European Business News (EBN), 96-11-19

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

Page last updated November 19 1730 CET

CONTENTS

[01] Bundesbank says single currency worries pushes up bond rates

[02] Gan chairman is refusing to step down

[03] Euro Disney posts profit for second year in a row

[04] Deutsche Telekom shares fall 5.4% on second day of trading

[05] Prodi defines Euro-tax and says Italy is ready to negotiate return to ERM

[06] Entergy is considering a $2 billion bid for London Electricity

[07] EMI earnings rise 9.4% in the first half

[08] Mannesmann predicts slight gain in 1996 operating profit

[09] Sumitomo posts first loss in its history, linked to copper losses

[10] Lamfalussy notes remarkable stability among ERM currencies

[11] October US Housing starts down 5.1%

[12] Eight injured in fire on truck in Channel tunnel

[01] Bundesbank says single currency worries pushes up bond rates

As the running time of the longer-term bonds reaches well beyond the planned 1999 start date of the single currency, they include expectations on the level of interest rates inside the currency union, the Bundesbank noted. Germany's unusually steep yield curve 'can to that extent be associated with uncertainty or scepticism over the interest rate and inflation conditions in the currency union,' the Bundesbank said.

The Bank also expressed disappointment that the difference between long- and short-term interest rates has remained large, saying the wide spread was in part due to EMU expectations.

According to monetary union time-tables, long-term German bonds would be repaid in euros, not the traditionally strong mark. The steep yield curve reflected the view that 'uncertainty or scepticism about interest and inflation rates is connected to European monetary union,' the Bundesbank said.

Worries were most pronounced regarding debt convergence, it added. The Bank said attempts at 'creative accounting' of the fiscal criteria were increasingly being viewed critically.

The Bundesbank warned that market scepticism over the currency union stems from worries that fiscal criteria in the Maastricht Treaty especially could be liberally interpreted. In this context, countries' use of 'creative accounting' measures to meet the criteria are coming under 'increasing criticism,' the Bundesbank said.

'There could also be worries that the European Central Bank will follow a less stability-oriented policy than the Bundesbank,' the report said.

The Maastricht Treaty criteria for participation in the single currency include a deficit not more than 3% of gross domestic product, and a debt not more than 60% of GDP or steady progress toward that goal.

European Union countries must achieve these criteria in 1997 in order to be in the first group of participants in the planned 1999 single currency. A decision on the participants will be made as early as possible in 1998. 'In order to keep the initial political dangers of the integration process at a minimum, a strict adherence to the Maastricht Treaty is to be pressed for,' the Bank said.

The report noted that differentials between bond yields in Europe have narrowed in part because of speculation that political forces will allow EMU to start on schedule in January, 1999. But only underlying economic factors will determine the success of EMU, it said.

Referring to the confusion of politics with economics as the reason for bond yield convergence, the Bundesbank said: 'It would be a heavy mortgage for the credibility of EMU monetary policy.'

[02] Gan chairman is refusing to step down

'He is not resigning,' said a GAN spokeswoman. Bonnaud was due to meet Finance Minister Jean Arthuis when the latter gets back at the end of the week from a trip to Japan with President Jacques Chirac.

If Bonnaud continues to resist calls for his ouster, the government will have to issue a decree signed by Prime Minister Alain Juppe.

Bonnaud's refusal to go quietly is likely to keep controversy over the failed sale of GAN banking unit CIC in the fore and could scuttle the government's attempt to quickly put the blame on Bonnaud's shoulders. The decision to request Bonnaud's resignation was made last week after Arthuis suspended the privatisation of CIC and criticised the way the proposed sale had been handled.

CIC is a group of 11 regional banks whose main forte is its strong local position and relations with a clientele of large and medium sized corporations.

The ministry has been under pressure to replace Bonnaud, who had been opposed to the sale of CIC and would have preferred GAN and CIC to be privatised together. GAN's privatisation has been delayed to allow the insurance company to recover from recurrent real estate-related losses.

A finance ministry spokeswoman said a new GAN chairperson would be named by the end of the week at the earliest. The new chairman is expected then to find a replacement for CIC chairman Bernard Yoncourt.

The decision to demand Bonnaud's departure was announced by the finance ministry in agreement with Juppe, who crossed swords with Bonnaud in February over an attempt by Juppe to place a close advisor at the head of CIC.

Banking analysts say the strict government conditions on the sale could only attract a low-price offer for CIC, which is valued at around 14 billion francs ($2.75 billion) on GAN's books.

