European Business News (EBN), 97-04-18

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

Page last updated April 18 1800 CET

CONTENTS

[01] Telefonica links with B.T., MCI's Concert alliance

[02] Racal shares plummet 12% after profit warning

[03] French stocks hit by talk of snap parliamentary elections

[04] France plans incentives prior to launch of France Telecom

[05] EU reportedly says Italy won't make EMU goal

[06] EU ministers adopt compromise to end dispute of Helms-Burton law

[07] Growth in U.K.'s money supply revives pressure for rate rise

[08] Microsoft posts 85% rise in quarterly profit

[09] U.K. Redland considers impact of single currency criteria

[10] Corporate and Economic Briefs

[01] Telefonica links with B.T., MCI's Concert alliance

E.U. regulators may also probe the effects of the alliance on pan-European telecommunications operator Unisource, in which Telefonica has been a member, the spokesman said. 'Obviously, this has an effect on the existing structures of Unisource; we're waiting to hear from the Unisource family,' he said. Earlier, Unisource said that it has asked Telefonica to leave the venture as its linkup with BT-MCI would be 'incompatible with its shareholding in Unisource.'

Telefonica has joined British Telecom and MCI Communications in their Concert alliance. BT said it would take a 2% stake in Telefonica, while the Spanish company would buy a 1% holding in BT. The crossholdings would cost around £280 million ($457.2 million) each. Juan Villalonga, chairman of Telefonica, would join the Concert board and Sir Iain Vallance, chairman of BT and co-chairman designate of Concert, would join the Telefonica board.

The deal, which was unwittingly revealed by Concert's newest partner Portugal Telecom earlier this week, deals a blow to BT and MCI's arch-rival, U.S. phone giant AT&T Corp., and heralds a major change in the telecoms landscape across the Americas and Europe.

AT&T said it 'regrets' Telefonica de Espana's decision to pursue 'their own interests at the expense of their partnership' with AT&T and the Unisource pan-European consortium.

As reported earlier, Telefonica de Espana, British Telecommunications and MCI Communications Corp. formed a strategic alliance to pursue new investment opportunities and provide enhanced products and services.

In a press release, AT&T said it 'remains committed' to Unisource, and to the companies' continued cooperation in Europe.

Telefonica's partnership with BT and MCI will confuse customers and will 'slow down the opening of the European communications market,' Unisource Chairman Lars Berg said.

[02] Racal shares plummet 12% after profit warning

In a press release, Racal said it will report pretax profit in excess of £40 million, but far short of forecasts in the area of £57 million. Racal's profit downgrade is a result of poor performance at its data products division, which posted a second half loss of around £7 million.

The loss comes largely as a result of a delay in the launch of the company's Fast Frame Relay products, which are designed to manage data flow. The company said development of the products is 'extremely complex' and led to increased research and development costs. The company also said its specialised businesses and energy divisions continue to experience difficult trading conditions, but that its managed network services and defence electronics have performed well.

Racal stock plunged an initial 12% or 33.5 pence to 243.5 pence after the company shocked the market with what is its second major profit downgrade in six months. Virtually all of the trading has occurred since the company's statement was issued over midday.

Analysts tempered surprise for Friday's latest bout of bad news with acknowledgement that the company's forecasts released in November were optimistic.

'Obviously it's a surprise,' said Justinian Clifford-Bowles, electronics analyst with Credit Lyonnais Laing. 'The company had stated quite firmly at the half year stage that the division would be in profit, but it was a fairly optimistic expectation,' he added.

The latest estimate, Clifford-Bowles said, should be met since the company's year end was March 31. Racal's full year results are due for release June 3.

However, the company also said progress has been made at the division where the operating loss will be less than that incurred in the previous year after increased development spending of £10 million. Racal's data products business has endured severe problems in recent years and has been under reorganisation for nearly two years. This is the company's second profit warning this fiscal year. As previously reported, in December the company said a significant reduction in orders at its radio group would result in a loss at that division.

[03] French stocks hit by talk of snap parliamentary elections

The latest polls indicate Chirac's governing conservative coalition still could win now, if he quickly dissolves the National Assembly and orders the balloting. In the French media, the word was that Chirac has all but decided to do it.

The leftist daily Liberation predicted a first round of elections June 1 and the second a week later. It quoted conservative party officials saying they were rushing to come up with campaign plans.

