European Business News (EBN), 97-02-12

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Page last updated February 12 1645 CET

CONTENTS

[01] UK unemployment drops to 6-year low, more than double expectations

[02] ITT rejects hostile Hilton bid as inadequate

[03] PolyGram earnings hit by weak music and film operations

[04] Merita shows sharply higher '96 earnings

[05] Den Norske Bank's operating earnings edge up 2.3%

[06] British Gas holders overwhelmingly support demerger plan

[07] Alitalia is expected to show larger than expected '96 loss

[08] Corporate and Economic Briefs

[09] UK banking sector is expected to show strong results for 1996

[10] World telecoms negotiators are optimistic a pact can be reached by Saturday

[01] UK unemployment drops to 6-year low, more than double expectations

The Office for National Statistics said 1.815 million, or 6.5% of the working population, were unemployed and seeking benefits, compared with 1.883 million in December.

January's unemployment level was the lowest since November 1990, and the unemployment rate was the lowest since December 1990, an ONS official said. It was the eleventh monthly drop in a row in seasonally adjusted unemployment. But underlying average earnings grew 4.25% in December, and November growth was revised up to 4.25% from an estimated 4%.

Economists, who had forecast a smaller 30,000 monthly drop, said the higher earnings figures were bad news for the government, and Chancellor of the Exchequer Kenneth Clarke in particular. He is charged with hitting a tough 2.5% inflation target.

The Bank of England's chief economist, Mervyn King, said the UK economy could not sustain another one percentage point rise in earnings this year without jeopardising the inflation target.

'If that were repeated you would get earnings levels that would be inconsistent with the inflation target,' King said. 'It follows therefore that the bank continues to see the need for moderate tightening of policy.'

The unemployment report, with its hint of inflationary pressures, came out with further signs of a widening rift between UK Chancellor of the Exchequer Kenneth Clarke and Bank of England governor Eddie George.

In the central bank's quarterly report, it said at it is more pessimistic about the outlook for inflation in two years' time than it was in November, despite the continued rise in sterling. It said a 'moderate' increase in interest rates is needed if the government is to meet its inflation target.

In its quarterly inflation report, the British central bank said its central projection for underlying inflation in two years' time is close to 3% and 'rising.' It predicted that the measure, which excludes mortgage interest payments, will reach a trough in the second half of 1997 before picking up.

But Clarke insisted it is too early to raise the British base rate from its current 6%, and that the government is on course to meet its target for underlying inflation.

[02] ITT rejects hostile Hilton bid as inadequate

ITT said that remaining independent would be in the best interests of its shareholders and other constituents. The company added that it would seek various options to increase the company's value.

At the end of January, Hilton Hotels launched a cash tender offer for 50.1% of ITT's stock at $55 a share. Hilton said after completion of the tender offer, it intends to complete a merger in which all remaining ITT shares would be exchanged for Hilton stock at $55 per ITT share. The deal would be worth about $10.5 billion, including ITT outstanding debt.

The rejection by ITT's board came a day after Hilton expressed its determination to press ahead with its take-over bid. Hilton said it might reduce its offer if ITT took measures to reduce the proposed merger's value.

'We do not intend to be deterred from pursuing our offer by any actions that you may choose to take,' Hilton Chief Executive Stephen Bollenbach said in a letter to ITT Chairman Rand Araskog.

Hilton, apparently preparing for a fight to control the ITT board as part of its take-over bid, has also named 11 candidates for ITT's current board seats, and named 14 others whom could be added if ITT attempts to thwart Hilton's bid by boosting the number of board members.

ITT said that it was reviewing various options to increase the value of the company, including 'monetising' or otherwise realising the value of ITT's non-core assets. 'The issue is creating shareholder value, both short- and long-term,' Araskog said in ITT's statement.

ITT also said it was filing counterclaims to litigation Hilton filed against it in a Nevada federal court. ITT said it was seeking to enjoin the offer and other relief because of Hilton's 'misappropriation and misuse of confidential ITT information, including information obtained in violation of a 1996 confidentiality agreement between ITT and Bally Entertainment, now part of Hilton.'

