European Business News (EBN), 97-06-04

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CONTENTS

[01] Unisource's partners to merge global operations in $2 billion deal

[02] Tietmeyer says EMU row with Bonn is over

[03] U.K. bids to rescue Eurofighter project

[04] Santer treads carefully over Sweden's anti-EMU declaration

[05] U.K's Brown announces Europe-wide jobs plan

[06] George says pound's strength bolstered by EMU worries

[07] U.S. April factory orders climb 1.2%, slightly above expectations

[08] Germany's April industrial output falls 1.3%

[09] Yeltsin orders sharp budget deficit reduction next year

[10] Jospin expected to start naming cabinet today

[11] U.S. to recommend competitors of BA/American receive 23 daily slots at Heathrow

[12] U.K. considers merging country's anti-trust authorities

[13] Southern Electric full year pretax profit falls 9.7%

[14] Corporate and Economic Briefs

[15] World News Briefs

[01] Unisource's partners to merge global operations in $2 billion deal

Unisource, whose members are Koninklijke PTT Nederland, Telia and Swiss Telecom, said it ''will provide the international carrier market with a complete portfolio of international carrier services ... from traditional international services to new, fast-growing international wholesale services.''

The bold manoeuvre, creating Europe's largest international carrier, promises to shake up the industry. It would quickly create a far more potent rival to both Concert Communications Services, a venture between British Telecom and MCI Communications, and Global One, a partnership of Sprint and the national carriers of Germany and France.

''This action will create Europe's leading international carrier with initial revenues of $2 billion and around 900 employees based across Europe, '' the company said.

The move is also likely to silence critics who have all but written off Unisource as a strong competitor for lucrative multinational customers in Europe.

Finally, the planned merger - which requires the approval of the companies' boards and regulators, including the European Commission - is expected to provide a shot in the arm for AT&T's position in Europe, a $160 billion market where the U.S. carrier remains a minor player.

It may eventually even persuade AT&T to fold its international assets into the new company and create an even larger global competitor.

'There is no return ticket here,' said Paul Smits, president and chief executive officer of Unisource, whose members include Koninklijke PTT Nederland, Telia of Sweden and Swiss Telecom. 'And now there can be no question whatsoever that Unisource is a loose alliance.'

Unisource's move 'is an understandable response to the formation of Concert, ' BT and MCI's more tightly organized venture, said Andrew Harrington, analyst at Salomon Brothers in London.

'The desire to serve multinational customers is driving trends across the industry. The winners will be those carriers who have maximum control over maximum assets.'

[02] Tietmeyer says EMU row with Bonn is over

Speaking to journalists after the International Monetary Conference in Interlaken, Tietmeyer repeated that talks had taken place and that there was a ''high degree of common ground.''

Meanwhile, the council of economic advisers to German Chancellor Helmut Kohl criticized the government's plan to revalue Deutsche Bundesbank assets and to privatize further shares of Deutsche Telekom.

Releasing the text of a special report sent to Kohl on May 23, the advisers, known as the 'five wise men,' said the asset revaluation and subsequent transfer of book profits to the government, as well as the earlier-than- planned Telekom sale were 'inappropriate methods of sustainably solving the faulty developments in public finances.'

However, Waigel refuted their criticism. 'Contrary to the presentation by the economic advisers' council on the question of revaluing assets, there will be no financing of the budget through the creation of money,' Waigel said.

The council said that it feared 'the project for a stability-oriented European single currency would suffer damages' as a result of such measures.

The council went on to say that the push to revalue the assets at the current time is tantamount to financing the federal budget through creating money, which is against the spirit of the Maastricht Treaty.

Such a result threatens the central bank's credibility and its independence, the five wise men said.

The statement echoes that of the Deutsche Bundesbank issued on May 28, though was written to Kohl several days before the Bundesbank released its position on the subject of revaluation.

The five wise men also said that one-off measures are against the goal of sustainable fiscal stability, and that the 'urgently needed budgetary consolidation can't be reached through that.'