That would correspond to about 9.4 billion francs for the 67%, which the government had put up for sale. Yoncourt infuriated Arthuis in October after declaring on television, in the middle of the privatisation tender process, that a sale to a major French bank could spell 'death' for CIC.

The irritation showed through again last week when Arthuis announced the scrapping of the sell-off tender and broke from his usually guarded rhetoric to criticise Bonnaud and Yoncourt.

'The managers of GAN and CIC did not behave in a way to encourage progress in this process,' he said at the time.

The government received only two bids for CIC -- from BNP and Societe Generale.

The French privatisation commission rejected the offer from Societe Generale on the grounds it did not comply with the terms imposed by the government, of which the most important is that any buyer must preserve the bank's regional integrity.

[03] Euro Disney posts profit for second year in a row

But Chairman Philippe Bourguignon predicted a tough year ahead. 'Persistent weakness in the economy, constant pressure on our prices and the strong increase in financial charges constitute several real challenges for the future, particularly in 1997,' he said.

Euro Disney, which operates Disneyland Paris east of the capital, posted 202 million francs ($40 million) in profit for the year ended September 30.

Attendance at the theme park, Europe's biggest tourist attraction, came in at 11.7 million, up 9% from 10.7 million in the year earlier. The company said the rise was due in part to lower entry prices, which were offset by an increase in food revenue.

The company noted that the earnings were preliminary and subject to change.

Euro Disney, 39%-owned by its U.S.-based parent The Walt Disney, opened Disneyland Paris in April 1992 and couldn't turn a profit until last year.

In 1995, the park boosted attendance by opening its Space Mountain thrill ride, cut admission prices and began serving wine.

The company said its 1996 revenues from the theme park and hotels had risen 9% to 4.97 billion francs.

[04] Deutsche Telekom shares fall 5.4% on second day of trading

The German telecommunications giant's stock ended floor trading on the Frankfurt Stock Exchange at 32.07 Deutsche marks, down 1.83 marks, or 5.4%, on the day. That left the shares 13% above the 28.50-mark launch price set Sunday by Telekom's underwriting consortium, but 3.4% below Monday's initial trading price of 33.20 marks. On Monday, market participants had forecast that the price would hit 35 marks by the end of the week. ''I'm definitely disappointed ... I would've expected 33'' marks on Tuesday, said one Frankfurt trader. ''Percentage-wise, it's a big difference.''

Meanwhile, Telekom's American Depositary Shares were slightly lower Tuesday on the New York Stock Exchange. They were quoted at about 21 1/4 at 11:10 a.m. EST, down 1/4 from Monday's close but about 12% above the launch price of 18 9/10. The stock fell mainly because individual investors and U.S.- based players decided to take their money and run after the first trading day's sharp gain, traders said.

And while the consensus is that German institutional investors still are demanding the shares, some of them were sellers as well, another Frankfurt- based trader said. Some German institutionals were dissatisfied because they received ''way below what they wanted'' in Monday's allocation after the issue was heavily oversubscribed, the trader added. ''So now they're getting out,'' waiting to buy again later, he said.

[05] Prodi defines Euro-tax and says Italy is ready to negotiate return to ERM

A further 3.5 trillion lire will come from employee severence funds, and 2.5 trillion lire will come from other measures. Prodi said tax-payers would be partly reimbursed, saying Italians could choose between a tax rebate from 1999 and a type of privatisation option on Italian state companies which are due to be sold off.

Prodi said that the government's definition of the composition of the tax is the last measure necessary for Italy to begin negotiations for the reentry of the lira into the European exchange rate mechanism. 'There are the conditions for bringing our currency into the ERM,' Prodi reaffirmed.

The government also announced the composition of the EuroTax, a one-time tax the government plans to levy to allow Italy to satisfy a key deficit criteria for European economic and monetary union.

When asked about his meeting last Friday with French prime minister Alain Juppe and whether the French have asked for a delay in the re-entry of the lira, Prodi replied that there has been so such request by France or any other E.U. partner.

At the same press conference, Italian Treasury and Budget Minister Carlo Azeglio Ciampi added that the government has indicated that reentry talks would begin once the budget passed in the lower house of parliemant. Whether the talks begin 'in an hour or a week' depends on the procedures already established in the past for such E.U. actions.

The budget was passed by the lower house last weekend.

[06] Entergy is considering a $2 billion bid for London Electricity

The confidential documents, which solicit £1.1 billion in financing for an acquisition, don't mention the target company by name, but instead substitute the code name 'Atlantic.' A financial profile, however, matches that of London Electricity on numerous points, including the latest full- year figures for turnover, depreciation, shares in issue and Eurobond issues.