[03] PolyGram earnings hit by weak music and film operations

PolyGram didn't forecast profit for this year but said 1997 will be a 'challenging year' for its music division and a 'year of transition' and higher costs in its film activities. PolyGram said last October that it was reorganising its music businesses in order to tackle sluggish market conditions.

'This will be a challenging year for PolyGram's music division, particularly in the US, where market instability is likely to persist for the next 6-12 months,' Chief Executive Alan Levy said. But he added that 'we remain optimistic that our continued success in breaking new talent and the measures we have taken to adapt to changing markets around the world will create the right conditions for long-term growth.

Earnings before extraordinary charges slipped to 722 million guilders ($388 million) in the year, while net profit dropped 18% to 608 million guilders. The net profit came after a charge of 160 million guilders to cover the restructuring of PolyGram's music operations.

The Dutch entertainment company also said its hopes to set up its US major film distribution network later in the year. The company noted that establishing its own distribution operation will increase costs, but said it will give PolyGram greater access to and control of revenues from our films in a market which has good growth prospects worldwide.. Levy said he expects '1997 to be a year of transition as we develop our presence further.'

PolyGram said its film operations were profitable in the second half of the year with sales rising by 25% in 1996 despite box office growth of only 7% in the US and 9% in Europe.

Music sales rose 5% to 7.9 billion guilders, or 84% of total sales although the global music industry grew just 3%. PolyGram said 34 of its albums sold more than a million copies, up from 31 in 1995.

In Europe PolyGram described the Spanish and UK markets as 'buoyant' although this was offset by 'flat or reduced performance' in France, Italy, Germany, the Netherlands and Scandinavia.

[04] Merita shows sharply higher '96 earnings

Gross revenues grew 9.2% to 22.46 billion markka ($4.57 billion) from 20.55 billion in 1995 and net profit more than doubled to 1 billion markkaa.

Merita's 1996 profit was 'satisfactory', said Merita Chief Executive Vesa Vainio, adding that 'the group's operating result was in line with our projections.'

Loan losses in 1996 amounted to 1.50 billion markkaa, down from 1.73 billion markkaa in 1995. The group's non-performing receivables dropped to 3.1 billion markkaa from 4.2 billion markkaa. Merita's result was largely in line with expectations -- the median of analysts' forecasts had been for a 1.27 billion markkaa operating profit in a 1.1 billion markkaa to 2.5 billion markkaa range.

Merita's profits have been on a steady upwards trend ever since the bank was created at the end of 1995 through the merger of Union Bank of Finland and Kansallis-Osake-Pankki.

Finland's banks in the early 1990s were plunged into deep crisis as the economy shrank dramatically after they had embarked on a lending bonanza in the late 1980s.

Operating profit will improve further in 1997, Merita said. The bank based its prediction the continued likelihood of falling interest rates and a steady downward trend in non-performing receivables and other underperforming assets.

'Loan losses already dipped below levels considered to be normal, and they promise to decline further during the current year,' said Vainio. 'Against this background, and with merger-related cost savings materialising as scheduled, we are well positioned for 1997.'

The bank proposed a 0.20 markka dividend per A share and a 1.60 markka payout per preferred B share. Both payouts were the first since the early 1990s - from either Kansallis-Osake-Pankki or Unitas.

[05] Den Norske Bank's operating earnings edge up 2.3%

'The positive development in DnB's core operations have led to a growth in lending and deposits which has almost compensated for the pressure on interest margins. This has coincided with a favourable loan-loss trend and continued reversals on previous loan losses,' DnB's Chief Executive Officer Finn A. Hvistendahl said.

The board of Norway's largest commercial bank proposed raising the dividend 16. 6% to 1.75 kroner a share.

The bank said its cost-cutting program has yielded results, with operating expenses down 7.2% to 4.58 billion kroner last year from the year earlier, despite an expansion of operations.

Also, the bank said it trimmed its work force nearly 9% last year to 5,565. The company said it accomplished the staff reductions through voluntary measures and sales of operations.

