European Business News (EBN), 97-05-19

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Page last updated Mon, May 19 7:12 PM CET

CONTENTS

[01] UK public finances in surplus for April, defying forecasts

[02] British Airways announces a 9.4% profit rise to £640 million

[03] Japan's contentious trade surplus doubles as soaring exports follow the weakening yen

[04] BASF and Boots face $8.5 billion racketeering claim in US

[05] UK consumer confidence surges in May

[06] Britain introduces tobacco advertising ban

[07] France's Total plans to invest $1 billion in China and is close to signing $3.5 billion Iranian deal

[08] Lonrho is considering a $2 billion merger with JCI

[09] The world's markets await the Fed's next move with bated breath

[10] Expectation mounts over $3 billion Formula One flotation

[11] Corporate and Economic Briefs

[01] UK public finances in surplus for April, defying forecasts

It means that public sector revenues exceeded spending last month for the first time since January.

And in a separate but related development a leading candidate to for the second deputy governorship of the Bank of England, said that the U.K. could have a balanced budget for the fiscal 1998-99 year.

Gavyn Davies, head of research at Goldman Sachs International in London said that Britain's public sector borrowing requirement might 'disappear' by the end of the next fiscal year, which starts April 1, 1998.

He also said for this year, Chancellor of the Exchequer Gordon Brown could 'quite easily' announce a post-budget PSBR target of between £11 billion and £12 billion.

In 1996-97, the Public Sector Borrowing Requirement, the amount the government needs to borrow to bridge the gap between its income and expenditure, was £23.11 billion. This was revised up from a previous estimate of £22.81 billion although it remains less than the £26.4 billion forecast by the previous Conservative government in its November budget. In 1997-98, which started in April, the PSBR is currently forecast to total £19.2 billion.

The figures show that income tax receipts were 12% higher in April than the same month a year earlier and value added tax surged 42%. Corporation tax revenues were 1.4% lower.

However, a spokesman at Britain's Treasury cautioned against getting overly optimistic about April's PSBR.

'We should not read too much into one month's figures at the start of the financial year. PSBR in April should be viewed with caution - flattered by a number of special factors including a one-off benefit of over £1.25 billion of asset sales and the change to quarterly VAT payments for big companies.

'The Chancellor is determined to see significant further progress before he is confident that the public finances are on a sounder, long-term footing.'

The London stock exchange has reacted positively to the news.

[02] British Airways announces a 9.4% profit rise to £640 million

The company also gave its 58,210 staff a bonus of 10 free shares each as well as £89 million ($145.8 million) from the profits.

The company made an exceptional charge of £127 million to cover restructuring costs associated with its 'Business Efficiency' programme, but also wrote back in an exceptional gain of £125 million as a result of restating at original cost its investment in USAirways, reversing the 50% write-down made two years ago.

BA shares were down after the news. 'The figures were at the top end of expectations, but I don't think many people were expecting the restructure charge,' said a trader.

Pretax profit was lifted by increased contributions from associated undertakings, including feeder traffic and fees from airlines operating under franchising agreements with BA, which rose to £114 million from £55 million a year earlier.

[03] Japan's contentious trade surplus doubles as soaring exports follow the weakening yen

Overall, the trade surplus soared 164% to 831.48 billion yen ($7.17 billion) last month, the Ministry of Finance reported. Exports zoomed 22% to 4.429 trillion yen, while imports grew just 8.1% to 3.598 trillion yen. The politically sensitive trade surplus with the U.S. shot up 174% to 468.97 billion yen, while the gaps with Europe and Asia rose 195% and 34%, respectively.

Economists have long expected the trade surplus, which had fallen sharply for several years, to start heading back up, thanks to the weakness of the Japanese currency.

In April, the yen traded at around 125 to the dollar, or 17% weaker than a year earlier. (A weak yen makes imports to Japan more expensive and its exports more competitive in world markets.) Until the release of the latest trade data, however, it was anything but clear that the surplus would turn around -- it fell in January and March and rose only weakly in February.

