Diageo bid talk props up UK's FTSE

Mon Jun 30, 2014 6:26am EDT

* FTSE 100 up 0.1 percent

* Diageo up on speculation of deal with SAB Miller

* EasyJet falls; BofA ML cuts to "underperform"

By Sudip Kar-Gupta

LONDON, June 30 (Reuters) - Bid speculation around drinks group Diageo propped up Britain's leading equity index on Monday.

Diageo shares, up 1.4 percent, added the most points to the benchmark FTSE 100 index, on talk it may merge with rival SAB Miller, whose shares were up 0.6 percent.

"It's speculation about a link-up with SAB," said Beaufort Securities sales trader Basil Petrides.

The FTSE 100 was up by 0.1 percent, or 4.22 points, at 6,761.99 points by the middle of the trading day.

Among other standouts, media group BSkyB also outperformed, rising 1.3 percent on news of a share buyback, but budget airline easyJet slumped 6 percent, after Bank of America Merrill Lynch cut its rating to "underperform".

"We believe the consensus EPS (earnings per share) upgrade story is over at easyJet, as negative yield momentum will cause confidence in the upgrade cycle to shatter," BofA ML analysts wrote in a note.

Most traders and investors expect the FTSE 100 to hit a record high of 7,000 points later in 2014, on expectations of a further strengthening in the British economy, better corporate results and more corporate takeover activity.

However, the FTSE has failed to break through the 6,900 point barrier so far this year, and has underperformed bigger gains on other indexes such as Germany's DAX and the U.S. S&P, which have both hit record highs.

Some investors are reluctant to place big bets on the FTSE, which they see facing near-term headwinds from stronger sterling , which would hit exporters, and the likelihood of higher interest rates soon, which would lead to bigger interest payments for corporates and a cooling of the housing market.

"I would not be in a rush to buy with the next move in rates up and a strong sterling hurting exporters," Hampstead Capital hedge fund manager Lex van Dam said. (Additional reporting by Tricia Wright; Editing by Louise Ireland)