European Business News (EBN), 97-05-26

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

Page last updated Mon, May 26 1:52 PM CET

CONTENTS

[01] French Socialists make unexpectedly strong showing in first round of legislative election

[02] Roche acquires two drug companies for $11 billion

[03] Rolls Royce is likely to be pressured into paying heavy compensation for grounded Hong Kong planes

[04] Daimler-Benz chairman doubts Airbus will meet restructuring timetable

[05] AXA-UAP to decide fate of two UK units by the end of summer

[06] French monthly inflation remained static in April

[07] Corporate and Economic Briefs

[01] French Socialists make unexpectedly strong showing in first round of legislative election

The first-round vote Sunday giving the left a slight lead in parliamentary races could be seen as a protest without real impact against the government of Prime Minister Alain Juppe.

But the second round, if the left keeps the edge, would force conservative President Jacques Chirac to cohabitate with a socialist prime minister and work with a party that rejects the right's fiscal austerity.

The unexpectedly strong showing of the Socialist/Communist alliance has prompted some selling of the French franc in early European dealing, but trading volume is extremely light.

On the Paris Bourse, the poor showing by the center-right has caused share prices to plunge in active trading. In statements from politicians and analysts soon after the first-round results were announced, Juppe clearly appeared to be the scape-goat for the right.

Virtually all conservative leaders said Chirac should 'send a strong signal' this week to voters, code words meaning Chirac should promise not to select Juppe again for a new government after June 1 if the conservatives hold on to a majority in the National Assembly.

'Everything will depend on the impact of what Chirac does,' said Jacques Julliard, an editorial writer for weekly magazine Le Nouvel Observateur, on television Monday.

In response to veiled calls for his own replacement after the combined left outpolled the centre-right in Sunday's first round, Juppe said: 'What is at stake is not Alain Juppe but France.'

'If the sole obstacle to the modernisation and renovation of France is a choice of personality, I am quite convinced the president will know how to make the right choice,' he said.

It was the nearest the prime minister had come to acknowledging that the president may have to sacrifice him to salvage the coalition after the left's strong first round vote.

Earlier, Juppe's fellow Gaullist rival, outgoing National Assembly speaker Philippe Seguin, hinted in a radio interview that it might be time to change premiers given Sunday's election warning.

Juppe, since heading the government in May 1995, has attempted to beat down France's record 12.8% unemployment rate through a few job incentive plans, but has also raised taxes and cut government spending in an attempt to get France to qualify for the European single currency union, slated for Jan. 1, 1999.

Juppe also has sought labor market reform, without much success.

The Socialist Party has said the higher taxes have cut consumer spending and thus cost jobs, and it doesn't want to cut government jobs and privatize job-heavy state companies for the sake of trimming the budget deficit.

Juppe's budget cutting has brought into question the benefits of France joining the European single currency.

[02] Roche acquires two drug companies for $11 billion

Corange controls the shares of the German diagnostics company Boehringer Mannheim and holds an 84.2% stake in DePuy, a leading U.S. producer of pharmaceutical products.

The deal is subject to approval by regulatory authorities.

Roche Holding, sitting on 15 billion Swiss francs ($21 billion) of liquidity, quenched the market's thirst for a big acquisition to propel the company into the sales league of its arch-rival Novartis.

Novartis said it won't change its strategy in the the Boehrigner Mannheim takeover. Chief Executive Officer Daniel Vasella said Roche's move 'to us is an incentive more than anything else.' The take-over 'won't have an influence on our strategy,' he added. He pointed out that Novartis isn't active in the field of diagnostics and implants, which is the strength of Boehringer.

Roche Holdings said the push to be a leader in diagnostics comes from a belief in the long-term potential of disease management and patient care. The company previously has made investments in the diagnostics sector, which in 1996 amounted to around 5% of Roche's total sales of 16 billion francs.

In the drug sector, DePuy will add market share to Roche with complementary products.

Roche's diagnostic operations already include clinical laboratory systems and the lucrative PCR technology. The combined group, called Roche Boehringer Mannheim Diagnostics, will have yearly sales potential of more than 3.5 billion francs, Roche said. The acquisition will spread Roche's sales and geographic reach, the Swiss group said.