In a further report, Chancellor Helmut Kohl's majority in parliament beat back an opposition motion to sack Finance Minister Theo Waigel over his bid to force the Bundesbank help Germany qualify for a single euro currency.

The centre-right coalition, deeply split over ways to fill gaping budget gaps to meet the Maastricht treaty criteria properly, mustered 328 votes against 311 for the opposition after Kohl threw his weight fully behind the struggling minister.

[03] U.K. bids to rescue Eurofighter project

He will press his counterpart Volker Ruehe on the need for Germany, which is holding up the project because of deep budgetary problems, to find the cash to move to production.

The Bonn government, which faces stiff budget pressures, has delayed making a decision on Eurofighter, but Ruehe said last month he was confident that Bonn would find the funds needed to buy 180 of the high-tech aircraft.

'I talked to the German finance minister and he assured me there would be no problems with regards to a decision (on Eurofighter),' Ruehe said. 'We are working on this issue and we are sure we will come to a successful solution.'

The Eurofighter consortium comprises Daimler-Benz Aerospace, British Aerospace, Spain's CASA and Italy's Alenia.

Britain hopes Germany can overcome the problems which have hampered development of a project which holds the key to around 40,000 British jobs.

[04] Santer treads carefully over Sweden's anti-EMU declaration

When asked at a press conference here about the declaration by Sweden's ruling Social Democratic Party, Santer at first hedged by claiming that the decision wasn't yet an official government policy, and the Commission thus couldn't comment on it.

However, he subsequently observed that Sweden appears to be taking a position that runs counter to the commitments of the Treaty - namely, that all member states will adopt the single currency on the launch date if they qualify, except for the U.K. and Denmark, which negotiated opt-out clauses in the Treaty.

'We'll have to assess the declaration,' Santer said, adding that, in any case, 'we shouldn't speculate now on which countries will be in' the first wave of euro-zone countries.

He also affirmed that the E.U. is 'well along the road' to economic and monetary union, and that 'we will have EMU on time, with or without Sweden.'

Santer's remarks reflect unease at the Commission over the Swedish position on EMU, since it effectively prejudges the decision to be made by E.U. leaders next spring on which member states should launch the euro zone in 1999. The Commission is charged with making sure the Maastricht Treaty and other E.U. agreements are fulfilled as faithfully as possible.

Technically, only Denmark and Britain possess a legal loophole in the Treaty if they qualify but don't want to participate. Sweden enjoys no such option.

However, E.U. Commission officials acknowledge privately that if Sweden or any other member state doesn't want to join in, they can't be forced against their will to do so.

[05] U.K's Brown announces Europe-wide jobs plan

Brown told reporters he has written to finance ministers in the European Union, setting out his plan which he will put on the agenda for their next meeting in Luxembourg.

The plan, he said, involves creating greater employment opportunities, more labour market flexibility in Europe and a task force to help smaller and medium-sized businesses by cutting down barriers, as well as moving to complete the European single market.

Brown said his plan, which he described as the first EU initiative by a British administration for 10 years, did not signal a willingness to give up Britain's veto over key issues.

Debate about the future of the European Union had been focussed too narrowly on the single currency, the euro, and should be broadened to include jobs.

'Better education and higher skills, combined with reduced burdens on business, are the way to guarantee...high and stable levels of growth and unemployment,' Brown said. 'This is the new economic agenda.'

[06] George says pound's strength bolstered by EMU worries

George said sterling's strength would be discussed on Friday, when the Bank of England's new monetary policy committee holds its first meeting. This sparked fears of an interest rate hike

He added that the bank's main monetary-policy goal was to 'balance the degree of tension between the pressure of domestic demands with an exaggerated strong exchange rate.'

Speaking to reporters at an International Monetary Conference in Interlaken, Switzerland, George said the pound's rise was due partly to differences between Britain's economic cycle and those of Continental states.

Indeed, the pound was threatening to hit a new 1997 high against the Deutsche mark at midday in Europe. Its current peak of 2.8330 Deutsche marks was reached May 6; sterling last traded higher in August 1992, when it hit 2.8577 marks.