Now, however, many people view the April report as an unmistakable turning point. 'The underlying trend is clearly one toward a larger trade imbalance, particularly with the U.S.,' said Russell Jones, an economist with Lehman Brothers Japan Inc. 'There won't be a dramatic change in this trend for some time.'

Export growth was led by shipments of automobiles, office equipment and computers, and semiconductors, which grew 32%, 39% and 9%, respectively. Weakness in imports largely reflected slumping shipments of foreign automobiles, beef, and aircraft, which dropped 24%, 40%, and 49%, respectively.

When measured in currency -- neutral volume terms that represent shipments of actual goods like vehicles and barrels of oil, the trend becomes even clearer. In April, Japan's export volumes swelled 15%, while import volumes actually shrank 1.2% -- the fourth time import volume fell over the last six months.

The pace of the rise in the April surplus, however, may not be repeated very soon. The fall in import growth, for instance, partly reflects lower oil prices; oil alone accounted for 11% of Japan's imports in April.

The April 1 boost in Japan's nationwide consumption tax to 5% from 3% also probably played a big role in boosting exports and holding down imports during the month. Companies that had focused on meeting a pretax boom in domestic spending could focus in April on boosting exports instead. Imports, too, rose in March largely to meet domestic demand, then fell off in April after the tax increase.

A rising trade surplus could further boost the yen, which in the first two weeks of May has staged a surprising rally to a level of roughly 116 to the dollar. Economists like Mr. Jones argue that both the rising surplus and an increased chance that the Bank of Japan will boost Japan's record-low discount rate by the end of the year are net positives for the yen.

For Japan, the rise in the surplus is basically good news. Rising exports contribute directly to Japanese economic growth, and in 1997 are generally expected to be one of the main engines for the economy as a whole.

[04] BASF and Boots face $8.5 billion racketeering claim in US

The lawsuit alleges that BASF, Knoll and Boots Pharmaceutical concealed a seven-year university study that concluded that their thyroid drug was no better than cheaper, generic brands to treat people suffering from hypothyroidism.

BASF has retorted that the suit is unfounded and that the amount of damages sought is 'grotesque.'

The lawsuit was filed in U.S. District Court in San Francisco. Attorney Barry Himmelstein, representing the thyroid patients, said on Saturday he would seek class action status for the lawsuit and a jury trial in San Francisco.

An estimated eight million Americans suffer from hypothyroidism, a condition caused by an under-active thyroid gland. The gland, located in the neck, produces a hormone called thyroxine which regulates the body's metabolism. People with hypothyroidism must receive thyroxine in order to survive.

The vast majority of people with hypothyroidism take the drug Synthroid - a synthetic version of the compound levothyroxine - manufactured and sold by Boots and later by Knoll. Knoll now controls 84 percent of the $600 million a year levothyroxine market in the United States, the suit said.

A 1990 study by researchers at the University of California at San Francisco concluded that Synthroid was no more effective than less expensive generic drugs.

The study, however, was not published for seven years because its sponsor, Boots Pharmaceutical, objected to the findings, the lawsuit alleges.

[05] UK consumer confidence surges in May

The findings are likely to intensify worries about the strength of the consumer side of the economy, increasing pressure for higher interest rates to keep the lid on inflation.

However, the survey, carried out between May 1 and May 15 - covering the week before and the week after the Bank of England was handed operational independence to set interest rates - showed that people became more optimistic about the outlook for inflation.

A net balance of 14 points expect prices to increase at a slower rate than at present over the next 12 months. In April, there were as many people forecasting a pick up in prices as a slowdown.

The latest survey from the European Union Commission, carried out by pollsters GFK Great Britain, showed that 39% of consumers expect the general economic situation to improve in the coming 12 months compared with 12% expecting it to deteriorate.