The bid, assumed in the documents to be about 700 pence a share, would represent a 10% premium over London Electricity's closing price of 636.5 pence Monday and a 22% premium over a 572 pence base price assumed in the document.

Entergy officials confirmed that they are interested in the British power industry and might consider an acquisition. But they declined to confirm or deny any specifics referred to in the documents.

Entergy was recently rumoured to be planning a bid for Yorkshire Electricity, another British utility . But a spokesman denied those plans. 'The reference to our bid for Yorkshire was in error,' he said.

According to the documents, the bid would be launched by Entergy Power Group, an arm of New Orleans-based Entergy that is set up to invest in privatisations.

Entergy Power's most recent acquisition was the $1.2 billion purchase of Australian electricity distributor CitiPower, which distributes power in the business district of Melbourne and suburbs, in late 1995.

Entergy reported net income of $381 million for the nine months ended Sept. 30, on revenue of $5.6 billion. It reported revenue of $6.3 billion for 1995.

Since a British government ban on utility takeovers effectively expired in 1995, three regional electricity companies have been scooped up by U.S. buyers, and two other regional electricity companies are in play.

Last week, Dominion Resources Inc. made a friendly £3 billion bid for East Midlands Electricity. Also, CalEnergy is pursuing an unsolicited bid for Northern Electric that values it at 630 pence a share.

[07] EMI earnings rise 9.4% in the first half

This is before a 33.7 million pound exceptional pretax gain on disposals of investments, assets and discontinued businesses, less finance charges. The comparative figures from a year ago were provided by the company on a pro forma basis. The figures, which matched analysts expectations, were 'achieved against a background of variable growth in the major markets and mixed results from our competitors,' said chairman Sir Colin Southgate.

In an interview with AP-Dow Jones, Southgate said the results 'are solid (and) they show we run our business very well even when our release schedule is slow.'

Southgate said the U.K., German and Japanese markets performed well, while the U.S. market is expected to improve over the next year as consolidation of rival retail outlets, particularly in malls, continues. Developing markets markets, notably Brazil, are showing the strongest growth, he said.

Finance Director Simon Duffy said EMI remained confident that the global music business would continue to grow by some 6-8% annually in the medium to long-term. 'This year is looking a little bit below that level,' Duffy said, adding that markets were patchy but that overall first half industry growth had been 5.5%. However, he added that the impact was diluted by the strength of sterling.

The market's sluggishness has recently been reflected by 100 layoffs at various labels within Warner Music and 400 job cuts at PolyGram NV -- another of the top five in the world music business.

EMI said that sales in the United States were almost flat and declined slightly in France. But this was offset by improvements in Japan, Britain and Germany while Southeast Asia and Latin America boasted particularly large gains.

Turnover from the EMI Music division was down marginally at around 1.1 billion pounds but improved margins helped to boost operating profits to 131.9 million pounds from 124.6 million.

In the first-half, George Michael's current release 'Older' was EMI's best- seller with sales of 4.5 million units. Another major success was the Spice Girls, a U.K. group, whose first single hit number one in 25 countries. Another Beatles Anthology and a new album by Prince will be released prior to Christmas.

[08] Mannesmann predicts slight gain in 1996 operating profit

The German machinery and engineering group said the sales rise to 23.9 billion Deutsche marks ($15.9 billion) was mainly the result of strength in the company's telecommunications and automotive operations. Never theless some analysts were disappointed by the mobile phone sales as the net additions to its (D2 mobile telephone) network in the third quarter were lower than in the preceding quarters. Mannesmann's traditional engineering and tubes businesses also posted weaker results.

Mannesmann Mobilfunk's D2 German mobile telephone network boosted earnings, but start-up losses in its fixed-line businesses increased, according to a statement. Mobile phone sales jumped to three billion marks from 1.9 billion, with the number of D2 subscribers increasing to 2.1 million at the end of September. Customer growth outstripped the first nine months of 1995 by 63%.

[09] Sumitomo posts first loss in its history, linked to copper losses

It is the first net loss in the history of the big Japanese trading house, which was established in 1919 and listed on the Tokyo Stock Exchange in 1949.

However, the company posted a 77.8% growth in pretax profit to 33.29 billion yen, helped by lower interest payments amid low domestic interest rates and increased profits from investments, as well as earnings from sales of securities holdings.

Accounting officials at Sumitomo predicted the loss from copper trading will not become larger than the already announced amount. The company has enough financial capacity to absorb the loss, they also said.