George also said the monetary policy committee would take into account windfall gains to consumers from the conversions of building societies to bank status.

The latest such conversion came on Monday, when Halifax, Britain's largest mutual society, became Halifax plc. All Halifax members get at least 200 free shares a piece, giving an immediate windfall of £1,550 ($2,480).

George, who estimated total payouts from windfalls would rise to £30-35 billion, said they would be 'significant' in terms of overall consumer income.

Britain's base lending rates current stand at 6.25%.

[07] U.S. April factory orders climb 1.2%, slightly above expectations

The increase to a seasonally adjusted $323.9 billion was slightly stronger than economists expected. It followed a 1.3% drop in March and gains of 0.4% in February and 2.5% in January.

Advances were broad-based and included a 1.3% increase for durable goods - big ticket items from bicycles to battleships expected to last three or more years - and a 1% rise in non-durable goods, the first increase in three months.

Factory orders are closely followed by economists as a barometer of future production. And if production fails to keep up with the pace of new orders, it's a sign that inflationary bottlenecks could be developing in the production pipeline.

However, shipments of manufactured goods, a measure of current production, also jumped 1.2% in April, the largest surge in a year. That helped produce the second consecutive decline in the backlog of unfilled orders - 0.3% in April, the same as in March.

[08] Germany's April industrial output falls 1.3%

However, the ministry also cautioned that an upward revision of the April data is likely.

'Much speaks for an upward revision of the preliminary April data, due to unusual calendar factors in the months of March and April,' the ministry said in its statement.

Indeed, the data is well below analysts expectations. In a survey by Dow Jones, analysts forecast a seasonally- adjusted rise of 0.6% in April from March.

The ministry also noted that the month's decline was exclusively attributable to the manufacturing sector, with other production sectors registered 'considerable increases.'

[09] Yeltsin orders sharp budget deficit reduction next year

In his annual budget message, Yeltsin said the government must focus on increasing tax revenues, restructuring spending and making better use of government funds.

He set a target of 0.5% of gross domestic product for the primary budget deficit, which doesn't reflect the cost of debt service. This year, the government expects the primary deficit to reach about 4.5% of GDP.

In his message, Yeltsin ordered the government to bring the primary deficit to zero in the 1999 budget.

He also called for reorienting government borrowing next year to target on reducing the burden on the economy caused by government debt, instead of the current focus on covering the budget gap.

Yeltsin also reiterated his call for an overhaul of the tax system aimed at stimulating the economy.

For spending, he said the main priorities should be military reform, the judicial system and health and social programs.

Government officials have said they aim to make next year's budget realistic, reflecting what the government actually will spend. This year, the government has had to slash expenditures in the face of a steep revenue shortfall.

[10] Jospin expected to start naming cabinet today

Television reports this morning said two Communist Party members could be part of a 15-person cabinet. Jospin also is expected to pick one environmentalist party member, LCI television said.

Elsewhere, the market awaits news as to the form which the new government of Socialist Prime Minister Lionel Jospin will take.

The Socialist Party is meeting this morning with Jospin to begin deliberations.

Speculation on Jospin Cabinet choices - an expected 15, down from Juppe's 29 - has narrowed in recent days, with several favoured candidates in top ministries:

- Elisabeth Guigou, a former European affairs minister, is the front-runner for the Foreign Ministry, a choice that could quiet fears about Jospin's commitment to Europe.

- Dominique Strauss-Kahn, a former minister and ex-economics professor well- liked by financial markets, appears to be top candidate for finance minister.

- Martine Aubry, a rising Socialist Party star and daughter of former European Commission President Jacques Delors, has said she does not want to return to the Labour Ministry, but is likely to get another influential post.

[11] U.S. to recommend competitors of BA/American receive 23 daily slots at Heathrow

The GAO doesn't require the British Airways-American Airlines alliance to jettison any of its slots, even though a giveaway has been a widely discussed scenario.

