European Business News (EBN), 97-05-21

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Page last updated Wed, May 21 6:36 PM CET

CONTENTS

[01] U.S. trade gap narrows substantially in March

[02] Bank of England set to lose its supervisory role under Brown's new super-regulator

[03] Veba purchases a 36.4% stake in Degussa for $1.7 billion

[04] US Air repurchases a quarter of its shares held by British Airways

[05] KLM's chairman to step down as company announces sharp drop in profit

[06] Commerzbank first quarter profit climbs 20%

[07] Repsol plans to continue cost-cutting through redundancies

[08] Money supply figures and Bank of England comments raise rate expectations

[09] French-led group buys Germany's Spar retail chain

[10] Prodi says 'inflation in Italy is below that in Germany.'

[11] Continental Airlines may spend $4 billion on 40 Boeing jets

[12] Bass reports 10% rise in first half profit, but stock price slides

[13] Norwich Union to offer three million shareholders 10% share discount in a pre-flotation offering

[14] Merck first quarter profit rises 7%

[15] Coffee producing nations extend export quotas for another year

[16] Corporate and Economic Briefs

[01] U.S. trade gap narrows substantially in March

The Commerce Department said Wednesday that the deficit in goods and services was the lowest it has been since last November and was down a dramatic 19.3% from a February imbalance of $10.5 billion.

The trade deficit with China, which is expected to surpass the imbalance with Japan this year, did show at least a temporary improvement in March. It fell 22.4% to $2.6 billion, the smallest gap in nearly a year. Sales of U.S. commercial jetliners rose while imports of Chinese toys, shoes and clothing all declined.

The deficit with Japan, however, was up in March by 8.3% to $4.6 billion, the highest since last November, as imports of Japanese computers and telephone equipment were up.

A worsening trade deficit has been one of the weak spots in a U.S. economy that is performing remarkably well at present.

While a 23-year low in the unemployment rate had raised concerns that tight labour markets could make inflation a problem down the road, the Federal Reserve passed up the chance on Tuesday to raise interest rates.

Critics of a Fed tightening move in March had argued that the central bank was needlessly raising borrowing costs to fight an inflation threat that did not exist. Consumer prices this year are actually rising at a slower pace than in 1996.

The March trade deficit was much better than had been expected. Before the report, economists had been expecting a deficit in the range of $10 billion. Even with the improvement, the trade deficit in the first three months of this year has been running at an annual rate of $125.5 billion, a deterioration from last year's total deficit of $114.3 billion.

[02] Bank of England set to lose its supervisory role under Brown's new super-regulator

The job will go to the Securities and Investments Board, which has regulated some markets and now will get greater legal powers to police London's financial community. The Bank of England was accused of lax regulation of the Bank of Credit and Commerce International - which went bust owing creditors some $10.5 billion in history's biggest banking fraud.

London's image has also been tarnished in recent years by the failure of Barings Bank, the near-collapse of the Lloyd's of London insurance market, the Robert Maxwell debacle and an array of smaller but significant scandals. Brown said he will simplify things by taking a variety of regulatory functions away from the Bank of England and several London self- regulatory bodies, and handing them to a more-powerful Securities and Investments Board.

The new SIB will be run by Howard Davies, deputy governor of the Bank of England. The current SIB chairman, Sir Andrew Large, had already decided to step down. It was Brown's second bombshell for the 'City,' as London's financial district is known, in less than three weeks on the job as chancellor of the exchequer.

Brown said reforms were necessary in British financial market regulation, because previous rules put in place in 1986 were 'not delivering the standard of supervision and investor protection that the industry and the public have a right to expect.' Bank of England Governor Eddie George said the shake-up from Brown was not a surprise, because the Labour Party had called for wholesale changes at the bank when it was out of power and London's financial community was hit by scandal after scandal.

[03] Veba purchases a 36.4% stake in Degussa for $1.7 billion

The Duesseldorf-based utility said it would pay 2.9 billion marks ($1.7 billion), or 86.80 marks per share, for a Degussa package held by GFC Gesellschaft fuer Chemiewerte mbH, owned by chemicals firm Henkel, Dresdner Bank and reinsurance group Munich Re.