The difference between the two figures, a net balance of 27 percentage points expecting economic conditions to get better, was up strongly from just one point in April. In May 1996, a net balance of 4 points expecting things to get worse.

When asked for an assessment of their household's financial prospects over the same period, 24% said they expect things to get better and 13% expect them to get worse.

The net balance of 11 points forecasting an improvement was up from 2 points a month earlier and 5 points a year ago.

The survey also found that consumers were much more optimistic about the outlook for jobs, with a net 14 points expecting the level of unemployment to fall over the coming 12 months. In April, a net 9 points expected unemployment to increase with pessimists outnumbering optimists by 24 points in May last year.

[06] Britain introduces tobacco advertising ban

Anti-smoking campaigners welcomed the move but tobacco companies said they were disappointed by a decision they said would not bring a drop in tobacco consumption.

'We recognize that some sports are heavily dependent on tobacco sponsorship, ' Health Secretary Frank Dobson said, describing the draft legislation.

'We don't want to harm these sports but they must recognize that by helping promote the sales of tobacco they are harming the health of many of their own sport's spectators and viewers.'

The government would give the sports involved time to reduce their dependency on tobacco and find other sponsors, Dobson told the annual congress of the Royal College of Nursing in Harrogate, northern England.

'I hope that during this process we will be spared the claims by the tobacco industry that their advertising is not designed to promote sales,' Dobson said 'The fact is that the tobacco industry, unique amongst all industries, kills around 120,000 of its own customers every year.'

Last week, announcing its legislative programme, the new government made a committment to ban tobacco advertising. But Dobson's statement made clear for the first time that it would also bar sports sponsorship, as well.

The legislation being drafted, Dobson said, 'will cover all forms of tobacco advertising including sponsorship.'

Colin Stockall, spokesman for cigarette manufacturer Gallaher, which sponsors several cricket, rugby and golf sporting events, was disappointed at the news.

'We take every opportunity to defend sports sponsorship because we believe there's no convincing evidence that sponsorship causes anybody to actually start smoking,' he said.'It might cause a smoker to switch brands, but we don't believe it would make someone take up smoking.'

A spokesman for Imperial Tobacco, which sponsors darts, snooker and fishing championships, made the same argument.

'I do not believe that advertising has any effect on the total size of the market or in influencing people to start to smoke' said Imperial executive Paul Sadler. 'We advertise in an attempt to gain market share.'

[07] France's Total plans to invest $1 billion in China and is close to signing $3.5 billion Iranian deal

State-owned China National Petrochemical and French oil group Total are to invest $1 billion in an oil refinery project in Dalian, a city in north China. The agreement was signed during the recent visit of French president Jacques Chirac to China, said Sun Jinguo, secretary of West Pacific Petrochemical Co.

And in Iran, a deal currently under negotiation deal would give Total a $3.5 billion contract to lead the development of one of the world's single largest gas fields. But comments by the National Iranian Oil Company and Paris-based Total indicated that a final document had not yet been signed and advanced negotiations were continuing, despite the Iranian Foreign Ministry saying the deal is to go ahead.

A contract to develop Iran's offshore South Pars field would represent the single biggest investment in the Islamic republic since its 1979 revolution. It would fly directly in the face of U.S. trade sanctions imposed against Iran.

'Total has signed an agreement with the minister of oil of our country,' Velayati said, speaking through a translator. 'Total's contract amounts to $3.5 billion. It belongs to South Pars which is an important field for gas.'

Industry analysts said Velayati's comments indicated that Iran had effectively given the green light to the French firm to develop the Gulf field after a series of detailed negotiations between NIOC and Total this year, but that the documents for signature had not been finalised.

[08] Lonrho is considering a $2 billion merger with JCI

The merger would combine a black controlled mining house with one of the most well known British firms operating in Africa, and would emerge from the deal as one of the largest mining concerns in the world.