With the unemployment rate already at a record 12.8%, Chirac could suffer an election defeat if he is forced to make further budget cuts to qualify France for a European single currency, and wait for scheduled March 1998 parliamentary elections.

'The majority is ready,' Foreign Minister Herve de Charette said on French radio, although he added that the decision was up to Chirac.

But Socialist Jack Lang, a former culture minister, said Friday Chirac was taking 'a rather big risk' if he called elections. The vote would be 'a sort of referendum for or against his policies. ... The chances for the left are not slim.'

At stake is the drive to establish the euro to strengthen the 15-nation European Union as a world economic power. France and Germany are the key engines behind the euro, and both are struggling with double-digit unemployment.

Chirac won the May 1995 election with unemployment his No. 1 campaign issue.

French media said Chirac will make up his mind next week, possibly by Wednesday. Should he dissolve the parliament, elections must be called between 20 and 40 days later.

New reports that France won't be able to cut its budget deficit to 3% of the gross domestic product this year - a measure required for the single currency - prompted Finance Minister Jean Arthuis to try to calm jitters Thursday and Friday, as the franc and the stock market slipped.

Arthuis reaffirmed that France's budget deficit will fall to 3% of GDP by the end of 1997. He also said that numbers indicating lower-than-expected tax revenue amid a sluggish economy were 'not worrying.'

New elections would also allow Chirac and Prime Minister Alain Juppe to reconfigure their cabinet. That would avoid political embarrassment if, as some newspapers have reported, two cabinet ministers face legal problems over questionable fund-raising.

News reports in recent weeks have said that Arthuis and Labour Minister Jacques Barrot could be placed under formal investigation, which in France means one step short of being charged.

[04] France plans incentives prior to launch of France Telecom

The bonds, known as 'Ballabonds, which mature in July, will be issued by a French government anxious to ensure a successful launch of its partial privatisation of France Telecom next month.

Named after the former Prime Minister who issued 110 billion French francs of them in 1993 as a form of down-payment on the country's privatisation program, the bonds are unlikely to be replaced by new borrowings, according to French officials.

'We will respect the contract in full,' said one government official, who added that repayment of the 90 billion Francs of the 6% bonds still outstanding 'poses no difficulty' for the government at this time.

That may be so, say analysts, but the imperative of having a highly successful initial public offering launch for France Telecom will likely mean that every option available will be used to encourage the two million or so individual Ballabond holders to exchange them for shares in France Telecom.

That will include a price discount for individual investors, as opposed to institutions, beyond the discount at which the shares are expected to be priced to other recently privatised European telecommunications companies, say analysts.

[05] EU reportedly says Italy won't make EMU goal

However, a European Union source said the figure could change before the Commission releases its spring forecasts next Wednesday. It had been calculated by officials 'at a technical level' and had now been passed higher up the Commission's political hierarchy.

The report will say that Italy needs another 5 trillion lire worth of adjustment to the 1997 minibudget and the country must make further efforts in the 1998 budget in order to give the government's finances a healthier medium term trend.

The government of Italian prime minister Romano Prodi recently presented a 15.5 trillion lire budget adjustment that seeks to bring the deficit this year to 3% of GDP from last year's 6.8%. But the quality of the budget adjustment doesn't convince the Commission, the Italian financial daily 'Il Sole 24 Ore' said.

And financial markets are generally sceptical of the structural changes in the minibudget, although without it the deficit is running at about 3.8%.

This morning, Italian bonds are falling on the back of fears raised by reports of the E.U. Commission.

In particular, traders said they are worried about the future of the government of Romano Prodi if Italy is to be excluded from the EMU in the first round.

'The futures contract is suffering already, below the 128.00 level. It could easily be above the 129.50 level at this point,' said one trader.

Economists however tend to take a different view and don't foresee a delayed entry for Italy as a catastrophe.

Bank of America economists noted in their 'Weekly Spotlight On The Italian Market,' that 'a delay in the entry of Italy and Spain could be guaranteed perhaps with a different timetable. If this occurs, the peripheral countries wouldn't react negatively.'

[06] EU ministers adopt compromise to end dispute of Helms-Burton law

'The current WTO panel proceedings in respect of Helms-Burton will now be suspended,' ministers said in a statement.