In the pharmaceuticals sector, Boehringer adds sales of around 1.5 billion francs to Roche. Boehringer's products include treatments in the cardiovascular and oncology segments. The company also has several 'promising' drugs in various stages of clinical development. One medicine to prevent and treat osteoporosis is in phase III of clinical development.

DePuy Inc., which makes artificial joint and orthopedic products, contributes sales of SF860 million. The 15.8% of DePuy shares that Corange didn't hold are traded on the New York Stock Exchange.

Analysts recalled Roche's 1994 $5.3 billion takeover of Syntex and its practically dilution-free financing. They expect Roche to pay cash for its latest takeover, financed from its existing liquidity and low-cost long- term financing.

Analysts added that Roche also could use short-term bridge loans in the financing. The company is known for its creative and lucrative financing techniques.

[03] Rolls Royce is likely to be pressured into paying heavy compensation for grounded Hong Kong planes

Cathay and Dragonair expect to cancel or reschedule numerous flights today and face possible disruptions for weeks to come, after grounding all 15 of their Airbus A330-300 jets at the weekend over engine trouble.

Cathay cancelled 18 flights Saturday and an additional 15 flights Sunday, while Dragonair cancelled 13 flights at the weekend. Numerous other flights were rescheduled or 'downgraded' to smaller planes because of the crisis, which has already left thousands of people stranded or inconvenienced.

Both Hong Kong carriers grounded their planes Saturday after the latest occurrence of an unusual problem with the $10 million Rolls-Royce Trent 700 engines that power the twin-engine aircraft.

Dragonair was forced to make an emergency landing in the Philippines Friday when one engine of a plane carrying more than 130 passengers failed enroute to Kota Kinabalu in Malaysia.

That was the fifth such failure since November - and the third in as many weeks - involving the two carriers. 'In modern jet-engine history, there's been nothing like this,' said Jim Eckes of Indoswiss Aviation consultancy in Hong Kong. 'For one engine to go down this many times is really quite exceptional.'

Garuda Indonesia is the only other airline in the world using the Trent 700 engine, which came on the market in March 1995, according to Rolls-Royce PLC, which makes the engine. A Garuda spokesman said Friday that the Jakarta-based carrier plans to continue flying its five A330-300 aircraft.

Rolls-Royce executives said inspectors have tracked down the source of the engine troubles.

'We've already identified a solution to the problem,' said Peter Barnes- Wallis, director of corporate communications. Even so, Barnes-Wallis said, it could take a few weeks to test and fix problems in the engine's gearbox, which was designed by French subcontractor Hispano Suiza, a division of Snecma, or Nationale d'Etude et de Construction de Moteurs d'Aviation.

Rolls-Royce executives insisted that the crisis won't affect future sales of the Trent 700 model. At least 50 engines are on order from Trans World Airlines, Gulf Air, Emirates and other carriers.

Barnes-Wallis declined to discuss how much compensation might be paid to Cathay and Dragonair, noting that 'it's a confidential issue between us and the customer.' He also argued that 'in none of the incidents so far has there been any safety threat.' In his view, the carriers 'are perhaps being overcautious' in grounding their fleet because of the repeated engine failures.

[04] Daimler-Benz chairman doubts Airbus will meet restructuring timetable

'I don't know if the transformation will be within the 1999 time schedule,' Juergen Schrempp said in an interview with the Financial Times newspaper. 'But it is going ahead,' he added.

Schrempp blamed the possible delay on the continued reluctance of France's Aerospatiale to accept the move to limited company status from its current consortium status.

Aerospatiale and Daimler Benz subsidiary Daimler-Benz Aerospace each hold 37.9% in the group, while British Aerospace owns 20% and Spain's Construcciones Aeronauticas holds 4.2%.

The consortium announced early in 1997 that it plans to restructure the legal status of the consortium, and has since been in negotiations over the details of the new company's structure.

One of the main sticking points has been the future ownership of its manufacturing and research facilities.

In April, Aerospatiale had said it wants Airbus consortium members to retain their separate facilities in order to secure funding from their governments. DASA and British Aerospace would prefer for the facilities to be subsumed into the new company.

Schrempp noted that the transfer is more difficult for Aerospatiale because its facilities are used jointly for Airbus production and other manufacturing.

