European Business News (EBN), 96-10-07

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated 1120 October 7

CONTENTS

[01] Shell and Texaco in merger talks to pool assets

[02] Virgin and Sabena discuss flight cooperation

[03] Gazprom sells its shares abroad

[04] Eurotunnel set to announce debt-for-equity swap with creditor banks

[05] Dole criticises Clinton's foreign policy

[06] Global One plan to market intrenets

[07] UK industrial production worse than expected

[08] Allianz reiterates '96 earnings will slip

[01] Shell and Texaco in merger talks to pool assets

The union under consideration would combine the downstream forces of Texaco, a scion of John D. Rockefeller's Standard Oil; Shell Oil, the U.S. unit of Royal Dutch/Shell Group, which is one of the world's largest publicly traded oil companies; and Star Enterprise, a joint venture between Texaco and Saudi Aramco, the state oil company of Saudi Arabia.

Officials with the companies would neither confirm nor deny that the talks are being held. But individuals familiar with the negotiations said they began in the spring and have taken place in New York, Atlanta, Houston and Los Angeles.

These individuals said the talks are being conducted under the guidance of a trio of investment bankers: First Boston for Texaco, Morgan Stanley Group's Morgan Stanley unit for Shell, and J.P. Morgan for Star.

A letter of intent could be signed within the next few months, according to people with knowledge of the proposed agreement. Under its terms, two separate entities, both as yet unnamed, would be created.

One would join Star's assets with those of Shell in the eastern half of the U.S., and the other would merge Shell facilities with Texaco's refining and marketing operations, which are in the West. Both the Shell and Texaco brand names, which have a long history and a strong identity to consumers, would continue to be used. Initially, at least, consumers across the nation won't notice any changes at their local service stations.

The two new companies together would control some 15% of the petroleum- products market in the U.S, likely making the duo the largest such marketers in the nation. Right now, the Texaco brand, including its Star products, holds about 7% of the market, while Shell commands 8%.

The marriage being discussed by Shell, Texaco and Star is similar to a deal struck earlier this year by British Petroleum and Mobil, which agreed to unite their lacklustre downstream operations in Europe.

Energy companies world-wide are looking at ways to partner up in order to cut operating costs and increase efficiencies. And the push to do this has been especially strong in the downstream sector, which has been stung by poor profitability for years.

Indeed, American Petroleum Institute statistics show that refining margins, an indication of profitability, dwindled to 33 cents a barrel in 1995 from 92 cents in 1986. If completed, the Shell-Texaco-Star coalition would mark the first downstream megamerger in the U.S., though others have been contemplated.

[02] Virgin and Sabena discuss flight cooperation

The conversations, which were described as 'very sensitive,' could result in joint flights between the carriers or perhaps an arrangement by which Virgin becomes a franchise operator for Sabena on the routes, said a person knowledgeable about the talks, reports Monday's Wall Street Journal Europe.

'We are in discussions with a number of European carriers about possible alliances or other arrangements,' said a Virgin spokesman, who declined to comment directly on the talks with Sabena, which is 49.5% owned by Swissair.

A spokesman for the Belgian carrier, reached Sunday night, confirmed that there have been discussions with the Brussels-based Virgin Express on a range of 'commercial arrangements' including ground handling and catering. While he sought to play down speculation about any imminent breakthrough regarding joint flights, he didn't deny that such an arrangement was being looked at.

'Maybe we could operate some things together,' the Sabena spokesman said.

The discussions, even if they eventually collapse, indicate the new importance of no-frills carriers as the April 1997 date nears for full liberalization of European Union skies. Flag carriers, many of them plagued by expensive labor contracts, are looking at franchising certain routes to the upstart carriers in order to cut costs. At the same time, travelers are finally seeing price reductions on some busy routes that have traditionally been dominated - at high fares - by flag carriers.

