocks helped bolster gains, while Serono leapt 18 per cent after Germany's Merck launched a surprise 16.6 billion-Swiss franc bid for the drug maker.

"The mood is cautiously optimistic, there are several data points that have been comforting. It should be good for the Fed keeping the lid on further rate hikes," said Jan Leroy, fund manager at Petercam Asset Management.

"You have M&A racing ahead in Europe, the second quarter results season was better than expected, so people are hoping that the outlook for the third and fourth quarters will be OK."

The pan-European FTSEurofirst 300 index closed unofficially up 0.4 per cent at 1,387 points, its highest level since mid-May.

Crude oil hovered close to six-month lows around $61 a barrel, providing some support to equity markets.

"The market overall is bullish, why? Because we have deals around and a low oil price," said a Paris trader.

"Don't forget in Europe a good chunk of people were a bit cautious with the market so the cash position for fund managers is bigger that usual."

Mining stocks rallied, with Anglo American up 2.6 per cent, while Rio Tinto added 1.7 per cent.

Merger news dominated, with Merck dropping 4.7 per cent after unveiling its surprise bid for Serono and saying it plans to raise d2-2.5 billion in equity, issue a bond and a syndicated loan to help fund the deal. Merck bonds also fell.

Shares in Serono ended up 18 per cent. "It really came out of nowhere. Everyone is focused on the financial details and synergies. The 20-per cent premium seems reasonable at a first glance but the market needs more details to make up its mind about the deal," a trader said.

Elsewhere, Zurich Financial rose 2.1 per cent on bid speculation, while Spain's Metrovacesa rallied 16 per cent on hopes that a higher offer may be forthcoming.

Among travel stocks, Germany's TUI gained 4 per cent on takeover talk, while Carnival rose 5.6 percent after posting better-than-expected earnings.

Telecoms stocks were also stronger, with Deutsche Telekom up 2.3 per cent after a German magazine reported private equity firm Blackstone was pushing for the resignation of the company's chief executive.

Also in the sector, France Telecom added 1.8 per cent after its Orange unit pulled out of the bidding for the UK operations of Time Warner's AOL, the Times reported.

Among major gainers, UK grocer Morrison rallied 7.7 per cent after it posted a return to profit in its first half, while caterer Compass rose 2.9 per cent on talk the company could be broken up.

On the downside, Airbus parent EADS fell 2.4 per cent after confirming fresh delays to the A380 superjumbo.