Both firms' shares rallied on the news as analysts said the acquisition, which would make Veba Degussa's largest single shareholder, would give both companies a strong strategic partner. Degussa's shares, which had closed on Tuesday at 76 marks, surged to trade up 7.90 marks, or 10.4%, at 83.90 marks at 1020 GMT while Veba was trading up 1.3% at 100.15 marks, just outpacing the broader market.

Analysts gave the news a firm thumbs up.

'I believe Veba wanted to have a major player in chemicals and what Degussa has achieved under Bufe has been quite impressive,' said Bayerische Vereinsbank pharmaceuticals analyst Nasseer Panju.

'The fact that Veba took a 36% stake, when they could have easily brought it up to 51% over the market, is a sign they believe in the Degussa management,' Panju said.

The deal, subject to cartel authority approval, should lead to synergies between Degussa and Veba's chemical unit Huels, both of which are trying to boost productivity and concentrate on core business to become more internationally competitive.

[04] US Air repurchases a quarter of its shares held by British Airways

US Air said the preferred stock it bought is convertible to 4.8 million common shares, leaving BA with preferred that is convertible into 14.5 million common shares.

In December, London-based BA offered to sell its 21% stake in US Air back to the U.S. carrier, a move that was expected after the two partners fell out over BA's plan to ally itself with AMR Corp.'s American Airlines.

In February, Virginia-based US Air said it wouldn't exercise its option to repurchase the shares held by BA. The U.K. carrier then said it intended to sell the stake, either through a public offering or a series of private transactions. BA paid $400 million for its US Air investment in 1993 and received a 24.6% voting stake.

But yesterday, US Air said it exercised its right to buy a small series of preferred and negotiated with BA for the further purchase of other preferred stock. US Air said it will retire the just-purchased shares.

A spokesman for BA confirmed US Air's purchase, but declined to say what the airline will do with its remaining stake, which it has agreed to convert to common by June 3. After conversion, BA will hold 18% of US Air's shares, or 14.5% on a fully diluted basis.

US Air, the nation's sixth-largest carrier, said litigation it brought against BA and American - alleging anticompetitive behaviour and breach of BA's investment agreement with US Air - is going ahead. The marketing agreement between the two former partners expired in March and BA withdrew its three directors from the US Air's board.

[05] KLM's chairman to step down as company announces sharp drop in profit

Net profit for the year to March 31 fell to 236 million guilders ($125.2 million) from 547 million. KLM Chairman Pieter Bouw plans to step down on 5th August. The supervisory board is to name KLM board member Leo van Wijk as Bouw's successor.

This included a pre-tax provision of 290 million guilders for its Focus 2000 restructuring programme which aims to boost operating profits by 1.5 billion guilders in three years.

But this was not the only factor behind the steep drop in earnings, with KLM noting that its operating costs had continued to rise faster than operating revenues.

This led to a fall in operating profit, before the provision, to 89 million guilders from 453 million.

A higher contribution to earnings from U.S. associate Northwest Airlines - 442 million guilders versus 258 million - was not enough to reverse the slide.

KLM said it expected 1997/98 operating income to show a significant improvement.

'On balance we expect for 1997/98 a significant improvement in operating income from the present unsatisfactory base,' it said.

[06] Commerzbank first quarter profit climbs 20%

Commerzbank, Germany's third largest private sector bank, said operating profit before provisions for bad debt rose to 1.05 billion marks ($625.1 million) from 874 million marks in the same period a year ago.

Net commission income benefited from buoyant financial markets and rose by 17.2% to 717 million marks. Net interest income increased by 15.8% to 1.56 billion marks, Commerzbank said.

But own-account trading income fell 25.4% to 223 million marks. The bank said the decline must be seen in light of the very strong trading income earned in the year-earlier period.

Total assets at the end of March reached 471.1 billion marks, up 5.1 percent from than at year-end 1996. Loan volume rose by 3.6% to 320.7 billion marks.

[07] Repsol plans to continue cost-cutting through redundancies

The spokesman was reacting to an article in Spanish business daily ''Expansion,'' in which the newspaper said Repsol plans to reduce its work force by 4,000 by the year 2001. ''This is nothing new,'' said the company spokesman. ''The real story is that this is something that we began in 1987.'' The spokesman added that the 4,000-employee figure ''isn't a target, just a forecast.''

If Repsol is successful in downsizing, it could save 20 billion pesetas ($140.2 million) to 25 billion pesetas in salaries, according to Expansion.