The trading house left unchanged its forecast for a full-year pretax profit of 103.00 billion yen. If Sumitomo reaches its full-year estimates, parent pretax profit will more than triple from the year earlier.

Analysts attribute Sumitomo's bold forecasts to expectations that the company will post major extraordinary profits on the sale of stock and bonds in the second half, in order to cover the estimated $2.6 billion in losses incurred from unauthorised copper trades. The company plans to write off the entire loss in the current fiscal year by drawing from special financial reserves.

'Sumitomo's expectations for higher recurring profit are probably due to the increase in capital gains it will make in order to cover its copper losses,' said Nozomu Kunishige, an vice president and senior analyst at Lehman Brothers Japan Ltd. To shoulder the loss, Sumitomo created a total of 43.2 billion yen in extraordinary earnings by liquidating part of its fixed assets. The sold assets included an 11,800-square-meter plot of land in Tokyo's waterfront area, from which it obtained 33.6 billion yen in profits.

The huge loss, however, will still weigh heavily on the business in the second half of the year, and the company might have to post a net loss of 150 billion yen when it closes its books at the end of March, Sumitomo said.

Sumitomo said its sales during the first six months declined 13.4% from the same period the previous year to 6,274.58 billion yen, due mainly to decreased dealing in copper ore, which plunged 43.3%.

[10] Lamfalussy notes remarkable stability among ERM currencies

Speaking to a group of bankers in Portugal, Alexandre Lamfalussy, president of the European Monetary Institute in Frankfurt, said that exchange rate stability 'has been maintained to a remarkable degree since the period of turbulence observed in early 1995.'

Lamfalussy also said that inflationary pressures among European Union countries are under control and are likely to remain tame. He said 'in my view, there are no strong reasons for believing that current price performance is unsustainable.'

The EMI president said that in many EU countries, virtual price stability, or inflation of two percent or less, has been established.

He said low inflation is due to cyclical factors and the determination of EU countries to keep prices stable.

'Concerning price stability, the picture is generally favourable,' he said. 'On balance, one may conclude that 'home-made' inflationary processes have in many EU countries been brought largely under control.'

[11] October US Housing starts down 5.1%

The October drop was sharper than expected; most economists had expected a slight increase. A Dow Jones News Services survey of 14 economists published Friday estimated housing starts to be up 0.8% to a 1,449,000 unit annual rate. Building permits, a precursor of future building activity fell 2.7% in October after falling by 1.7% in September. Single-family construction starts fell 4.6% to an adjusted 1.069 unit pace in October after falling 9.6% in September while construction starts on homes with two- to four-units rose 23.4% in October.

The level of October single-family starts was the lowest since 1,036,000 in June 1995, the Commerce Department said. Starts on homes with five or more units fell 12.5% in October after rising 6.6% the previous month. By region, housing starts fell 9.3% in the Northeast, 9.2% in the Midwest and 8.3% in the South. In the West housing starts rose by 6.5% in October. By region, housing permits were unchanged in the Northeast, and were down 2.6% in both the Midwest and South. Permits were down 4.0% in the West. Permits for single-family homes were down 3.0% in October after dropping by 3.5% in September.

Through the first 10 months of 1996, Commerce said an estimated 1,268,600 housing units were completed, compared with 1,154,100 during the same time a year ago. Commerce said an estimated 128,900 housing units were actually started last month, down from 127,000 in September. Last month's housing starts were 1.11% above the construction pace a year earlier, while permits were down 2.3% over the year.

[12] Eight injured in fire on truck in Channel tunnel

It was not immediately clear what caused the fire Mmoke. And it just filled up with smoke so quick it was just unbelievable. Everyone was vomiting and choking and we all thought it was going to be the end.' One driver, who identified himself only as Christophe, said that security officithern port city, Eurotunnel officials were unable to say why the train had stopped when the fire broke out, rather than continue on to Britain as procedures called for.

The fire broke out at 9:45 p.m. (2045 GMT), about 17 kilometers (11 uesday afternoon, all had been released. Fifteen trucks were damaged, as was the rear locomotive of the shuttle. The Channel Tunnel is best known for its high-speed Eurostar trains that transport passengers from London to Paris and Brunal trains. The president of the company released a statement late Tuesday calling the fire a 'serious accident, the first since the opening of the Channel Tunnel. 'I am however delighted to see that the security procedures functioned well and that our clients and our crew members were quickly out of danger.'

The French train authority was providing alternate service to passengers Tuesday, including ferries and plane flights.

At the close of trading in Paris, shares in Eurotunnel ended down 3.5 pence at 7.7FFrancs a share.

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

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