The GAO plan, to be released at a Senate aviation subcommittee hearing, is more acceptable to American than a British government recommendation that the two carriers give up rights to 12 takeoffs and landings a day at Heathrow.

The Clinton administration had wanted the proposed alliance to give up about 30 takeoff and landing slots, about the same number rival U.S. airlines were seeking, people familiar with the matter said.

American said it was pleased the GAO doesn't insist it or London-based British Airways give up slots at Heathrow. Rather, the carrier suggested that slots for other U.S. airlines could come from trades within alliances, purchases from other carriers, or new slot creation.

'We've always known when open skies are achieved that all U.S. carriers will get their hands on slots at Heathrow one way or another,' said David Schwarte, American's managing director of international affairs.

If American and British Airways aren't forced to surrender slots, he said, the partners wouldn't oppose the number of slots GAO suggests be made available to competitors.

Critics of the British Airways-American alliance, which as proposed in June 1996 would hold 60% of the lucrative trans Atlantic market, say the controversial marriage would lead to higher air fares and less competition on trans-Atlantic routes.

The two airlines are seeking immunity from U.S. antitrust laws to share revenues and coordinate their operations over the Atlantic as a single airline.

The European Union Commission, which must also approve the deal, has indicated it will demand more slots than the British government proposal.

[12] U.K. considers merging country's anti-trust authorities

In a keynote speech on competition, President of the Board of Trade Margaret Beckett said she intends to accept the merger proposals made by Lord Borrie, a former director general of the OFT, subject to the views of her parliamentary colleagues.

Beckett also said the government wants greater commercial freedom for the Post Office, plans to set up a new authority to promote exports and is calling a summit on competition in July.

Meanwhile, the liberalization of the U.K.'s electricity supply market will go ahead in April 1998 as planned, said Stephen Littlechild, director general of the Office of Electricity Regulation, or Offer.

Littlechild said that although the timetable for introducing domestic competition is increasingly tight, a number of companies will be ready by April next year.

Last week, an Offer report suggested that at least one electricity supplier, Southern Electric may not be ready for the April 1998 market liberalization. But in presenting his annual review of the British electricity industry Wednesday, Littlechild stressed that would be an exception.

'There should not be a delay to the whole programme just because some companies are not ready,' said Littlechild.

He added that even though one or two electricity companies may not be ready at the beginning, it would be only a matter of months before they qualify.

[13] Southern Electric full year pretax profit falls 9.7%

The power distributor said pretax profit fell 9.7% to £255.5 million in 1997 from £283.0 million in 1996, primarily due to the effects of two successive price-cap reviews from the industry regulator.

The company also cited the impact of full-year interest charges from a return of £143 million to investors through a share consolidation earlier this year and changes in tax rates as contributors to the profit decline.

Southern Electric restated its 1996 pretax profit figure to reflect the exclusion of profits from the sale of National Grid Group in late 1995.

Chairman Ken Coates said, 'In a year of tightening regulation in distribution, underlying business performance has been excellent.'

[14] Corporate and Economic Briefs

German tyre manufacturer Continental said that it expected a significant rise in net profit in full-year 1997 and that sales would rise about 5% to 11 billion Deutshce marks ($6.4 billion). Management board chairman Hubertus von Gruenberg said that pre-tax profits in the first five months of 1997 rose 47% to 185 million marks, while sales rose 2.3% to 4.4 billion marks in the same period.

Philips Electronics said it disputed the extent of the 631 million Deutsche mark ($364.4 million) loss reported by Grundig earlier this week. Philips is obliged to cover Grundig's losses up to the end of 1996, but a spokesman said Philips would not pay up in full until it had agreed with Grundig on a 'reasonable amount' for the German firm's 1996 loss.

Italian inflation fell to 1.6% in May, its lowest level since February 1969 when it was 1.4%, national statistics office Istat said. The figure was at the high end of market expectations after preliminary data from 11 sample cities had pointed to a consumer price index of 1.5 or 1.6% year-on- year for May. Year-on-year inflation was 1.7% in April and 4.3% in May 1996. May CPI rose 0.3% month-on-month. The data followed a warning from Bank of Italy governor Antonio Fazio last Saturday that although inflationary expectations had been beaten, 'the flames of inflation have not been completely extinguished'.