An arrangement on flights between Brussels and the U.K. could hold significant benefits for both Sabena and Virgin Express. It would connect Virgin Express's continental network with the U.K., a goal outlined by Branson last week to journalists who accompanied him to South Africa. At the same time, it could help feed Sabena's long-haul flights from Brussels. Such a move by Sabena would also send a powerful message to its labor unions that, under new chief executive Paul Reutlinger, the Belgian carrier is finally serious about bringing its costs in line. Previous efforts have resulted in strikes and, in February, the resignation of former chairman Pierre Godfroid. The crucial role of the no-frills airlines was underlined on Friday as a battle for France's Air Liberte intensified. The troubled carrier is being pursued by British Airways, Virgin Express and by another French airline, AOM. British Airways urged E.U. regulators to block any sale to AOM. Such a sale, said British Airways, would be an illegal use of state aid: AOM is a former unit of state-owned French bank Credit Lyonnais, which is being restructured through a state aid injection.

[03] Gazprom sells its shares abroad

Although Russia's mammoth gas monopoly is wary of investors, suffers from a cash-flow crisis, and is, by many accounts, incredibly inefficient, Western stock buyers are beating a path to its door.

Vastly rich but closed to outsiders, Gazprom underlines the dilemma foreign investors face when considering the Russian market: whether the riches outweigh the risks.

'Would you invest in a company which does not fully inform its shareholders about its activities?' asks Mark Mobius, a specialist on emerging markets and president of Templeton Investment Management. 'Oddly enough, in the crazy, topsy-turvy world of Russian investments, the answer may be yes.'

The reason serious investors like Mobius are taking a hard look at this company lies in its potentially lucrative profile, no matter how murky it is. With control of more than a third of the world's known natural-gas reserves, Gazprom enjoys a capitalization on paper that is bigger than that of the entire $20 billion Russian equity market.

Estimates of Gazprom's value vary wildly. At the expected offering price of $1.50 a share, the market would put a $34.5 billion price tag on Gazprom. But analysts who have valued the company's reserves at Western prices, then discounted the sum for the significant Russian risks, have come up with an astounding $92 billion capitalization, putting it nearly on par with the world's largest energy companies, such as Royal Dutch Shell, which has a capitalization of more than $100 billion.

Investors so far seem convinced that Gazprom is a good buy. With Gazprom about to accept bids on dollar-denominated American depositary receipts on Monday, Moscow brokerage houses reported record trading volumes for the company's usually sleepy domestic shares on Friday. 'It's the most interesting Russian stock,' says James Fenkner, director of research at Moscow brokerage company CentreInvest Securities. 'It's bigger than the Russian market itself.'

What's more, Gazprom is one of Russia's few truly emerging multinational corporations. A long-time exporter, it is expanding ambitiously now in lucrative European markets and taking advantage of the world-wide increase in demand for gas to market new uses for its product, such as power generation.

[04] Eurotunnel set to announce debt-for-equity swap with creditor banks

The deal is thought to contain a debt for equity swap and a debt-to-bond conversion. The measures could give the banks control of up to 70% of the company. Analysts say around half of Eurotunnel's total debt must be retired if it is to have a viable future.

Today's announcement should pave the way for a return of Eurotunnel shares to the markets. Trading on the stock was suspended last Monday.

[05] Dole criticises Clinton's foreign policy

In the 90-minute debate held in Hartford, Connecticut, Clinton said his foreign policy has advanced U.S. leadership in the world, but Dole charged that Clinton has fumbled everywhere. Clinton cited nuclear arms control with Russia, the North Korean nuclear deal, U.S. naval deployment to the Taiwan Strait, Bosnia and Middle East peace talks as areas of accomplishments in U.S. foreign policy.

Dole, former Senate majority leader, attacked the Clinton administration's foreign policy as leading the U.S. to lose credibility in the Middle East and that it has underestimated the difficulty of achieving peace in Bosnia. Dole also lashed out at Clinton for not taking tougher action against Cuba, Iraq and North Korea, and what he termed as undermining U.S. leadership by sending U.S. troops for use in U.N.- controlled peacekeeping operations.

On trade, Clinton said he has achieved the 'largest number' of trade agreements in U.S. history during his term and that the agreements have helped bring about the 'biggest increase' in global trade.

The president singled out the U.S. automobile industry as benefiting from his trade policy, which featured a high-profile agreement last summer with Japan.

