Rio Tinto rises on deal hopes, but FTSE 100 slips back

Shares in Rio Tinto have risen 70p to £26.64 after the mining group received US approval for its $19.5bn investment from Chinalco, and subsequently repeated its commitment to the controversial deal.

But many traders believe the Chinese link-up may still not succeed, since it needs to be cleared by both Australian regulators and Rio's shareholders. Some expect erstwhile suitor BHP Billiton, 18p better at £14.10, to return with another offer for Rio, or perhaps to buy some of Rio's assets. In less than two weeks it will be six months since BHP's bid failed, but it cannot make a new offer for 12 months unless it receives the recommendation of the Rio board, or another bidder emerges.

There are other possibilities. If the Chinalco deal does fall through, Rio might need to resort to a rights issue, for example. In a sell note on the company Charles Kernot of Evolution Securities said:

"Rio Tinto and Chinalco have received approval from the Committee on Foreign Investment in the United States for the parts of the proposed Chinalco transaction that affect the US. These are the issue of convertible bonds and the proposed sale of a 25% interest in Kennecott Copper to Chinalco. US approval was always anticipated – but Australia's Foreign Investment Review Board remains key. A decision here is expected on 15 June – and may have stringent conditions attached.

"In the background, the company is still discussing the transaction and alternatives with its shareholders. However, it seems difficult to understand how the chairman can undertake conciliatory discussions when his chief executive and Chinalco are becoming more entrenched in their positions. Something has to give and it may just have to be [chief executive] Tom Albanese."

Overall, leading shares ended the week on a subdued note, with the FTSE 100 slipping 14.47 points to 4348.11. Wall Street had added around 30 points by the time London closed, after reasonably positive US inflation, industrial production and consumer confidence figures. Angus Campbell, head of sales at spread betters Capital Spreads, said:

"Whilst US markets have been trying to make some gains, here in the UK we've seen a second day in a row of mundane trading. The moment the FTSE went anywhere near 4400 the sellers took control and sent the index lower. This week we've seen the market fall from its recent highs and without any form of attempt to test 4500 and push higher. It's as if investors' appetite for more risk with the purchasing of more equity has dried up completely. The only encouraging thing is that we haven't seen a large move lower so far and, as it stands, we've still put on a 25 per cent gain from the lows since March."

A dip in the crude price left oil companies lower, with BP down 3.25p to 501p and Royal Dutch Shell B shares 12p lower at £16.

But Barclays bounced 14.75p to 267.75p. The bank confirmed reports it had received offers for its asset management business, which could fetch $10bn. Alex Potter at Collins Stewart said:

"If we assume around 50% of the sale price is goodwill - similar to the [proposed] iShares transaction - then $10bn for the entirety of Barclays Global Investors yields a gain of around £3.6bn. This improves tangible book value per share to 260p (from 230p) and equity Tier 1 to a much-healthier 7.5% plus (from 6.7%). Improvements in book value and capital ratios have been key drivers for bank stock prices. Whilst BGI does generate around 15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view."

Meanwhile analysts at KBW raised their target price for Barclays from 170p to 270p. They said:

"Barclays remains our favoured UK domestic. BarCap [the investment banking business] performed well in the first quarter of 2009 and more than offset rising credit costs. We think it can trade profitably over the next few years and capital should build, but monoline exposure will remain a debating point. We maintain a market perform rating on an increased 270p price target."

This follows yesterday's news that Morgan Stanley had lifted its target for the bank from 270p to 325p.

Marks & Spencer added 5.75p to 327.5p ahead of its full year results next week. There is a growing feeling in the City the retailer should cut its dividend, with Seymour Pierce expecting a reduction in the full year payout from 22.5p a share to 11.25p. Investec analysts Katharine Wynne and David Jeary issued a sell note on the company, saying:

"We believe the trading strategy, the store portfolio mix and the management team all need to see changes in order to restore positive momentum. By resorting to discounting to protect market share, and cost-cutting to protect the dividend, the longer term health of the business is threatened in our view."

Credit information group Experian was lifted by buy notes from both JP Morgan and Deutsche Bank, and its shares closed 17.75p higher at 483p.

But British Airways dipped 5.4p to 154.6p as UBS analysts turned less positive on the stock. They said:

"We are removing British Airways as one of our most preferred stocks in the transport sector. The weakness in recent revenue trends could lead to a reduction in management expectation on 2010 revenue growth, currently -5%. Our forecasts are below this, but we think that consensus forecasts will need to be cut in line with our numbers."

A number of mid-cap companies issued trading updates, to mixed receptions. PV Crystalox Solar, which supplies silicon wafers to solar cell makers, slid 14.5p to 93.5p after it warned of a fall in first half revenues due to an increasing number of delayed orders.

Bookmaker Ladbrokes lost 20p to 204.75p as it said profits in the last four months had fallen 34%, partly due to a number of results at the Cheltenham Festival favouring its customers. Investec said:

"There is no hiding from the fact this is a disappointing update. We see more positive catalysts at William Hill and Paddy Power, both of which have lower levels of financial leverage (or net cash, in the case of Paddy Power). We see no reason to change our 180p target price for Ladbrokes and hence we move our recommendation from hold to sell."

Morgan Crucible Company, the industrial materials group, fell 4.25p to 112p after a downbeat trading statement. But precision engineer Renishaw pleased the market with news that its second half losses would be lower than the expected £10m, which prompted a 34.75p rise in its shares to 414.75p.

And IT business Computacenter climbed 14.25p to 182.25p after it said first half profits would be well ahead of last year's figure.

Lower down the market AGI Therapeutics, a specialist in gastrointestinal drug products, tumbled 24.5p to 15p after it revealed that its lead drug Rezular had failed in large scale tests as a treatment for irritable bowel syndrome.