European Business News (EBN), 97-04-01

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

Page last updated April 1 1715 CET

CONTENTS

[01] European stock and bond markets skid on heels of two days of consecutive tumbles in New York

[02] Suez swings to 1996 net profit, says board approves merger with Lyonnaise des Eaux

[03] Italy speeds up placement of third tranche of ENI stock

[04] US manufacturing survey signals economy is picking up more steam

[05] U.K. manufacturing activity continues to expand

[06] Nippon Credit starts government-backed restructuring

[07] Air France ground-crews strike in Paris

[08] Amstrad conditionally agrees to sell mobile phone unit

[09] Repsol plans $11.2 billion investments

[10] U.S. and E.U. fail to reach meat-inspection accord

[01] European stock and bond markets skid on heels of two days of consecutive tumbles in New York

In those two days of trading, the Dow Jones Industrial Average gave back virtually all of 1997's gains.

Stocks were the big decliners in Europe: Most major share indexes fell at least 1.5%, following a 2.3% decline in the Dow Jones Industrial Average Monday.

Ostensibly the excuse was concern about further rises in official U.S. interest rates, after the U.S. Federal Reserve nudged its target for the Fed Funds rate 0.25 percentage point higher last week.

But volumes were exceedingly low, suggesting that investors aren't convinced the decline will last or that further rate rises would be any kind of surprise.

'This is not the time to panic,' said Adrian Owens, European economist at institutional fund manager Julius Baer Investments in London. 'Following last week's rate rise in the U.S., we already expect a further rate rise in the U.S. in the second half of 1997, and a rate rise in Britain after the May general election.'

Nevertheless, stocks were lower.

Frankfurt's DAX index closed official floor trading down 3.9% at 3296.69 points. Those losses were extended in later electronic trading. The weighted 30-share IBIS DAX stock index settled at 3281.46 points, down 126.37 points, or 3.7% from Thursday's settlement ahead of Germany's four- day Easter break.

In London, stocks slid 1.5%, saved from deeper losses by the market's defensive nature. Although the blue-chip FTSE 100 share index closed down 64.8 points at 4248.1, strategists said the loss could have been far worse. Indeed, the index's closing level was the day's best, and volume was light.

Provisional volume for the whole market was 610.2 million shares.

In Paris, the CAC 40 index dropped 2.8% or 74.86 points to 2581.82, its lowest level since March 24.

Declines in bond markets were more subdued, but in line with weaker U.S. Treasurys Monday, which fell on strong economic data that heightened interest-rate fears.

'The Bund market opened weaker on the data that came out in the U.S. on Monday, and other markets followed,' said GNI senior economist Peter Osler. 'There was early selling of Bund futures, and the market fell through several stop-loss levels, which helped the downward move.'

The Italian government-bond market also was depressed by criticism of the government's new mini-budget and a weaker lira, traders said.

In the currency markets, meanwhile, both the dollar and the Deutsche mark slid against the yen in late European trading. The session was slow, characterized by the dollar's recovery from an early selloff against the mark.

London traders spent most of the day in a wait-and-see mood, concerned as to whether the ferocious correction which had brought the Dow Jones Industrial Average (DJIA) nearly 300 points lower over the previous two trading sessions would continue, or reverse

In the event, U.S. stock prices were narrowly mixed; at 1600 GMT the DJIA was up 9.06 points at 6592.54 points.

[02] Suez swings to 1996 net profit, says board approves merger with Lyonnaise des Eaux

Both companies have said their boards would review the merger for final approval on April 11. No new details on the long-awaited merger were disclosed.

Suez posted 1996 net profit of 843 million francs ($149.7 million) compared with a loss of 3.96 billion francs the year earlier. In January, Suez had already said it expected 1996 net profit of about 800 million francs.

The company said its board had approved a special dividend in order to distribute part of the capital gain of 3.4 billion francs from the sale of investment bank Banque Indosuez last year to Credit Agricole.

The statement, however, didn't quantify the dividend, which is expected to be distributed to long-time shareholders in order to give Suez stock owners extra cash ahead of the merger with Lyonnaise.

Shareholders in Compagnie de Suez will be looking for some reward for taking on risk from the company's planned merger with Lyonnaise des Eaux, Jean-Louis Beffa, head of glassmaker Saint-Gobain said.

He said the distribution of a special dividend of about ''10% of Suez's 34 billion francs ($6 billion) in financial assets seems appropriate.''

He told a news conference that Saint-Gobain, which holds just over 6% of Suez, along with Banque Nationale de Paris and insurer Axa-UAP wanted the payout.

A spokeswoman for Suez, which has confirmed that it is holding merger talks with Lyonnaise des Eaux, declined comment. The two companies are scheduled to hold special board meetings on April 11 to discuss the merger.

Beffa said that the merger plans seemed reasonable, but contained some element of risk. 'I think that it would not be bad for Suez shareholders, given the disappointments they have had in the past, and given the bet they are ready to take to put their financial assets behind a new strategy, to give them a reasonable share, by redistributing financial assets to them.

