Dealmaking nudges European shares near six-week high

MILAN (Reuters) - European shares rose on Monday, buoyed by a flurry of year-end M&A and expectations that a U.S. bill lowering corporate taxes could soon pass.

Top U.S. Republicans said on Sunday they expected Congress this week to approve the tax reform. The plans have helped to propel global equities to records in the hope it will boost company profits and trigger share buybacks.

“The prospect of tax cuts being approved ahead of Christmas is propping up global stock markets,” said CMC Markets analyst David Madden.

A number of strategists are looking at how to arbitrage the tax changes. SocGen says the market has already priced in the benefits but believes there might be a case for rotating stocks.

“Growth stocks are clear losers as they pay relatively little in tax and will have bills to settle,” SocGen analyst Andrew Lapthorn said. “Perhaps it’s our old favorite, defensive orientated Quality Income stocks (that have lagged during 2017) with their Telco, Oil & Gas and Utilities bias, that will prove to be the surprising winners in 2018.”

Thales TCFP.PA jumped 8.3 percent after the French aerospace and defense company agreed to buy chipmaker Gemalto GTO.AS for 4.8 billion euros. Gemalto shares rose 5.7 percent.

UBS said the deal propels Thales further into digital technologies and should boost its earnings by 20 percent. Thales said on Monday it had the financial leeway for further acquisitions.

Both stocks were among the biggest gainers on the pan-European STOXX 600 .STOXX index, which rose 1.2 percent to its highest in nearly six weeks. Euro zone blue chips .STOXX50E added 1.4 percent and the UK's FTSE .FTSE rose 0.6 percent.

Germany's DAX .GDAXI outperformed Europe's other main markets, gaining 1.6 percent on optimism for coalition talks this week between the Social Democrats and Chancellor Angela Merkel's Christian Democratic Union.

“Germany hasn’t had a functioning government in over two months, but the economy is still going from strength to strength,” said Madden.

Among the biggest fallers, IG Group IGG.L was down 9.3 percent after the European Union's securities watchdog proposed curbs on core parts of its market.

Investec analyst Alistair Ross said he was keeping a "buy" rating on IG, saying the company looked relatively well placed compared to rivals. Plus500 PLUSP.L and CMC Market CMCX.L fell 11 percent and 13 percent respectively.

Unilever ULVR.L sealed a long-awaited deal to sell its margarine and spreads business to U.S. private equity firm KKR for 6.8 billion euros. The consumer goods maker fended off a $143 billion takeover attempt by Kraft Heinz KHC.O this year and wants to sharpen its focus on faster-growing products.

The KKR deal creates a clearer separation between Unilever’s food and home/personal care businesses, making it easier for the company to split in two as a potential defense against a hostile takeover, said a sales trader at a European bank.

But analysts at RBC stuck with an “underperform” rating on Unilever stock, pointing to acquisitions it has made over the past two years that added 2.2 billion euros in turnover.

“What we don’t know is how the profitability of these acquired businesses compares, but we expect that in aggregate margins will be substantially lower than the Spreads’ business’s 22.4% EBITDA margin in 2016,” they wrote in a note.

Unilever shares rose 0.3 percent.

German real estate group Vonovia VNAn.DE agreed to buy peer Buwog BWOA.VI in a cash deal valuing it at 5.2 billion euros and sending the Austrian company's shares up 17 percent to the top of the STOXX 600.

Ryanair fell 3.3 percent. Europe’s biggest low-cost airline averted a strike by pilots in Ireland and Portugal after it agreed on Friday to recognize trade unions for the first time.

Credit Suisse cut its rating to “neutral” from “outperform” on concerns of the impact on staff costs and the risk that “labor issues continue to dominate the investment case for an extended period”.

Fashion retailer H&M HMb.ST fell 2.5 percent, staying under pressure after a series of price target cuts that followed a disappointing trading update last week.

“We sense things will get more difficult and there is more bad news coming through. It’s hard for them to compete in the shift online,” said Chris Beauchamp, chief market analyst at IG.

Reporting by Danilo Masoni; editing by Tom Pfeiffer