Lonrho said the two companies have held talks in order to identify the 'scope for any benefits from combining the two groups' and that further details will be provided only if there are significant further developments.

A merger would value the combined company at about £2 billion. The company was responding to newspaper reports that it was in merger talks with JCI.

The Sunday Telegraph said that under the proposals Lonrho would bid for JCI, which is valued at £900 million ($1.5 billion), and the new company would be quoted in London and Johannesburg.

The newspaper said the plan envisaged Anglo American Corporation of South Africa swapping its 28% stake in Lonrho, plus some cash, for Lonrho's 41% in Ghanaian gold mine Ashanti.

[09] The world's markets await the Fed's next move with bated breath

Interest rate moves in the United States are still far and away the most important event for global financial markets, and investors are as usual waiting with bated breath for the outcome of Tuesday's Federal Open Market Committee meeting.

The key issue - whether the central bank, after taking into account the pace of growth and the level of inflation, will maintain the status-quo or tighten or loosen its grip on credit.

But why are U.S. rates so important for the rest of the world, and in particular financial markets?

The simple answer is that the U.S. is still the world's locomotive for growth and its bond market is the world's largest and most important financial market. The link comes through two angles. The first is the currency effect should the dollar, the world's reserve currency, move significantly after a rate change.

For example, the dollar may rally after a U.S. rate rise and if a country's currency weakens significantly it could start to 'import' inflation via more expensive dollar denominated imports. The majority of the world's raw materials such as oil are priced in dollars.

A threatened rise in inflation via a weaker currency could well prompt a government to raise rates to counter the inflationary impact of a weaker currency. The second link is the impact a rate change has on U.S. growth, in other words the economic locomotive effect.

If the locomotive slows down because rates have been raised or speeds up if rates are cut, the countries who are the 'wagons' slow down or speed up accordingly. While it is true that producers tend to go and set up shop in the United States if that is their biggest export market, it is nevertheless still a massive market for many overseas producers.

So what is going to happen on Tuesday? Unfortunately the experts are divided but after inflation figures that were a little higher than expected, analysts are tending to lean towards a rate rise.

[10] Expectation mounts over $3 billion Formula One flotation

However, analysts not involved in the flotation say they are hard pressed to understand how to value the company at all, let alone to find the reason for the new projection.

When news that Formula One was considering an initial public offering first surfaced in early March, the market capitalization was put at £2.5 billion ($4.03 billion). But reports indicated that the company will be valued at between £1.5 billion and £2.0 billion.

'Not knowing how many shares they plan to offer makes it impossible to know where they got this figure,' said Nigel Hawkins, football analyst at Yamaichi International Ltd. in London.

Nevertheless, he pointed out that Formula One will attract global investors, not just U.K.-based fund managers and stock buyers.

'Look at Manchester United football club,' Hawkins said. 'It's got a market valuation of £400 million, but Formula One will attract worldwide appeal because it's a worldwide event. So looking at it that way, a pricing in the billion-pounds range is more likely.'

A spokeswoman for Formula One refused to confirm or deny the new market- capitalization estimate. However, it was implied that an official announcement about the flotation will be made soon.

What is widely known about the flotation is that the key factor behind the initial pricing of the shares - and their subsequent movement - will be revenue from television rights.

'I would see this (sale of broadcasting rights) as substantially cash- generative,' Yamaichi's Hawkins said. 'And ... it will be a fairly profitable business.'

More than 130 countries pay to receive the 16 Grand Prix annual races, for which an average audience of 450 million tunes in every two or three weeks. U.K. broadcaster Independent Television alone paid £70 million in 1996 for rights to broadcast the races for the next five years.

[11] Corporate and Economic Briefs

Russia's stocks of the rare precious metals platinum could run out within a year, according to an official of the world's largest refiner of these metals Johnson Matthey Plc. And the country's stocks of palladium could be depleted early in the next century. Russia is the largest exporter of palladium and the second largest supplier of platinum after South Africa.