'That's one of the reasons America is number one in auto production again,' Clinton said.

Dole emphasized that the U.S. has 'highest foreign deficit in history,' but refrained from going any further into trade policy.

On North Korea, Clinton said his administration has 'worked hard to end the North Korean nuclear threat' along with nuclear disarmament in Russia and other former Soviet states.

Dole questioned the North Korean nuclear deal, in which the Clinton administration agreed to supply Pyongyang with two nuclear reactors for power generation in return for freezing North Korea's nuclear development program.

'We shouldn't be doing any favors for North Korea,' Dole said, noting that North Korea has enough plutonium to build six nuclear bombs.

As an example of what he said was a successful action in deploying troops abroad, Clinton mentioned the two naval task groups he sent to the Taiwan Strait earlier this year to monitor what the U.S. called provocative Chinese military drills near Taiwan.

Dole did not touch on the China-Taiwan issue, but said Clinton has deployed 'more troops than any president in history around the world,' costing the U.S. 'billion and billions' of dollars for peacekeeping operations.

Dole slammed the Clinton-proposed summit last week in Washington between Israeli Prime Minister Benjamin Netanyahu and Palestinian President Yasser Arafat, calling it an 'ad hoc' foreign policy.

'It's sort of we get up in the morning and read the papers, and what country is in trouble, say let's have a meeting,' Dole said. 'We have lost credibility around the world.'

Clinton, stressing the importance of keeping the Middle East peace talks moving, said, 'All those leaders promised me they would not quit until they resolved the issues between them and get the peace process going forward again.'

On Bosnia, Clinton described the current situation as a 'virtual miracle' given the recent election without any return to war.

Dole, in a rare case in a presidential debate, expressed support for his opponent, saying, 'I've supported the president when I thought he was right on Bosnia.'

[06] Global One plan to market intrenets

France Telecom said the three companies intend to begin separately marketing Internet services to large businesses as internal corporate networks, or intranets, next year.

The move is significant because the marketing clout of the three partners is likely to spur growth of the Internet in Europe, where interest in the network lags behind the U.S. It also marks the first time the three companies, who operate together internationally as Global One, are jointly introducing a new service. The service, to be called Global Intranet, or Global Net, will be available through 800 access points.

'We are trying to develop a common core of services,' said a Sprint executive who said that Sprint and Global One will become ‘one-stop shops for companies wanting to establish a global intranet.'

All three companies already offer various Internet-related services. But next year they will begin to directly market intranets as an alternative to traditional corporate data networks.

The move is likely to put pressure on smaller Internet service providers, particularly in Europe, and follows an announcement by AT&T last week that it, too, will be entering the European Internet market with its WorldNet service.

[07] UK industrial production worse than expected

Seasonally adjusted figures from the Office for National Statistics (ONS) published Monday showed that industrial output was unchanged from the year before while manufacturing alone was 0.9% lower.

The data were far weaker than expected in financial markets, where economists forecast both industrial production and manufacturing output to have risen 0.5% between July and August. They are likely to hand ammunition to Chancellor of the Exchequer Kenneth Clarke with which to resist Bank of England calls for an increase in interest rates.

The ONS said the trend in manufacturing output remains flat.

[08] Allianz reiterates '96 earnings will slip

In its interim report, Alliance said 'We expect another considerable improvement in pre-tax results, assuming that claims experience continues to be moderate, that we see no extraordinary catastrophes and that the current favourable situation on the capital markets does not drastically change.'

For 1995, Allianz posted net profit of 2.01 billion Deutsche marks ($1.3 billion). But the figure was boosted by tax breaks carried over from the company's East German unit Versicherungs.

Worldwide group premium income for the first half of this year rose 8.3% to 39.6 billion marks, and the company said it expects group premiums to rise about 6% for the full year.

That forecast doesn't include any effects from Allianz's takeover of the Vereinte group and the Hermes loan insurance company, or from its sale of the DKV health insurance unit. Those transactions were announced earlier this year.

The insurer said it expects to at least match last year's 16 mark dividend this year.

From the European Business News (EBN) Server at http://www.ebn.co.uk/

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