According to Expansion, Repsol's Director of Human Resources Jesus Fernandez de la Vega has already signed an agreement with the trade unions to begin implementing early retirement for some employees in 1998 and 1999. The majority of the jobs affected will be refining- and distribution- related, the newspaper said.

''I'm not saying that the news isn't true, but we already have an agreement with the trade unions that covers voluntary early retirement,'' the spokesman said.

[08] Money supply figures and Bank of England comments raise rate expectations

Analysts said comments made early in the day by Bank of England Governor Eddie George reinforced expectations that the base lending rate will be raised at least another 0.25 percentage point from the current 6.25% at the first meeting of the bank's new monetary committee. The date of the meeting has yet to be announced.

In a radio interview broadcast early today, George warned that 'pre-emptive action' may be needed to prevent 'a head of steam' from building up in the economy.

Neil Parker, treasury economist at Royal Bank of Scotland in London, said George confirmed the impression given in the central bank's latest quarterly inflation report, released last week, that 'they are hinting strongly that there is a need for more monetary tightening.'

George's comments overshadowed the release of data showing that growth in the M4 broad money supply slowed to a seasonally adjusted annual rate of 10.4% in April from March's 11.2%. That was well below expectations for a rise to 11.3%.

Nevertheless, growth remained well outside the government's 3% to 9% target range. In addition, analysts said the slowdown could be traced largely to one-time factors.

'There is not a general slowdown in the trend of the economy,' said Michael Saunders, U.K. economist at Salomon Brothers International.

This was certainly the impression in currency markets, where the pound hurtled over 2.8000 marks at one stage as it discounted another rate rise.

[09] French-led group buys Germany's Spar retail chain

The Swiss-based buyers' group, which is 51% held by Intermarche unit ITM Entreprises SA, is buying a stake of 75% plus one share in Spar, Germany's fourth largest food retailer.

The remaining 49% of the buyers' group is held by investors Friedrich Dieckell, Berhard Schmidt, Klaus-Peter Schneidewind and WCM Beteiligungs- und Grundbesitz.

Spar, with nearly 4,000 stores, aims to boost annual sales to 25 billion marks by the end of the decade from the current 21.6 billion marks.

ITM, with 2,200 stores, has sales of about 40 billion marks.

[10] Prodi says 'inflation in Italy is below that in Germany.'

Prodi also said that 'inflation in Italy is below that in Germany.'

After the close of the market yesterday, four Italian cities released preliminary consumer price index data for May. Later today, an additional six cities will release data.

The figures released yesterday are in line with market expectations for a rise of 1.5% on the previous year and a rise of 0.2% on the previous month, economists said.

Prodi made his comments at a joint press conference with Hungarian Prime Minister Gyula Horn.

[11] Continental Airlines may spend $4 billion on 40 Boeing jets

The agreement, which must be approved by Continental's board, would pre- empt a fight for the order between Boeing and Europe's Airbus Industrie. An agreement is likely to be announced within two weeks, the newspaper said.

A 20-year 'sole-supplier' agreement with Boeing would exacerbate European anger over such contracts the Seattle jet maker has already signed with Delta Air Lines, American Airlines and other companies, the Journal said.

The agreements are a key concern in the European Commission's review of Boeing's proposed $14 billion acquisition of McDonnell Douglas. The commission was expected to release a statement of objections to the acquisition.

Continental's board will be asked to chose between a proposal for the jet purchase that includes the exclusive contract and one that does not. The board is likely to opt for the sole-supplier agreement since it provides steep discounts for the airline, said sources close to the talks not identified by the newspaper.

The airline plans to purchase 10 Boeing 777 jets and 30 Boeing 767-400 jets to replace 27 McDonnell Douglas DC-10 jets and to expand international routes.

[12] Bass reports 10% rise in first half profit, but stock price slides

Bass' shares were down on the news, after analysts had expected a slightly higher figure. Traders said the market was also disappointed that there's still no positive news on regulatory wranglings over its merger with Carlsberg.

Bass said, it expects to have a decision from the Department of Trade and Industry on its merger with Carlsberg-Tetley by mid-June. Bass announced that it would buy Allied Domecq's 50% stake in Carlsberg-Tetley for £200 million in August 1996, which would give it around 35% of the U.K. beer market.

The deal was referred to the Mergers and Monopolies Commission in December.