Czech retails sales rose 6.4% in March from March 1996, and were also up 2.4% in the first quarter versus the first quarter a year ago, the Czech Statistics Office reported Monday, citing data in constant prices. Constant prices are pegged to 1994 price average, the CSU said. Retail sales in March were influenced by an increase of car and related services sales, compared with the same period of last year, the CSU said. The CSU also cited significant increase of food stuff sales due to the Easter holiday from the end of March, the CSU said. In current prices retail sales rose 11.7% in March from March 1996, and were up 8.1% in the first quarter from the corresponding period of 1996.

Italy's preliminary May consumer price index figures, scheduled for release Tuesday and Wednesday, are likely to be followed by a 50 basis point to 75 basis point cut in interest rates, according to analysts. May's CPI is expected by analysts to rise 1.5% on the previous year and 0.2% on the previous month. The optimism about rate cut possibilities comes from the fact that the last three cuts introduced by the Bank of Italy have come in the wake of preliminary CPI releases. The discount rate currently stands at 6.75% and the fixed-term advances rate is 8.25%. Economists at the Bank of America say that the data could be effected on the 'negative side by an increase in postal tariffs which could add up to 0.05%.' Additionally, they say that 'the quarterly revising of furniture and household goods could play a role in the data, while the seasonal component in May is considered to be neutral.'

Poland's unemployment rate fell to 12.4% in April from 13% in March, the Labour ministry announced Monday. The number of unemployed declined by 55, 539 to 2,131673 people. 'In my opinion, the result is simply sensational,' Labour Minister Tadeusz Zielinski said at a news conference. He predicted the unemployment rate would fall to 12% in July. The unemployment rate in April was the lowest in five and a half years. In December, the unemployment rate was 14.9%. In April 1996 it was 15.1%.

Domestic investors can start pre-registration Monday for shares in utility Electricidade de Portugal, as Portugal's largest-ever privatisation effort gets underway. On Thursday, the government set a share price range of 1750 escudos to 2250 escudos for EDP shares, with the final price to be set June 16 after a book building exercise among institutional investors to gauge interest. That range values EDP at 1.05 trillion escudos to 1.35 trillion escudos. The government can sell off up to 49% of EDP's capital, but has indicated it will sell around 30% of the company during this first phase.

Spain's unemployment rate fell to 21.49% of the population in the first quarter of 1997 from 21.78% in the fourth quarter of 1996, the Nationlion in the first quarter of 1997 from a rounded 3.49 million in the fourth quarter of 1996. The institute figure, compiled from a survey of 64,000 households, is one of two rates used to measure unemployment in Spain. The other rate, taken from the number of people registered as jobless with the Labour Ministry each month, put the jobless rate at 13.61% in April.

U.K. fund management group Aberdeen Asset Management reported reduced pretax profits of £3.28 million in the half year to March 31, compared with £3.38 million in the corresponding period of 1996. The company also said it was outsourcing its fund administration and accounting function to another U.K. fund management company, Henderson PLC. The outsourcing is planned to be effective in July.

U.K. public house operator Greenalls Group said that increasing capital expenditure in 1998 will help achieve stronger growth rates. Commenting after the group's first half results, Finance Director Alan Rothwell said: 'Uplifting capex will add further momentum to earnings growth.' Capital expenditure is expected to increase to £200 million next year from a planned £175 million this year. The main focus of investment will be in hospitality offering good returns on investment with an average 13% return targeted, Rothwell said. At Greenalls' lodges, the group looks for returns of about 17% to 18%, Village's returns are about 15%, De Vere hotels give 14% to 15% returns, pubs range from 14% for newly-bought pubs and with 25% from redeveloped pubs. The Group believes it can accommodate this level of spending - 'interest cover last year was four and gearing was 65% and this will fall a little this year', said Rothwell.

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