Meanwhile, DnB said loan losses on new loans were down to 837 million kroner down from 1.251 billion a year earlier. DnB said the loan-loss reductions were due to improvements in customers' financial positions and increases in collateral value.

[06] British Gas holders overwhelmingly support demerger plan

Shareholders backed the reorganisation by a ratio of 10 to one, with 330, 000 voting.

Chairman Richard Giordano, answering a shareholder's question, said British Gas is not in talks with any party about a merger.

The reorganised British Gas will comprise BG, containing the onshore pipeline operator TransCo, the exploration and production division, and the Global Gas and power generation businesses, and Centrica which will comprise the UK gas sales and marketing operation plus the enormous Morecambe Bay gas fields.

The demerging British Gas expects its gas portfolio to be in a satisfactory shape by the end of this year, said director David Varney, designate chief executive of one of the demerged companies.

Varney said British Gas remains in dialogue with gas producers over its take or pay contracts. Since the company renegotiated its contracts with BP and Mobil in recent months, it has been approached by other producers, he added, saying he expects further settlements this year.

However, Varney emphasised the need to look at the overall market situation before signing deals. He said the collapse in spot prices since early December would not impede take or pay renegotiations as they involved a long-term view of the market.

Chairman Giordano said the giant Morecambe Bay field will play a central part in the resolution of the take or pay issue.

Giordano said that by the time the Monopolies & Mergers Commission makes its ruling on pipeline operator TransCo's pricing formula, the combined size of the workforce of the demerged companies will be 35,000, compared with 70,000 in January 1994.

The implied loss of 35,000 jobs compares with figures issued by British Gas in September estimating a total of 31,000 jobs would have been lost.

The MMC must report by the beginning of April this year.

Varney played down suggestions that industry regulator Ofgas might take TransCo to court to force it to place its full accounts in the public domain. He cited commercial confidentiality of information about suppliers using the pipeline system as the reason for reticence about the level of disclosure sought by Ofgas.

Varney said no further overseas expansion of demerged entity BG is planned at present. He added that he is carrying out an evaluation of overseas exploration and production assets and that will be completed in the second quarter.

[07] Alitalia is expected to show larger than expected '96 loss

Ciampi reiterated that 50% of the 3 trillion lire restructuring plan for the airline has already been handed over by Istituto per la Ricostruzione Industriale, the state-owned holding company that owns 90% of Alitalia.

Ciampi said the remainder of the restructuring funds will come from market sources through partnerships with other airlines; a possible employee stake in the airline; and sales of non-strategic assets.

The minister added that asset sales still to be done should bring in 500 billion lire. He didn't specify what might be sold.

The company won't be in a position to make significant investments until 1998 due to its problems, though it might be possible to start that process this year if things go better than expected, he said.

Alitalia expects to make operating profit of 175 billion lire this year.

Its restructuring plan has been under close scrutiny by the European Union officials and word is expected by the end of March.

In 1995, the airline reported a loss of 86 billion lire, but this was softened by a one-off gain of 442 billion lire from asset sales.

Alitalia's loss for 1996 will be the ninth straight year of losses.

[08] Corporate and Economic Briefs

Analysts have said since the proposals were announced last year that the vote would be a formality due to strong support from institutional shareholders. Nonetheless, British Gas noted the strength of the vote in favour from shareholders with less that 1,000 shares.

The reorganisation was backed by a ratio of 10 to one, with 330,000 voting. Gaz de France has been authorised by the government to invest some five billion francs ($880 million) abroad under its new contract plan for 1997- 1999, according to Les Echos newspaper.

The state had cleared three billion francs in foreign investments under the previous 1994-1996 contract. Gaz de France will also strive to cut debt to reach a debt-to-equity ratio of 45% at the end of 1999, compared with the current 96% ratio. Littlewoods' proposed acquisitionof Freemans, a unit of UK retailer Sears, will be referred to the UK Monopolies and Mergers Commission, a government official said.

The development throws an unexpected hurdle in Sears's restructuring plans. John Taylor, the U.K.'s minister for corporate and consumer affairs, said the proposed acquisition 'raises competition concerns in relation to the market for agency mail-order catalogues in the UK, which merit investigation' by the commission.

