Merger Fever Is Gripping London

Remember that apocryphal British weather report: Fog over the Channel, Continent cut off? In financial terms, at least, it finally came true. While the big Continental markets languished in 1995, London behaved as if Europe weren't even there: The blue-chip Financial Times-Stock Exchange (FTSE) index uncoupled itself from its neighbors and followed Wall Street's prices into the stratosphere, soaring 20%--or 18% in dollar terms--to record highs. And most pros think the British bull isn't tired yet.

No question about it, the London market's historic close correlation with American stocks played a big part in the runup. The British economy and its corporate coffers have also continued to benefit from lower interest rates and higher growth ever since the country's departure three years ago from the restrictive monetary policies of the European Union's exchange-rate system. But the root of the London price explosion is merger fever. Sparked by the $14 billion marriage of drugmakers Glaxo PLC and Wellcome PLC in March, mergers and takeovers worth some $125 billion have swept pharmaceutical houses, banks, and utilities. The takeovers, together with a bunch of share buybacks, have turbocharged the market with liquidity. "Institutions and investors had a lot of money that they wanted to get back into the market," says Michael Hart, chairman of the Foreign & Colonial Investment Trust. He figures the FTSE index could climb an additional 10% in 1996.

SPARKED UP. The utility mergers that reshaped the British electric-utility industry came as a particular surprise. When the trend started, money managers doubted whether the Tory government would put competitive concerns behind the need to improve the industry's efficiency. They were seriously mistaken. In recent months, eight regional utilities have been snapped up by other electricity producers, water companies, and a few American utilities that see Britain's market as a laboratory in which to get ready for pending U.S. deregulation.

While additional utility takeover candidates are beginning to grow scarce, plenty of other action remains. Catherine Guinefort, European strategist at Paribas Asset Management in Paris, thinks Lloyd's Bank PLC and HSBC Holdings PLC--the parent of Hongkong & Shanghai, Midland, and Marine Midland banks--will jump, as interest rates continue to fall.

But Morgan Stanley & Co. analyst Matthew Stainer thinks that British Airports Authority PLC, which operates the country's big gateways, is poised for a growth spurt. He thinks BAA will see a 12% profit growth over the next three years, and he figures the stock could rise by 20%. Another undervalued pick comes from Wolfhardt Graetz, European strategist at Zurich's Bank Vontobel. He likes cigarette maker BAT Industries PLC. Its price-earnings ratio of 11 is a bargain compared with Philip Morris Cos.' 14.

Despite the euphoria, the reality of national elections to be held by 1997 and a likely Labor Party victory will probably set in around midyear and give the bulls reason for caution. But until that reality check comes, the London market appears to have plenty of energy to burn.