Nevertheless, Schrempp expressed confidence the project would proceed, based on progress already made in the technical study groups designed to work through such problems. 'I have no doubt France will eventually come round,' he told the newspaper.

He added that he didn't see any negative fallout for the project from DASA's recent decision to co-operate with Lagardere Groupe of France. DASA had come under fire earlier this year for its decision to support Lagardere against Aerospatiale in a takeover bid for France's Thomson consumer electronics group.

[05] AXA-UAP to decide fate of two UK units by the end of summer

A spokesman for the French insurance giant in Paris dismissed reports that AXA would force its Sun Life unit to buy Equity & Law at what newspapers termed an inflated price of £3 billion ($4.89 billion).

He confirmed, however, that AXA is considering selling AXA Equity & Law to an 'internal or external' party and declined to elaborate. He also said the company might reorganise both businesses to focus them on different financial services sectors within the U.K.

'We have several options available and are in brisk and constructive discussions, which include selling Equity & Law to another party. Also, we could decide to organise the two U.K. businesses on separate markets,' he said.

AXA, which tied up with France's Union Assurances de Paris, or UAP, in November to make one of the largest insurers in the world by asset size, has begun reviewing the future of all its regional subsidiaries where AXA and UAP had interests.

AXA brought Equity & Law to the merger, while UAP brought Sun Life, which listed on the London stock exchange in July 1996. The spokesman said the aim of the reorganization is to eliminate any overlap in subsidiaries. 'We're also looking at duplication in Belgium and Germany, for example,' the spokesman said. He reiterated AXA's commitment to Britain. 'We are totally committed to Great Britain,' he said. 'We will not exit the profitable U.K. industry whatever we decide.'

[06] French monthly inflation remained static in April

That compares with March's 0.1% rise from February and a 1.1% year-on-year rise.

In the past three months, the overall index has risen 0.3%, INSEE said, suggesting an overall slowdown in consumer price gains. In March, the three- month average was up 0.5%.

Outside of tobacco products, April's index was flat on the month and up 0.8% on the year. Excluding energy, product prices rose 0.1% from March and 0.8% from a year ago.

In addition to their traditional figures, European Union members also provide a second set of CPI data each month, using standardised methods to calculate the figures.

On this basis, French CPI was unchanged in April after rising 0.1% in March. The rise from a year ago was 1.0% on the year. In March, CPI rose 1.1% on the year by the same calculation.

These standardised CPI figures will be used as the basis of comparison when E.U. leaders meet in 1998 to decide which member states meet the various Maastricht Treaty criteria.

Under the Treaty, countries wishing to participate in the single currency must have had an average inflation rate over 12 months not more than 1.5 percentage point above the average of the three best performers.

Food prices rose 0.2% in April from March, as fresh food product prices reversed course and rose 1.6%. They had fallen 3.5% in March and 7.1% in February due to unseasonably warm temperatures. Outside of fresh products, food prices were steady on the month and up 1.6% on the year, INSEE said.

Manufactured goods prices fell 0.1% on the month in April and were unchanged on the year. Prices of clothing and shoes were flat after rising 2.0% in March and rose 0.3% on the year. Other manufacturing product prices fell 0.1% in April.

Energy prices fell 0.9% on the month, but rose 2.1% on the year. April's month-on-month decline was due to the recent fall in petroleum product prices, INSEE said.

[07] Corporate and Economic Briefs

The final two major German states have reported their May consumer prices. North Rhine-Westphalia said prices rose 0.4% in May from April and were up 1.8% from the year earlier. The month-on-month rise follows a decline in April. Prices in the Hesse rose 0.3% in May from April, after declining in the two preceding months. May consumer prices in Hesse were up 1.2% from May 1996, the office said. Last week, Bavaria reported a 0.5% month-on- month and a 1.5% year-on-year increase rise in inflation, while Baden- Wuerttemberg reported slightly smaller increases of 0.3% on the month and 1.3% on the year. Based on the cost-of-living data in the four largest states, the Federal Statistics Office will calculate a preliminary western German CPI for May, due later today or early tomorrow. So far, all four state CPIs have been above economists' estimates of a 0.1% month-on-month rise in CPI for all of Germany. They also exceeded the year-on-year forecast of a 1% rise.

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

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