Generale des Eaux, another Suez shareholder and rival to Lyonnaise des Eaux, has also said it plans to try to obtain maximum shareholder value from Suez ahead of any merger. Any heavy demands by Suez shareholders for a big payout, could however diminish the value of such a merger to Lyonnaise.

[03] Italy speeds up placement of third tranche of ENI stock

'The share placement will be completed by the summer,' the Treasury said. The government owns 61% of the energy giant and Treasury Minister Carlo Ciampi has said the state's holding will not fall below 51%.

While no specific date had been given in the past, this sale was generally expected toward the end of the year as the privatisation of telecommunications holding company Societa Finanziaria Telefonica per Azioni is to be held in the autumn.

The announcement moves up the next ENI tranche, but no mention was made of the size. The Treasury said it would give further details of the summer offering in the next few days.

The offer follows a record second tranche sale in November 1996, which raised 8.87 trillion lire ($8.8 billion) after the exercise of an over- allotment, or 'green shoe' option because of heavy demand, and an initial 15% sale in November 1995.

ENI made a consolidated net profit of 4.45 trillion lire in 1996. The company's shares closed down 0.79%, or 90 lire, at 8,393 in Milan before the Treasury's announcement. The decline was less than the market in general.

Italy's centre-left government is determined to press on with its privatisation programme, which also includes the sale of telecommunications holding Stet and its operating unit Telecom Italia this year, despite opposition from key ally, the hard-left Communist Refoundation party.

[04] US manufacturing survey signals economy is picking up more steam

'The manufacturing sector is showing a little acceleration of activity, and that may be reflective of stronger demand over the last few quarters and relatively low levels of inventories,' observed Bill Sharp, an economist at Smith Barney Inc.

The National Association of Purchasing Management reported Tuesday an increase in its March composite index of 55.0% from February's 53.1%. The latest reading exceeds the consensus forecast of 54.0% by a full percentage point and marks a two-year high. The last time the NAPM's composite index was higher was January 1995, when it hit 56.9%. An index above 50% suggests expansion in the manufacturing sector, while one below 50% points to contraction.

While the bond market cheered a marked decline in the prices index to 50.9% from 55.1%, economists were preoccupied with a rise in the supplier deliveries index to 53.6% from 51.3%. The rise in the index indicates that suppliers were less able to meet delivery schedules, according to the NAPM.

'Somebody might say the bright spot in that release is the decline of the price index, but I take little solace in that,' said Kenneth Mayland, chief economist at KeyCorp in Cleveland. The rise in supplier deliveries, considered a leading indicator of inflation, hints at production bottlenecks down the road, he noted.

'The bottleneck is tightening,' agreed Lehman Brothers senior economist Cary Leahey. The pickup in supplier deliveries is 'a good signal for the economy, but not a good signal for potential inflation,' Leahey said.

The supplier deliveries index, Sharp said, 'is getting to the point we associate with a danger zone' in terms of Fed tightening cycles. The present levels of both the composite and supplier deliveries indexes are 'consistent with prior periods of Fed tightening phases,' he added.

The NAPM survey, taken with Tuesday's news of a 2.3% rise in February construction spending and earlier signs of strength in consumer demand, suggests that the first quarter gross domestic product growth rate may be in the 3.5% to 4% range - if not higher, Leahey noted. Such a rate would be well beyond the non-inflationary potential growth rate that's generally believed to be in the neighbourhood of 2% to 2.5%.

While manufacturing previously was having a neutral impact on GDP growth, it could now be adding a half to full percentage point to growth, he added.

[05] U.K. manufacturing activity continues to expand

The PMI fell to a seasonally-adjusted 52.9 in March from 53.4 in February, while the index for prices alone rose to 40.6 from 39.7, according to the latest monthly survey from the Chartered Institute of Purchasing & Supply.

The fall in the overall index in March was due to a drop in manufacturing employment while the decline in prices was due to lower import prices resulting from the strength of sterling, the CIPS said.

'The impact of the recent increase in the value of the pound continued to subdue export orders compared to the strong performance recorded in the latter half of last year,' the CIPS said.

The positive side of the pound's strength was that it depressed imported raw materials and components prices. 'This led to a sharp fall in manufacturers' average input prices in March - the 17th consecutive monthly decline,' the report said. Measured against a basket of other currencies, the pound has risen around 15% since last August.

[06] Nippon Credit starts government-backed restructuring

'We appreciate public and private support to restructure the bank. With the measures disclosed today, we should complete all the necessary write-offs of bad loans,' the bank's President Hiroshi Kubota told a news conference.

The bank, struggling under huge property-related bad debts, said it would increase its capital by about 300 billion yen ($2.43 billion). It said this would occur 'soon,' but didn't specify a time frame. Nippon Credit's capital has been depleted by heavy losses to 100 billion yen.

The bank said it would raise 80 billion yen of the fresh capital by issuing preferred shares to a fund previously set up with money from the Bank of Japan to protect the stability of the financial system.

A bank spokesman declined to comment on how the rest of the capital would be raised. However, the Finance Ministry has been asking the private financial sector to assist the scheme, according to local media. The Tuesday evening edition of economic daily Nihon Keizai Shimbun said private banks were asked to provide 70 billion yen, and major life insurers were requested to come up with around 150 billion yen.

