Economic Growth Pauses; AON, Benfield Merge

123jump.com Staff
22 Aug, 2008
New York City

The UK economic growth was flat in the second quarter compared to the first quarter and rose only at 1.4% from a year ago. The manufacturing sector declined for the second quarter in a row as manufcturers battle rising value of pound in international markets. Conumers are battling rising inflation driven by higher energy and food prices. Separately Aon agreed to acquire Benfield Group for 840 million pounds.

[R]1:00PM New York, 6:00PM London - UK service sector output drops 0.2% in the quarter to June.[/R]

London market averages rose cheered by optimism from U.S. Federal Reserve Chairman Ben Bernanke that the recent decline in commodity prices and the rise in the dollar was an encouraging indicator.

Second quarter economic growth was flat compared to the first quarter and rose 1.4% from a year ago. The strong pound is hurting exports, falling home prices have turned consumers cautious and financial service sector is dragging the service sector lower. The economic growth is likely to be anemic for several quarters as the island economy battles the rising inflation and expectations of tighter monetary policy.

Market Sentiment

In London trading FTSE 100 rose 2.52% or 135.4 to 5,505.60. Of the 102 FTSE 100 stocks 95 rose, and 7 declined. Liberty International led advancers in the index shares with a rise of 8% followed by Lloyds TSB Group increasing 6.96%.

Service Output Falls 0.2% in Q2

The Office of National Statistics reported on its Web site today the output of the service sector rose 0.2% in the three months to June from the previous quarter.

Significant increases were measured in transport, storage and communication, distribution and government and other services, while there was a decline in hotels and restaurants.

Between May and June output slumped 0.5% weighed down by the distribution sector. The ONS said output from distribution in the three months to June increased 0.5% from the previous quarter as retail, motor trades and wholesale shored output.

However output fell 2% between May and June as output from retail dropped markedly. Output from distribution decreased 2.0 per cent between May and June. This was mainly due to a sharp fall in output from retail.

In addition, output from hotels and restaurants plunged 1.4%, while output from transport, storage and communication rose by 1.1% in the second quarter ended June.

Business services and finance output advanced 0.1% in the three months to June from the previous quarter, with significant increases recorded in computer services. Decreases were realized in other financial services and renting of goods.

Also in the quarter to June output from government and other services soared 0.3% from the previous quarter as health and social work, education and sewerage and refuse disposal rose significantly.

Aon Corp Buys Benfield Group

The Netherlands based Aon Corp agreed to buy U.K. based Benfield Group for £844 million pounds after settling a legal dispute recently. The boards of both companies have since sanctioned the transaction.

Aon ((AOC)) will acquire Benfield for £3.50 or $6.55 per share in cash and assume £91 million or $170 million of Benfield net debt, representing an enterprise value of approximately £935 million or $1.75 billion on a fully diluted basis. The consideration represents a 29% premium to Benfield’s closing stock price on August 21, 2008, the last trading day prior to the announcement of the agreement.

The transaction is expected to generate approximately £65 million or $122 million in annual cost savings fully phased-in in 2011 primarily from shared administrative and support services across both Aon Re Global and Benfield.

The company estimated return on investment for the acquisition of 13.8% higher than the return on investment of 12% for the share repurchase program.

Gainers & Losers

Liberty International Plc led gainers in the FTSE 100 index shares with a rise of 8% followed by increases in Lloyds TSB Group of 6.96%, in Aviva Plc of 6.81%, in HBOS Plc of 6.25% and British Land Co. of 6.22%.

British Land Co. gained on optimism over the future health of the economy.

Financial stocks increased on news that Korea Development Bank might be targeting Lehman Brothers and comments by the U.S. Federal Reserve Chairman Ben Bernanke that the falling commodity prices and a stronger dollar were encouraging. Royal Bank of Scotland advanced 5.37%, Barclays increased 5.06% and Old Mutual soared 5.16%.

Retailers rose. Sainsbury spiked 4.70% and Next soared 4.29%.

Homebuilders gained. British Land Co advanced 6.22% and Hammerson gained 5.15% as a result.

Eurasian Natural led decliners in the FTSE 100 index shares with a fall of 2.73% followed by losses in Xstrata of 1.87%, in Antofagasta of 0.61%, in Vedanta Resources of 0.55%, and Tullow Oil of 0.38%.

Commodities fell as oil prices held steady at $120 per barrel.