Britain's top shares fell on Tuesday, dragged down by healthcare shares, as new US tax rules made it less likely companies such as Shire and AstraZeneca would become take-over targets. Sentiment was also depressed by surveys showing French business activity contracting again in September and Germany's manufacturing sector growing at its slowest pace since June 2013, casting a shadow over euro zone recovery prospects.
The US Treasury Department announced new rules, effective immediately, that will reduce the tax benefits for companies that re-incorporate abroad. Britain's more favourable tax regime has fuelled US take-over interest in London-listed companies, particularly in healthcare.
"This is a big impact and certainly it will put a cap on a lot of M&A or take-over activity ... If you look over the last few months a lot of what has been driving the FTSE has been this M&A activity," IG analyst Brenda Kelly said. Drugmaker Shire, which is being acquired by AbbVie's , fell 2.5 percent. AstraZeneca, which turned down a bid from Pfizer this year, fell 3.6 percent, and medical devices manufacturer Smith & Nephew Plc, also tipped as a US bid target, shed 2.8 percent.
The broader FTSE 100 closed down 97.55 points, or 1.4 percent, at 6,676.08 points, falling further from this month's 14 1/2-year high of 6,904.86. Energy stocks also took a toll on the index as Brent crude oil fell towards a two-year low near $96 a barrel. Elsewhere among the worst-performing blue-chip stocks, supermarket retailers were hit by data from market researcher Kantar Worldpanel, which showed Britain's grocery market grew at its slowest rate for more than 20 years over the last 12 weeks.
Tesco extended its decline from Monday, when the world's No 3 retailer cut its profit forecast for the third time in two months after finding a fault in its accounts. Its shares fell 4.2 percent to their lowest levels in more than a decade. Sainsbury's dropped 5.4 percent.
Mid-cap sweetner maker Tate & Lyle fell 16.7 percent after it said its annual profit would be hit by significant disruption to its supply chain and increased competition for its Splenda sucralose sweetener. That marked the second high-profile profit warning in Britain this week. But analysts said those were isolated events that had little broader market significance.
"Tate with its sucralose market and Tesco with its accounting issues - they are very, very stock specific and I don't think there's necessarily a big read-across to the performance of the UK corporate sector on the back of those two announcements," said Exane BNP Paribas global head of equities strategy, Ian Richards.