The adoption of the agreement hammered out last week, effectively ends a World Trade Organization complaint that the EU had initiated against the U.S. over the 1996 Helms-Burton Act, which seeks to punish foreign companies that invest in property confiscated from Americans after the 1959 communist revolution in Cuba.

EU governments warned however, that the Union could renew its complaint, if the U.S. does not live up to its agreement to eliminate a provision of Helms-Burton that denies U.S. visas to executives of corporations that have invested in expropriated property.

The same compromise covers the so-called D'Amato bill, which would have applied similar sanctions on businesses and individuals doing business with Libya and Iran.

In their statement, EU ministers lauded U.S. aims of 'promoting democratic principles, humans rights and fundamental freedoms.'

But they reiterated their oft-stated opposition to the approach taken in the Helms-Burton law, calling the legislation 'unacceptable both in law and in principle.'

The statement further expressed 'strong opposition to the imposition of extra-territorial legislation as a means of advancing these objectives.'

The 15-nation EU rejected U.S. claims that the law was a private matter of national security, and accused Washington of violating international trade rules by seeking to impose its policies beyond U.S. territory.

[07] Growth in U.K.'s money supply revives pressure for rate rise

The Bank of England said M4 - the broadest measure of money supply, consisting of bank deposits, bank lending and private-sector holdings of notes and coins - grew 1.0% month-on-month in March after seasonal adjustment, down from 1.4% a month earlier, to stand 11.2% higher year-on- year, little changed from 11.3% in February.

The increase was higher than the 11.0% economists were expecting and left M4 growth well above the government's monitoring range of 3% to 9%. In the latest six months, broad money supply expanded at an annualized rate of 13%, up from 12.8% in February. The Bank of England said this measure is free of distortions from gilt repos, which have inflated M4 growth.

Net bank and building-society sterling lending to the M4 private sector was a seasonally adjusted £4.5 billion in March, lower than the £6 billion expected by economists and almost half the £8.2 billion seen in February.

But economists pointed out that net sterling lending would have been a robust £7 billion except for a £2.5 billion fall in reverse gilt repos in March. Net lending has averaged around £6 billion per month since autumn.

Bank of England Governor Eddie George believes current rates of money- supply growth cannot be sustained without pushing inflation higher and is expected to urge the chancellor of the exchequer to raise rates promptly following the election.

The next monthly monetary-policy meeting between George and the chancellor is set for May 7. 'Double-digit growth in broad money is something that can only strengthen the resolve of George to press for higher rates, and I think there will be a good chance they go up by half a (percentage) point soon, possibly at the May 7 meeting,' said Kevin Gardiner, U.K. economist at Morgan Stanley International in London.

'These figures don't change the picture, which is that activity is running at a very strong level,' said Adam Cole, U.K. economist at HSBC James Capel in London. 'This, along with run of activity data for the domestic economy, will make his (George's) case very solid indeed for a rate rise after the election.'

Concerns about the outlook for interest rates and inflation had eased recently after statistics showed that sterling's strength is cutting prices of imported raw materials, reducing pressure on manufacturers - and hence retailers - to raise selling prices.

As a result, underlying retail-price inflation - which excludes mortgage- interest payments - is expected to fall below 2.5%, the target to which both the ruling Conservative party and the main opposition Labour party are committed, later this year. Underlying inflation fell to 2.7% in March from 2.9% in February.

However, with domestic spending expanding strongly, a tightening labour market and buoyant growth in the service sector, interest rates are expected to rise sharply this year, regardless of which party wins the election, to stop inflation from rising in 1998.

[08] Microsoft posts 85% rise in quarterly profit

Microsoft credited strong revenues from the Office 97 bundle, released in January, which helped drive application and content revenues up 24% from the year-earlier period.

But revenues from Microsoft's platform products, including the various Windows operating systems, rose 73% to $1.68 billion.

The software giant's net income of 79 cents a share compared with earnings of $562 million, or 44 cents a share, in last year's fiscal third quarter. Revenues rose to a record $3.21 billion.

Analysts on average had forecast earnings of 64 cents a share and revenues of about $2.9 billion.

[09] U.K. Redland considers impact of single currency criteria

According to Redland, a UK aggregates and roofing specialist with large operations on the Continent, it's impossible to hedge against the negative impact of the tough convergence criteria laid out in the Maastricht Treaty.