Bass Finance Director Richard North said 'We await the decision, and we hope it will be approved, as it is the best way to safeguard jobs.' He added, 'Perversely, there is likely to be a greater loss of jobs if the merger fails to go ahead.'

But analysts feel the decision is not an important factor, and Bass will need to make a major acquisition to advance its share price.

North said, 'We do have the ability to make a significant investment, a quantum larger than Carlsberg-Tetley.' He added, Carlsberg-Tetley was a tiny acquisition in comparison with the size of Bass.

The company reported a rise in its interim dividend to 8.3 pence from 7.7 pence in the first half of 1996.

[13] Norwich Union to offer three million shareholders 10% share discount in a pre-flotation offering

Norwich is to raise £1.75 billion ($2.9 billion) of fresh capital in the offering and up to a further £670 million to fund cash payments to its half million overseas members.

The company has also increased its estimate of the price of the new shares.

They are now expected to be sold at between 240 pence and 290 pence. The group's brokers Kleinwort Benson had previously given a guide price of between 220 pence and 265 pence.

Members of the insurance group, Britain's third largest with seven million customers worldwide, are to be offered extra shares at a fixed discount of 25 pence.

A member is someone who holds a Norwich life insurance, pension or annuity policy. Holders of non-life policies such as house contents or car insurance do not qualify.

Members will also receive around 1.3 billion free shares worth around £3.4 billion under flotation plans already announced.

[14] Merck first quarter profit rises 7%

The company warned, however, of the risk potential of exchange-rate fluctuations this year.

In addition, Merck said its group net profit rose 7% to 140 million marks in the first quarter of 1997 compared to the like period the previous year. First-quarter group operating profit, meanwhile, rose 17% compared to the first quarter of 1996 to 279 million marks.

The pharmaceuticals division accounted for 58% of first-quarter group sales, the company said. This compared to a 55% share in the first quarter of 1996. Pharmaceutical sales rose 18% in the three months through March to 1.1 billion marks, up from 931 million a year earlier. Merck's original products accounted for 547 million marks in sales (up 12%), while generic products generated 237 million marks (up 76%) and over-the-counter drugs 98 million marks (up 123%).

The strong rise in self-administered drugs stemmed from the acquisition of subsidiaries Seven Seas and Monot, Merck said.

Merck said it invested 100 million marks in fixed assets in the first quarter of 1997. This compared with 114 million marks in the corresponding year-earlier period.

Investment in research and development totalled 176 million marks through March, up 15% on the year-earlier period.

[15] Coffee producing nations extend export quotas for another year

At the Coffee Sugar and Cocoa Exchange in New York, arabica coffee futures for July rose 10 cents to top $2.50 per pound after news of the exporters' London accord. And consumers are paying up to 50% more in the shops as roasters have passed on their higher costs.

The Association of Coffee Producing Countries led by Brazil ended talks with an accord to limit total exports by the 14 members to 52.75 million (60 kg) bags for the 12 months from July 1.

This is about the same as the volume limit that they had applied under current curbs expiring June 30. A statement said the goal was 'to ensure prices remain at a level remunerative to producers'.

The deal was cut against a backdrop of a rally that has taken benchmark futures prices for green (unroasted) beans up 80-100 percent since January, because of low stocks and tight Latin American supply.

[16] Corporate and Economic Briefs

The consumer price index for the region of Basel in Switzerland fell 0.3% month to month in May and dropped 0.5% from a year ago, the local statistics office reported Wednesday. In April, the Basel index rose 0.6% from the previous year.

Pilkington said that Roger Leverton stepped down as chief executive and was replaced by Paolo Scaroni, former president of the company's automotive products division. According to a Pilkington spokesman, Leverton left the company by mutual agreement after he failed to reduce costs ''deep enough or quick enough'' over recent months. Shares in the U.K. glass maker have fallen from a high of 222 pence a share in 1996 to a low of 110.5 pence a share earlier in 1997 - a drop of 50%. 'The shares have under performed the market for three years,' the spokesman said. 'This change (Scaroni's appointment) is not a change in strategy, but an acceleration of it.'

Dell Computer stock jumped 8.5% in early trading Wednesday after the company posted first-quarter earnings late Tuesday that exceeded expectations by far. Many analysts are now boosting their earnings estimates for Dell's second quarter and fiscal years 1998 and 1999, according to Chuck Hill, a spokesman for First Call Inc., which tracks analysts' estimates.

