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JP Morgan gives thumbs up to Diageo’s potential $10bn bid for Beam

Two weeks ago, The Sunday Telegraph revealed Diageo held talks with Japanese drinks company Suntory in the spring and summer about them jointly making an offer for Beam, whose bourbon brands include Jim Beam, Marker’s Mark and Knob Creek.

Yesterday, Matthew Webb, an analyst at JP Morgan, said: “Diageo’s participation in any potential bid for Beam could further strengthen its position in the key US spirits market, help to consolidate this fragmented market, and plug portfolio gaps for large-scale bourbon and (potentially) tequila brands.

“The availability of cheap debt for companies with Diageo’s strong credit rating would also make a deal attractive on financial grounds – despite the likelihood of a full price.”

Diageo – the company behind Guinness, Smirnoff and Baileys – edged up 10p to £18.47 as JP Morgan upgraded the stock from “sell” to “neutral”. Mr Webb added that Diageo shares are cheap at the moment and currently trade at only a modest premium to other drinks companies.

Overall, yesterday was another quiet day in the City with a low volume of shares changing hands. The FTSE 100 eventually closed down just 3.25 points at 5958.34 but the FTSE 250 put on 20.36 points to 12422.77.

Still, Angus Campbell, head of market analysis at Capital Spreads, said: “The focus still remains on the US fiscal cliff negotiations between President Obama and the Republicans which continue to be unresolved and there’s now a feeling that investors have run out of steam.”

Carnival took the wooden spoon following its fourth-quarter earnings results, which contained a downbeat outlook for next year. Carnival shares slid 154p to £22.91 after the world’s largest cruise operator said advance bookings for 2013 continued to be below the prior year levels despite lower prices. Carnival also disappointed analysts by giving a full-year earnings forecast that fell short of what had been anticipated. The company said it sees 2013 adjusted earnings per share in the range of between $2.20 to $2.40, lower than the estimate of $2.46.

Elsewhere, gold mining companies peppered the loserboard as prices of gold futures fell to their lowest since August. Randgold Resourcesdipped 140p to £59.65 and Polymetal International fell 21p to £11.59.

Bunzl dipped 6p to £10.14 following some negative broker comment. For example, Seymour Pierce downgraded the distribution company to “reduce”. “Following a strong yearly share price performance we believe the shares are too expensive,” argued Caroline de La Soujeole, an analyst at Seymour Pierce.

On a more positive tack, Weir Group was one of the best blue-chip performers after it unveiled the acquisition of Mathena, a US oil equipment maker that manufactures a range of pressure control products. Weir will initially pay $240m (£148m) for Mathena with a deferred payment of up to $145m.

On the mid-cap index, Vesuvius jumped 28 to 352p on its second day of trading following the demerger of Cookson Group.

Vesuvius consists of two of Cookson’s three divisions (Engineered Ceramics and Precious Metals Processing) and the majority of its revenue, profit, debt and other legacy liabilities. Alent, down 4.7 to 305p, is the new name for Cookson’s Performance Materials business.

Investec took up coverage of Vesuvius with a “hold” rating and price target of 346p. Analysts at the broker said: “The demerger of the former Cookson group presents an opportunity to leave behind an unfortunate legacy. The group was a serial equity fund-raiser – to finance acquisitions or survival – and it had a record of value destruction.”

However, they added: “In spite of the undoubted cyclicality of its markets, we believe that Vesuvius can break with the past and be managed prudently to generate robust cash flows, underpinning a good and progressive dividend.”

Spirent Communications perked up 3 to 150.8p after Panmure Gordon named the company as one of its ‘Top Picks’ for 2013.

Among the small caps, Afferro Mining put on 2¾ to 84¼ as fresh bid speculation did the rounds. Traders claimed Jindal Steel and Power was rumoured to be close to making an offer at 130p a share while Sinosteel was said to be working on a counterbid.

Northacre, a property development holding company, jumped 18 – or 23pc – to 97p in late trading after revealing it had received offers from a management buyout vehicle and Abu Dhabi Capital Management.

DCC, the Irish support services company, closed up 16 cents at ♠24.57 after it said it had bought Kent Pharmaceuticals for €71.2m (£58m). Kent Pharmaceuticals is the UK’s biggest producer of generic antibiotics and DCC said it will combine it with the Irish company’s own healthcare division to create a pharmaceutical business with total revenues approaching €150m. Cavendish Corporate Finance – the advisory firm run by Howard Leigh, one of the City’s top corporate financiers – advised Kent Pharmaceuticals on the sale. Gordon Hamilton and Michael Jewell, who work at Cavendish, said there had been a significant amount of consolidation in the sector in recent months, and claimed that this deal would create UK generic pharmaceutical business with “excellent” growth opportunities.