A revival of Diageo merger speculation helped give traders a distraction from another grim day for the FTSE 100.
The drinks maker should consider a merger of equals with SABMiller, said Nomura analysts. Cost savings could add 18 per cent to combined profits and would face few regulatory hurdles, it said.
Diageo and SAB have been frequently rumoured to have investigated a tie-up, and in 2007 considered a joint bid for Scottish & Newcastle.
With Diageo’s growth stalled and SAB reported to be looking at strategies to fend off AB InBev, a deal might make sense to both management teams, said Nomura.
“We estimate that with circa 50:50 emerging and mature market split of profits, a merged group could offer a firmer profit base in uncertain times (for SABMiller holders) and potentially increase its growth profile in the longer term (for Diageo holders),” Nomura told clients.
The biggest SAB shareholders, the Altria and Santo Domingo families, might also prefer a merger to an InBev takeover for tax reasons, the broker added.
SAB closed 3.1 per cent lower at £29.46 and Diageo drifted 0.9 per cent to £16.98, which valued the drinks makers at £48bn and £43bn respectively.
Miners led the wider market lower after weak German factory data kept the pressure on metals prices. The FTSE 100 lost 2.4 per cent, dropping 151.18 points to 6,042.92, which took its weekly decline to 3.3 per cent.
Anglo American lost 7.8 per cent to 668.5p to lead Friday’s fallers as open-market diamond prices slipped towards five-year lows.
Anglo’s De Beers unit is seen as the main support for its dividend, having provided 37 per cent of first-half earnings.
Glencore was down 6 per to 123.2p. The commodity trader still needed to cut 2016 net debt by between $6.5bn and $7.5bn to avoid a rating downgrade, and reduced funding for its marketing business would result in sharply lower earnings, forecast JPMorgan.
“Unless commodity prices rise, we believe capital preservation measures will render Glencore’s medium-term equity appeal unattractive,” it said.
Evraz, the steelmaker controlled by Roman Abramovich, was the sector’s relative outperformer on a loss of 2.6 per cent to 66.2p.
A move this week to by Polyus Gold’s owners to take the miner private has increased speculation that Russian companies are facing renewed pressure to delist from foreign exchanges.
BP faded 5 per cent to 337.9p on a downgrade to “underperform” from Merrill Lynch.
The energy major faced a free cash flow shortfall to the end of 2017 as the sector sought to maintain dividends, defend their ratings and bolster reserve bases with mergers and acquisitions, Merrill said.
Engineer GKN fell 3.9 per cent to 270.2p with Investec downgrading to “hold” on a potential slowdown in car production in China and other emerging markets.
Clothing retailer Next faded 3.1 per cent to £75.95. UK consumer strength had been overestimated and, while Next was well positioned to adapt, the headwinds to growth made its valuation look stretched, argued Exane BNP Paribas, which downgraded to “underperform”.