Market Report: Anglo American firms up on merger talk

Speculators were drawn to Anglo American, as Nomura weighed in on the possibility of a "merger of equals" with Xstrata, the famously acquisitive Anglo-Swiss miner.

The two have been linked numerous times before, with rumours resurfacing after Xstrata dropped plans to acquire the platinum specialist Lonmin. Although Xstrata continues to maintain a significant stake in Lonmin, Nomura said a marriage with Anglo made "compelling" sense.

"We feel that both companies have lost ground to major rivals over the past 12 months, particularly BHP Billiton and Vale," the broker said,

"The fact that the current market capitalisations of Xstrata and Anglo are almost identical at around $30bn (£19bn), with very similar net debt levels, suggests to us additional flexibility in how any potential deal could be structured (i.e. some potential for a nil-premium merger of equals, although we suspect Xstrata may be more likely to pay a premium for control)."

Nomura reckons Xstrata may sell the Lonmin stake anyway, "because Lonmin's new chief executive, Ian Farmer, appears to be running [the company] as Xstrata management had intended", limiting the operational upside that might have been realised if the Anglo-Swiss miner gained control.

The possibility kept Anglo, which was moved to "buy" at Nomura, and also upgraded at Goldman Sachs, up almost 3 per cent or 45p at 1,625p, while Xstrata, whose target price was moved to 1,074p at Goldman and 1,060p at Credit Suisse, rose 17.5p to 655.5p. BHP Billiton, whose target was moved to 1,778p from 1,302p at Goldman, was 25p ahead at 1,422p, and Lonmin, whose target was moved to 1,246p from 650p at Goldman, gained 49p to 1,328p. In the wider sector, Antofagasta was 2.7 per cent or 15.5p stronger at 591.5p, after Credit Suisse moved its target price for the stock to 510p from 450p.

Overall, the market was broadly flat, with the FTSE 100 rising slightly to 4,365.29, up 19.82 points, and the FTSE 250 gaining 29.1 points to 7,541.47.

Lloyds Banking Group recovered to 68.6p, up almost 3 per cent or 1.9p, while the Royal Bank of Scotland strengthened by 2.5 per cent or 1p to 40.9p. Exane BNP Paribas, which moved Lloyds to "neutral" from "underperform", said the threat of regulatory demands from European authorities may be have been overdone in recent days, saying: "Surely this is not 'new news'?"

"In terms of the potential scope for mandatory business disposals, the outcome is highly unpredictable," the broker said. "However, it is worth noting that, in time, Lloyds will wish to dispose of a number of businesses where the HBOS acquisition has created duplication."

On the downside, BAE Systems was weak, retreating to 357p, down 2.1 per cent or 7.75p, as President Barak Obama signed a new law to reform the way the Pentagon buys weapons systems, aiming to clamp down on cost overruns and delays.

Further afield, Brixton, the commercial real estate group, rallied to 61.75p, up a healthy 24.1 per cent or 12p, after it emerged that rival Segro had made a takeover approach. Brixton said it had entered into discussions with a small number of parties, with analysts saying that the Segro offer was likely to be the best fit, given the synergies between the two businesses. Unlike Brixton, Segro, which was 5 per cent or 1.25p ahead at 26.25p, was among the legion of commercial property companies that tapped shareholders to bolster their balance sheets.

Elsewhere, National Express was 7.3 per cent or 20.2p stronger at 299.25p, thanks to Investec, which upped its target for the transport group's stock to 350p from 280p in a sector review. "While the loss-making East Coast franchise is putting severe pressure on the finances, we expect the group to exit this in time," the broker said, "Although this could also cost it participation in other rail franchises, it could pave the way for a successful rights issue and refinancing in September [next year], which would leave the shares looking inexpensive, in our view."

The broker also revised its stance in Go-Ahead, which was 10p firmer at 1,286p after being moved to "hold" from "sell", saying that as the group has emerged as the "clear front-runner" for the Southern rail franchise, forecast upgrades may be forthcoming as early as next month.

"We still see risk of weakness in commuter volumes, but this is emerging later than we thought, which is helpful for Go-Ahead as its most exposed franchise (Southeastern) goes into revenue support from next April," said Investec.

Among smaller companies, Yell, the directories group which has been on a downward trend since posting results earlier this week, was off another 16.4 per cent or 6.5p at 33.25p.

Alliance Pharma, the AIM-listed specialist pharmaceuticals group, went the other way, rallying to 12.25p, up 6.5 per cent or 0.75p, following news that investor Nigel Wray had upped his stake in the business to more than 10 per cent by picking up 1.8 million shares earlier this week. It has been a good week for the company, whose AGM statement prompted Numis to nearly double its full-year sales estimates for Alliance's Deltacortril steroid tablets.