Retail analysts said the government's decision to direct the £395 million ($648.3 million) deal to the commission was a surprise, and that Sears had been hopeful of getting a green light. The deal would give Littlewoods about 25% of the UK mail-order market. Allianz declined comment on speculation that it may be planning a take-over bid for Assurances Generales de France.

A spokesman for the German insurance group, which rarely comments on rumours, said there was no need to deviate from that policy on this occasion. 'We have no comment,' the Allianz spokesman said. Shares in AGF had risen strongly on the rumours on Tuesday, but the French insurer distanced itself from the take-over speculation on Tuesday evening. 'It's ... not in Allianz's tradition to go into costly unfriendly take-overs,' an AGF spokesman said. 'We don't think it's in the works.'

[09] UK banking sector is expected to show strong results for 1996

Double-digit profit rises are expected, as well as at least one share buyback and updates on cost savings from banks that completed mergers or made acquisitions in the last 18 months.

Most major investment houses have recently upgraded forecasts for 1996 profits, prompted by better-than-expected interim earnings and a steady recovery of the British economy. The share prices of the six lenders about to report have reflected the positive outlook, rising an average of 11% since Jan. 1, compared with a 3.5% gain in the FT-SE 100 share index.

''We continue to expect solid operating earnings performance in 1997, allowing further share repurchases, dividend increases and other actions that should underscore the sector's strength,'' analysts at Salomon Brothers said in recently published research. ''Investors looking for 'safe' commitment in an elevated market may find the high visibility of bank earnings attractive.''

Low interest rates, an upswing in the housing market and growing consumer confidence are the building blocks for healthy profit margins, analysts say. And while the country may be in the final months of Conservative Party rule, as long as interest rates and inflationary pressures are kept in check, there's little on the horizon to alter the earnings-enhancing environment.

Barclays PLC (BCS) and Asia-focused HSBC Holdings PLC are analysts' top picks for steady long-term growth in both profit and share prices. So is acquisition-minded National Westminster Bank PLC (NW), even though it's the only member of the group expected to post a decline in profit.

The range of forecasts was narrow compared with previous-year projections, reflecting a consensus for strong earnings across the board.

Lloyds/TSB Group PLC kicks off the 1996 results season Friday and it's expected to post one of the biggest pre-tax profit increases: a rise of nearly 30% to around £2.4 billion.

Analysts at ABN AMRO Hoare Govett believe Lloyds/TSB is the most profitable bank in the sector, with a return on equity exceeding 30%.

''Lloyds/TSB has improved the quality of its earnings through low-risk mortgage lending and non-capital-intensive life-insurance earnings,'' the banking team wrote in a recent research note.

With a market capitalisation second only to giant HSBC Holdings in the banking sector and now the U.K.'s seventh-largest blue chip, Lloyds/TSB is looking for insurance acquisitions, according to a September interview with Chairman Sir Brian Pitman by APDJ World Equities Report. The bank recently took full control of insurance unit Lloyds Abbey Life, buying out the 37% it didn't already own for £1.68 billion .

On Wednesday, Lloyds Abbey Life posted stronger-than-expected pre-tax profit of £548 million for 1996, meaning parent company Lloyds/TSB could post even higher profit Friday than already expected.

Hugh Pye, banking analyst at BZW Research Ltd., prefers Lloyds/TSB among all the domestic banks. ''We can see quite clearly the trend in cost savings over the years, growth in revenue and very predictable growth in operating profit,'' he said.

NatWest is another popular pick among city analysts. BZW Research wisely became buyers of the stock in January, which has gained 20% to close at 828.5 pence Tuesday since ending 1996 at 685.5 pence.

Pre-tax profit for 1996 at NatWest is expected to come in at around £1.18 billion, down 33% from £1.75 billion in 1995.

The forecast drop is primarily due to a 65% year-on-year fall in interim profit, the result of one-time charges of £186 million for the restructuring of retail-banking services; £20 million to integrate fund manager Gartmore PLC, which NatWest bought in February 1996; and £690 million to dispose of US unit Bancorp.