But Redland Finance Director Paul Hewitt told Dow Jones Newswires that the company can expand outside Western Europe and sell Redland Granulats, its loss-making French aggregates unit, to mitigate the effect of government belt-tightening across the Continent.

In the UK, US and France, the company makes aggregates, or building materials made from combinations of other substances, which are often used in roads. Redland also produces roofing products across Europe and in East Asia.

According to Hewitt, the single currency itself is less of an issue than the measures governments must take in order to meet the adoption criteria. 'I don't think to us it's that important,' he said.

However, Hewitt said Redland has already anticipated 'to some extent' the changes that European economic and monetary union will bring for its debt, which is now hedged in local currencies.

Hewitt also said Redland is using its normal systems review

to consider the implications of using two base currencies after the launch of the euro, planned for January 1, 1999. 'It's an issue, but it's not a big issue,' he said.

[10] Corporate and Economic Briefs

France's state-controlled Banque Herve is expected to announce within days that it will make a second attempt at privatization, financial daily L'Agefi reported. The first attempt at privatization failed in 1993 after the bank was hit by a crisis in the real-estate sector and Credit Commercial de France pulled out of the deal. At the time, the bank's market value was estimated at 830 million French francs ($143.1 million), the report said. According to its sources, the newspaper said that the finance ministry responsible for studying the feasibility of the project, had given the final go ahead. The banks charged with managing the sale were named as Lazard Bank and Financiere Edmond de Rothschild.

Registrations of factory-new cars in Germany declined 8.5% in March from a year earlier, but were up 32% from February, the Federal Motor Vehicles Office said Friday. The total number of all new vehicles being registered was down 5.2% from the year-earlier level, the office said. Meanwhile, in the first quarter of the year, the trend in Germany's vehicle sales, as indicated by registrations, showed some continuing weakness in both the automobile and commercial vehicle sectors, though motorcycle sales were far higher.

Retail sales in the Netherlands were up 1.8% on an unadjusted basis in February, compared with that month of 1996, the government said Friday. February 1997 had one fewer Thursday than February 1996, which the Central Bureau for Statistics said was why the rise was so low, compared with the rise of the last few months. Thursdays have traditionally been a heavy shopping day in the Netherlands, as that is when shops stay open in the evenings. But this effect has been reduced steadily as opening hours have widened on other days of the week, as well. If the figures are adjusted for the missing day in Feb. 1997, then Feb. 1997 sales were about 6% higher than in Feb. 1996. The CBS said non-food sector sales rose 4.7% on the year, while food sales fell 1.1%. Dutch industrial production in February rose an unadjusted 5.9% from the same period a year earlier and 3.7% from January, the government's Central Bureau for Statistics said Friday. The CBS said the industrial production index for February stood at 108.8, compared to 102.7 a year earlier.

In January, industrial production rose 1.5% from a year earlier, while the index climbed to 100.9, according to the CBS. Adjusted for seasonal influences, the Dutch industrial production index stood at 110.2 in February 1997, and 106.3 in January 1997.

Russia's economy has stabilized enough that capital flight is no longer a problem, despite reports that money is flowing out of the country in large amounts, First Deputy Prime Minister Anatoly Chubais said Friday. 'There is no problem of capital flight. Forget about it,' Chubais said in response to a reporter's question. 'It was a problem of 1993 and 1994.' In the early years of reforms, capital flight was estimated at more than $10 billion annually. Now, Chubais noted, while money is continually flowing out of the country - much of it evading taxes - foreign capital inflows have surged to compensate.

SAirGroup, which includes Swissair, reaffirmed its partnership with Sabena, despite the Swiss company's writedown to zero of its 267 million Swiss francs ($182 million) investment in the Belgian airline. 'In no way,' said SAirGroup Chairman Hannes Goetz of the 1996 writedown of its 49.5% equity stake in Sabena, 'should this be interpreted as a repudiation of our partnership with Sabena.' Goetz, speaking at the SAirGroup's annual news conference, said his company has 'no plans to turn our back on the chance to broadly position ourselves throughout Europe.' He said SAirGroup's board elected to create provisions of 300 million francs to cover 'eventual structural adjustments and to ensure that we have the necessary room to maneuver in the E.U.'s liberalized market.'

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

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