Total Chairman Thierry Desmarest said that the oil and chemical company's first-half operating profit should rise to around 35% from the 4.96 billion French francs recorded during the corresponding year-earlier period.

Germany's Metallgesellschaft, the diversified engineering and trading group, said that its pre-tax profit for the first half of 1996/7 rose by 50% to 106 million marks ($63.1 million). The firm said that its sales for the same period rose 18% to 7.7 billion marks. 'The financial situation of the firm has improved further,' Metallgesellschaft said. It added that for the financial year 1997/98, it expected profits to be above those in the previous year. MG said that the year-earlier pre-tax profit of 70 million marks was hit by delays in billing plant construction contracts.

Russian Prime Minister Viktor Chernomyrdin told Parliament that tax revenues are running at the lowest levels in years, but said that government is working on a package of measures to boost collection. ''We're running at a collection rate below 1994-1996,'' Chernomyrdin told the State Duma. He noted that in the first four months of the year, tax revenues amounted to only 8.7% of gross domestic product.

UK chemical company Courtaulds's full year pretax profit was up 2% £133.6 million ($221.2 million) from £130.9 million a year ago. Howard Evans, Courtaulds' finance director, said although bottom line pretax profit has not shown much growth in the past year, the company's markets are all showing healthy growth. 'Continued operations are showing good progress, but because of translation and transactional effects from sterling's strength and because of discontinued operations, bottom line profits have shown little growth,' said Evans. He also said that, due to the global nature of Courtaulds business, it is difficult to exactly quantify what the transactional impact of sterling's strength has been on its business.

British electricity generator National Power expects competition to intensify in the UK but said it was aiming for real dividend growth. The company said year pre-tax profits before exceptionals totalled £740 million ($1.2 billion), down 8% from a year ago. It paid out a dividend of 25 pence per share, compared with 23 pence previously.

RWEexpects earnings for its fiscal year ending Sept. 30 to be higher than year-ago figures. ''We expect the size of the increase to be in line with that reflected in the first nine months of the fiscal year,'' Chairman Dietmar Kuhnt said. Earlier this month, RWE reported 9-month group net of 878 million Deutsche marks ($516 million) compared with 822 million marks a year earlier. Sales were 52.9 billion marks, compared with 49.1 billion in the first nine months of fiscal 1996.

Beiersdorf, a German specialty chemicals group, said group sales rose 6.8% in the first four months of the year. Beiersdorf didn't specify a total revenue value for the period, but noted that sales in Germany declined 2.3%, while sales abroad were up 12%. Two-thirds of all sales were posted outside Germany, it said, noting also that there were no significant changes in its group structure compared to the year-earlier period. For all of 1997, the company said it expects sales to 'clearly' surpass 6 billion Deutche marks ($3.6 billion), compared with 5.78 billion marks in 1996.

Germany's state-owned postal savings bank Postbank, due to be privatized by 2000, confirmed it posted a net loss of 1.2 billion Deutsche marks ($713.2 million) in 1996. Postbank said the loss resulted from it withholding 1.55 billion marks for payment to state-owned postal services company Deutsche Post for the use of service windows. Excluding the Post payment, the savings bank reported operating profit of 308 million marks for 1996, up from 234 million marks in 1995.

British property giant Land Securities, whose portfolio is valued at £5.76 billion ($9.5 billion), has announced a 2.6% rise in pre-tax profits to £243.8 million in the year to March 31. It posted a 13.3% rise in net asset value per share to 783p from 691p, and its managing director Sir Peter Hunt said he sees continued steady growth in rental income from prime sites. 'It's still a fact that rental growth is patchy but it's nice to see a bit of a return to growth, a bit of demand and values gently increasing,' Hunt said.

British broadcaster Carlton Communications reported a 10% rise in its first-half pretax profit to £158.6 million ($262.6 million), from £143.3 million a year earlier. Raising half-year dividend by 12% to 4.9 pence and sending the company's shares jumping, chairman Michael Green pledged that the group would continue to invest in businesses and boost prospects. Green said, 'Over the last three years we have consistently invested in our businesses. We have maintained our clear focus, built up our market leading positions and enhanced both our profitability and our prospects for future growth.'

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