The FTSE hit a three-year high this week as the financial year reached the halfway stage.

Over the week, the benchmark FTSE 100 finished the week up 82 points, 1.6 per cent at 5,161.0, its highest level since May 27 2002. The mid-cap FTSE 250 index continued to break new levels, rising 117 points, 1.6 per cent, to an all-time high of 7,446.2.

The week’s gains meant the blue chip index rose 6.2 per cent over the first half.

“Equity valuations still seem pretty reasonable,” said Mark Webster, of State Street Global Investors. “What’s likely to drive the market from here is free cash flow and cash flow yield,” he said.

The prime drivers for the week were telecoms and oil stocks. France Telecom’s removal of its €500m ceiling for takeovers and KPN’s €1.12bn acquisition of Telfort led investors to re-evaluate telecom assets and speculate that sector consolidation was on the way.

BT Group rose 4.4 per cent to 232¾p while its former mobile unit 02 added 3.9 per cent to 134p. Oil major Shell’s decision to alter its share structure pushed its shares 6.1 per cent higher to 553p.

The move will make it easier for Shell to make acquisitions using its own paper. Many fund managers are believed to be short of shares, as Shell’s weighing in the index moves to 9 per cent from 3.9 per cent.

Yesterday, a strengthening US dollar encouraged overseas investors into dollar sensitive stocks in London. The FTSE rose 47.8 points while the FTSE 250 index finished 77.5 points higher. Volume was 2.9bn shares.

Banking group Standard Chartered gained 2.2 per cent to £10.42, plumbing supplies group Wolseley gained 2.2 per cent to £12.00, while brewer SABMiller rose 1.7 per cent to an all-time high of 886p.

Hilton Group gained 2.2 per cent at 292½p after it announced plans to sell 16 UK hotels to raise over £300m. A substantial amount of the proceeds could be returned to shareholders.

So far this year Hilton has sold £111m of assets and this new tranche would make a total of £400m or around 10 to 12 per cent of its hotel assets.

Emap rose 2.2 per cent to 795p after Morgan Stanley said the media group was too cheap and upgraded its recommendation to “overweight”.

Patrick Wellington said Emap’s lowly valuation was unjustfied as earnings are forecast to grow by 8 per cent per annum over the next three years.

Rolls-Royce rose 3 per cent to 296p as the jet engine maker said its civil engine fleet would increase by 40 per cent over the next three years with long-term service agreements secured for half the fleet.

Cable & Wireless eased 0.5 per cent to 148¼p after Deutsche Bank remained cool on recent market speculation that the alternative telecoms group could be either a predator or prey in any sector consolidation.

“C&W’s £1.3bn cash and toughening markets means it is likely to be involved in consolidation,” said Gareth Jenkins, an analyst at Deutsche, as he initiated coverage with a ‘hold’ recommendation,” he said.

Deutsche said it would prefer to see C&W build scale by acquisitions of smaller players in the internet service providers and carrier pre-select markets.

Mobile network operator 02 also slipped 1.7 per cent to 134p as investors doubted it would be the subject of a private equity bid.

Analysts at Bear Stearns said a 10 per cent bid premium would push the cost of a deal to £13.2bn, unprecendented in scale in the telecoms sector.

Rio Tinto added 0.9 per cent at £17.24 after it agreed to buy a 50 per cent interest in the Hope Downs iron ore assets from Hancock Prospecting. No financial details were provided but the deal is thought to have cost around $187m.

Seen as probably the best undeveloped iron ore project in Australia, analysts reacted favourably to the news “Strategically, this is a great deal for Rio Tinto,” said Nick Hatch at Investec: “Hope Downs wil add to Rio Tinto’s position as the world’s second largest exporter of iron ore.”

Easyjet, the budget airline, rose 5.3 per cent to 258p as talk returned that Icelandair was raising its 10.1 per cent stake.

Woolworths, the high street retailer, advanced 3.4 per cent to 38¼p on continued talk of a private equity bid.

Insurer Britannic was in focus following the publication of the offer document for its proposed reverse takeover of Resolution Life. Shares were suspended at 508p on June 9 pending the takeover plans.

Dealers expected Britannic shares to rise when trading resumes on Monday, with spread betting firm Cantor Index forecasting an opening spread of 536p to 537.9p.

French Connection, the clothes retailer, dropped 8.2 per cent to 245p after it warned full-year profits were likely to be between £20m and £25m, well below the consensus expectations of at least £30m. See more on French Connection

Traders were largely concerned at the fashion retailer’s pricing strategy.

”Until the company reassesses its role with the UK clothing industry, and so long as the UK consumer remains price conscious, then French Connection will continue to struggle,” said Justin Scarborough, an analyst at Panmure Gordon, cutting his share price target to 200p from 250p.

BATM Advanced Communications, the telecoms group, jumped 8.3 per cent to 19½p as it told its annual general meeting that turnover and operating results were both “significantly ahead” of the previous year and matched half year expectations.

Shed Productions, the television production company behind Footballer’s Wives , was 0.9 per cent stronger at 116½p on talk it had won its first BBC Commission for 6 to 8 episodes of Waterloo Road, a drama based on an inner-city school.

Patsystems, the exchange trading software group, rose 16.7 per cent to 14p as it said it would be breakeven in its interim results, after losses in 2004.

Wembley, the gaming company, rose 7.6 per cent to 780p as it remained committed to selling its US gaming division to BLB Investors despite legislative delays. Passage of the legislation is still uncertain despite rumours that it could be passed before the shareholders’ general meeting scheduled for July 18. Dealers said the news of benefits for shareholders had sucked in event-driven hedge fund managers.

Matrix Communications was 0.3 per cent firmer at 171p on talk the IT network integrator will shortly confirm market rumours that it has won a worldwide contract with Vodafone for filtering content to mobile phones. Dealers said the contract could deliver over £10m in revenues over the next few years.

Aerobox, the plane cargo box maker, was unchanged at 6p. Rumours said it would soon announce management changes.

Intec Telecom Systems, which provides billing technology for telecoms operators, lost 2 per cent at 62¼p as a director sold 7m shares.

Hardy Underwriting fell 5.6 per cent to 212½p after the Lloyds insurance underwriter said it had terminated takeover talks with Omega, unchanged at 109.5p. Hardy rejected two earlier indicative offers from Omega which recently listed on Aim.

“Omega is clearly looking to take advantage of its highly rated paper and there is the possibility of further discussion with other quoted Lloyds investment vehicles,” said Geoff Miller of Bridgewell Securties.

Punch Taverns firmed 1.8 per cent at 746p after the pub group announced plans to restructure its short-term debt in a move which will reduce annual interest costs by about £1.5m and create £150m in new cash. Lex live on pub companies

Analysts said the restructuring reflected the company’s intent to make further acquisitions with a deal involving the privately owned Spirit Group seen as one possibility.

Cello Group firmed 0.9 per cent at 115½p after the marketing services group acquired Leapfrog, a market research company for £6m in cash and shares.

ITM Power firmed 0.5 per cent to 98½p after it announced it had met the first major milestone outlined at the time of its flotation with the production of a fexible fuel cell suitable for military and civilian aplications.

Mark Davis of Panure Gordon, who initiated coverage with a “buy” recommendation and target price of 150p, said: “ITM Power’s technological advantages over the competition suggetsts the company will be a key long-term particpant in the fuell cell market.”

Avesco rose 7 per cent to 99p after the media services group raised £2.4m net via a placing of 2.8m shares at 90p, conducted by KBC Peel Hunt.

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