NatWest's second-half results are not expected to be as clouded. Analysts are hoping to see another share buyback, following one made at the half- year mark.

''I consider both Barclays and NatWest candidates for buybacks,'' said John Leonard, banking analyst at Salomon Brothers. ''Although at some point the economics get a little less attractive, so they might not be as big as before.''

If Barclays does announce another share buyback in conjunction with the release of 1996 results Feb. 18, it will be the fourth such move in 18 months.

When interim results were announced in August, Richard Reay-Smith, director of the personal sector in the UK banking-services division, said it was ''not without possibility'' that Barclays would make another buyback in February.

Barclays has already returned almost £1 billion to shareholders by repurchasing its own shares.

Analysts expect a rise in pre-tax profit of around 15% to £2.4 billion at Barclays, a figure which could be dented by about £50 million if it accounts for a number of recent branch closures in France in the second half of 1996.

Analysts at Lehman Brothers and BZW Research favour HSBC Holdings and Standard Chartered PLC. Neither bank made any large-scale acquisitions in 1996, but their share prices soared anyway on the back of expectations for continued strong profit growth.

HSBC Holdings shares rose 28% in 1996, while Standard Chartered stock gained 25%.

HSBC Holdings is expected to report pre-tax profit of about £4.5 billion, an increase of 25% from 1995. Standard Chartered is seen posting a 30% increase to £868 million, duplicating last year's 30% gain from 1994 profit of £510 million. If Standard Chartered achieves analysts' 1996 expectations, profit will have risen 250% since 1992.

The only black cloud hanging over the two banks is sterling's strength.

Salomon's Leonard estimated that about 60% of HSBC's profits are dollar- related. ''About 75% of Standard Chartered's profits are related to the dollar,'' he added. ''It's certainly a factor that could lead management to issue some cautionary comments about the future run of the currency.''

Abbey National PLC, which will announce 1996 results Feb. 27, is expected to post the smallest increase in pre-tax profit, rising 6% to about £1.08 billion, as 1996 accounts absorb the integration and restructuring costs of its acquisition of National & Provincial Building Society.

However, discussions at the bank's presentations to analysts and reporters are likely to centre on Abbey's bid of £1.4 billion for Scottish Amicable Life Assurance Society, and whether the bank will raise it. (Alison Turner, AP-Dow Jones)

[10] World telecoms negotiators are optimistic a pact can be reached by Saturday

Meanwhile, the EU submitted a revised offer that clarified its position. The EU said all basic telecoms services, whether they be sound, data, or images would be liberalised. However, broadcasting wasn't part of this offer and belonged to the audio-visual sector.

A senior Canadian official said 'we believe were are very close to a deal.' And Karl Falkenberg, chief telecoms negotiator for the European Union, told reporters 'I look forward to a conclusion (of the talks) by the week-end.'

In April 1996, the US walked away from the negotiations, claiming that the market opening by other nations didn't add up to an acceptable package. The talks then were rescheduled with a new deadline of Feb. 15, 1997.

'The US are in the very different mood in February 1997 than they were in April 1996,' Falkenberg said, that the chances of Washington turning away from concluding the negotiations wasn't very high.

The US, which accounts for nearly a third of the estimated $600 billion in annual global telecoms revenues, is crucial to a world telecoms pact. Its negotiators have said that while progress was being made, market opening offers by many of the 60 countries participating in the negotiations needed to be improved further to add up to an acceptable package.

But Falkenberg and other trade officials from key countries said trade negotiators typically seek to get the best deal possible in the time available and that US comments could be seen in that light. The 60 countries participating in the talks account for some 91% of global telecoms revenues.

A senior Canadian official said he hoped others - a clear reference to the US - wouldn't use foreign ownership limitations set by his country as an excuse to walk away from the talks.

This official said Canada couldn't do better than allowing foreigners to hold a 46.7% interest in a telecom company. US officials have pressed Canada to allow foreigners majority shareholding. However, Canada has offered to open its market in various ways and is now considering even allowing phone companies to use satellites other than Canadian for calls within the country.

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