Many banks are known to be reluctant to bear the burden of the rescue plan, and it wasn't known what agreement they would eventually reach with the Finance Ministry.

Nippon Credit said that with the capital increase, it would aim to have a capital adequacy ratio of 6% at the end of the current financial year in March 1998. This would still be below the 8% level required by the Basle- based Bank for International Settlements of banks operating internationally.

As part of its restructuring, Nippon Credit said it would 'gradually' withdraw from all of its overseas operations. Kubota didn't give a timetable for the process, and said there weren't any definite buyers yet for the operations. The bank has five branches and seven representative offices abroad, in addition to financial industry units.

The bank said it would also sell off fixed assets within Japan, including its Tokyo headquarters and a branch in Osaka.

In total, the bank expects a special profit of 67 billion yen from selling fixed assets, Kubota said.

Kubota said he didn't preclude the possibility of a merger with another bank, and that Nippon Credit had considered the possibility of a merger with foreign banks, although there were no concrete proposals for this so far. 'The bank may have some difficulties raising funds through bank debentures in the near future, but as it gains more confidence in the market, that should be solved,' Kubota said.

[07] Air France ground-crews strike in Paris

The strike, against job cuts caused by the merging of Air France and Air France Europe - its domestic wing - came the same day the European Union fully deregulates its skies to spur competition.

Though some shuttle flights between Paris and the cities of Nice, Toulouse and Marseille would take off, most of Air France Europe's Orly morning schedule is cancelled, said an airline spokeswoman who refused to give her name.

The strikes are the latest in a series of labor actions protesting the restructuring of Air France Europe, formerly Air Inter, including plans to cut salaries and full-time jobs to boost efficiency.

The head of state-owned Air France warned the company's pilots earlier this month that the strikes planned for March and April will cost the airline 1 billion Francs ($200 million).

But unions said they opposed new work schedules to go into effect May 1, and an increase in part-time employment, presumably at the cost of full- time jobs.

[08] Amstrad conditionally agrees to sell mobile phone unit

An Amstrad statement said Dancall hadn't achieved ''the critical mass to protect itself against component pricing pressures and to provide the cash flow necessary to fund its research and development program.''

Amstrad added that it 'believes that Dancall has reached a stage in its evolution where it would benefit from being part of a larger organisation, with more substantial resources in manufacturing, distribution and consumer image.'

Amstrad bought Dancall in 1993 after it ran into financial problems in the late 1980s. However, Dancall's problems had continued and it showed an operating loss of £6.8 million in the year ended last June 30.

The British group said Dancall's performance in the first two months of its third quarter has been 'above the level experienced in the same period in 1996'. Amstrad said its other businesses had performed in line with management expectations.

The Dancall sale is conditional upon Amstrad shareholder approval and clearance from the Bundeskartellamt, Germany's competition regulator.

Dancall, which manufactures mobile digital handsets for use of GSM and PCN networks, is based in northern Denmark and employs more than 600 people and had net assets of 296 million Danish kronor ($46.5 million).

Some analysts have suggested that the sale of the Dancall unit may signal a decision by Amstrad Chairman Alan Sugar to sell off the company and concentrate on his football interests.

[09] Repsol plans $11.2 billion investments

The company's aim is to consolidate its position in the Spanish energy market and lay claim to the fast-growing economies of Latin America.

If all goes well, the five-year investment plan 'will transform our company, both in terms of activities and growth,' says Alfonso Cortina, the industrial engineer who was named Repsol's chairman and chief executive officer in June. The company hopes expansion and diversification will double its assets between 1997 and 2001.

It is an ambitious target, to say the least. But Repsol is eager to show that it is back on track after a disappointing profit performance last year.

Operating income fell 6.5% to 198.6 billion pesetas in 1996, largely because of a cyclical downswing at the company's highly volatile chemical business - a setback that depressed Repsol's share price during most of the year. Net profit in 1996 rose a modest 1.3% to 119.2 billion pesetas.

Now, the Spanish government plans to sell its remaining 10% stake in April, in a global offer that could raise as much as 170 billion pesetas. The sale forms part of a broader government attempt to liberalize the electricity, oil and, eventually, natural gas markets, in an effort to cut Spain's energy prices.

For Repsol, open markets offer a bevy of new business opportunities. 'Electricity generation, natural gas and expansion in Latin America will be the three pillars of activity that enable us to grow from here to 2001,' says Cortina.

[10] U.S. and E.U. fail to reach meat-inspection accord

Agriculture Secretary Dan Glickman indicated that both sides have been trying to reach an agreement that will permit U.S. meat, meat products and other commodities to continue to be shipped to the E.U., even though U.S. inspection standards would differ somewhat from stricter new E.U. guidelines that take effect today.

'Things don't look good for an agreement,' Mr. Glickman said, referring to any 11th-hour accord.

The U.S. Agriculture Department is to unveil this morning possible retaliatory actions if U.S. exports are blocked. The department has said it will subject E.U. slaughtering plants to individual inspection, which would disrupt E.U. exports to the U.S.

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

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