Market Report: BAT returns to a rapturous welcome

THE RETURN of British American Tobacco to the stock market after a 22-year absence brings a humiliating end to one of the most ambitious diversification programmes ever undertaken by a British group.

Until it hit the takeover trail, BAT was a "pure" tobacco company. Worried about the growing impact of the smoking and health campaign, it joined the rest of the industry in a madcap spending spree. Now, once again an uncomplicated smokes group following its final demerger, BAT was given a rapturous stock market welcome, puffed up 128.5p to 466p in busy trading.

To rub salt into the diversification wound, the last remaining non-tobacco business, the Allied Dunbar and Eagle Star financial and insurance operations which merged with Switzerland's Zurich group, made a far less impressive debut. Allied Zurich, as the new financial group is known, ended 30.5 down at 786p.

The sharply contrasting displays is due to the market perception that the insurance group faces an uncertain time and the once despised tobacco side is undervalued and high yielding. There is also a belief that the tobacco business got the best of the break-up.

BAT, it now appears, wasted its time spreading into such areas as catalogue retailing, supermarkets, and paper and packaging. At one time it even fancied itself as a brewer. It was an unsuccessful takeover bid, inspired by the late Sir James Goldsmith, which ended BAT's expansionist aspirations. It beat off the Goldsmith assault by promising to get back to its core business and, before the financial split, had sold or floated its other operations.

A host of investment houses advocated the merits of BAT. Credit Lyonnais and Schroders were among those suggesting the shares are a buy.

The tobacco/financial spilt pushed oil group Lasmo out of Footsie, just ahead of the steering committee meeting to decide on the quarterly changes. It looks like being quite a shake-up, with Enterprise Oil following Lasmo. Others in the firing line include RMC and Smiths Industries.

One late contender for Footsie honours is TeleWest Communications, the cable group. A share conversion, completed as the market closed, should have provided enough ammunition, in the shape of ordinary shares, to ensure Footsie membership.

The country's second largest cable group said 490 million preference shares, issued when it took over General Cable, had been switched into ordinary shares. The new shares lifted Telewest's capitalisation to approaching pounds 3bn which is enough to give Footsie status. There could, however, be a questionmark over the timing of the conversion; the new shares had not actually been traded when the Footsie calculations were made.

Footsie ended 2.8 points off at 5,344.2; at one time it was up 52.8, reflecting a strong New York opening. It could be argued that Monday's dramatic advance was in anticipation of yesterday's Wall Street strength. Supporting indices were rather more confident. The mid cap gained 57.4 to 4,804.5 and the small cap 17.3 to 2,102.2.

Enterprise slipped, although Henderson Crosthwaite, despite the impending Footsie relegation, believe the shares are a buy. Conversely it takes a cautious stance on Securicor, likely to become an index constituent. The oil group, 716.5p a year ago, fell a further 3p to 347p; Securicor rose 11p to 485p.

United News & Media, ahead of figures today, put on 45.5p to 672p and Norwich Union, following first half figures, rose 27p to 452p.

More overseas orders lifted some of the depression from Rolls-Royce, up 7.75p to 199.5p.

The signalled arrival of David Rowland as chief of National Westminster Bank prompted a 33p gain to 990p with the market at least relieved at the ending of the uncertainty over the chairmanship.

Supermarket shares were ruffled as BT Alex.Brown trimmed its profits forecasts for Asda and Safeway, two chains which once nursed merger hopes. Asda retreated 5.5p to 180.5p and Safeway 8p to 323p. J Sainsbury shaded 2.5p to 540p and Tesco 1p to 169p.

Marks & Spencer gave up 21.5p to 498p in response to the bleak trading performance of one of its major suppliers, Dewhirst. After a torrid session on Monday following its figures, Dewhirst gained 2.5p to 108p.

Booker, now in reverse takeover talks with Budgens, tumbled 14p to 156p, another new low.

Talk of interest rate cuts had the predictable impact on house builders which have suffered sharp reverses in recent months. Barratt Developments led the mid cap advance with a 17p recovery to 181.5p and Beazer added 14.5p to 157p. Taylor Woodrow, with strong results, gained 14.5pto 162.5p.

TLG, the lighting group where US group Cooper Industries has made a 160p a share bid, rose 3p to 170p as Wassall, the conglomerate, picked up another 550,000 shares at 165p. It now has 15.94 per cent.

SEAQ VOLUME: 5,344.2m

SEAQ TRADES: 62,674

GILT INDEX: n/a

SUPERFRAME, a designer and maker of retail display equipment, held at 12p. There are suggestions Mike McDonald, chairman of Sheffield United, the quoted football club, is thinking about pumping some of his private businesses into the group. Superframe's shares are near their year's low; they have been up to 23p. Dean Corporation, the builder and property services group, is a near 30 per cent shareholder.

FLYING FLOWERS, which has withered from nearly 600p to 130p following profits warnings, firmed 3p to 149p. Beeson Gregory has upgraded its recommendation from hold to buy. It sees profits falling from pounds 5.8m to pounds 5.1m with pounds 7m in the frame for next year. But analyst Russell Kerr says it is unlikely the market will give FF a rating "that reflects the group's intrinsic value until investor concerns are allayed".