Denmark's current account surplus for the first quarter of 1997 at 5.9bn kroner ($913.9 million) was smaller than the 8.2 billion kroner surplus shown in the corresponding quarter last year,' the Danish national statistics agency said in a written statement. 'This development is the result of a 1.8 billion kroner increase in the merchandise balance compared to last year and a deterioration in the services balance of 2.5 billion kroner,' the agency added. The decline in the services balance was caused, among other things, by increased costs for sea transport and traveling as well as a deterioration in investment income and other receipts of almost 1.7 billion kroner, explained the agency.

Canal Plus, the French television station, said that first-quarter sales rose 11% to 2.95 billion francs ($515.1 million) from 2.65 billion francs a year earlier. Canal Plus has said it will only break even in 1997, due to losses from its acquisition of Nethold. The company's 1996 sales rose 14% from the prior year to 11.63 billion francs, while net profit rose 11% to 741 million francs. Canal Plus last September said it would acquire 100% of Nethold from Switzerland's Cie Financiere Richemont and South Africa's MIH in exchange for 6.1 million new Canal Plus shares and a cash payment of $45 million.

British Energy, the U.K. nuclear electricity generator privatized last July, recorded its first full-year pretax profit on a pro forma basis. Pretax profit after £4 million ($6.4 million) of exceptional items totalled £61 million in the year ended March 31, compared with a pretax loss of £155 million a year earlier. The company also said it has concluded a new fuel services contract with British Nuclear Fuels worth around £1.5 billion. British Energy had its balance sheet reconstructed after privatization, and on the old basis, the company made a pretax profit of £532 million in the year ended March, compared with a pretax profit of £130 million in the year to March 1996.

Finnish power concern Ita-Suomen Energi has made an offer to buy power distributor Savon Voima. The company's offer of approximately 800m Finnish markkaa is the same as Vattenfall AB's offer two weeks ago, according to Ita-Suomen managing director Martti Lappalainen in an interview with Finnish daily Savon Sanomat Wednesday. The Vattenfall offer is good until June 15 and the Ita-Suomen offer will stand until the end of June, said Lappalainen. The city council of Iisalmi, the largest municipal shareholder in Savon Voima, voted Tuesday to reject the Vattenfall offer.

Finland's Valmet reported earnings of 387 million markkaa ($75.6 million), or 3 markkaa a share, for the January-April period. Valmet said net sales for the period were 3.7 billion markkaa, a 50 million markkaa increase from the same period a year ago. The company said operating profit fell 7% to 292 million markkaa. Income after items was 322 million markkaa, down 14% from last year. Valmet said the reductions were mainly due to higher marketing and product development expenditures than last year.

[15] World News Briefs

Guarded by Marines, 1,200 foreigners boarded helicopters in _Freetown, Sierra Leone_ and fled this West African country for the safety of a U.S. warship. Nigeria, which backs the elected government that was deposed May 25, sent in new troops and appeared poised for another assault today. Nigerian state radio said Tuesday Nigeria hopes no ''full military operation'' will be needed, but says its troops are ''policing the coup leaders so as to flush them out.''

Israeli hardliners burned a Palestinian flag outside Jerusalem's PLO headquarters to celebrate the 30th anniversary of Israel's capture of the city's eastern sector. Throughout the city, Israelis held marches to mark Jerusalem Day which falls on the anniversary of the 1967 Mideast war in which Israeli troops seized east Jerusalem from Jordan. The Palestinians seek the eastern sector, home to 180,000 Arabs, as a future capital.

Palestinian leader Yasser Arafat met Egyptian President Hosni Mubarak for talks on the stalled Middle East peace process. Arafat arrived in Cairo from the Zimbabwean capital Harare, where he attended a meeting of the Organization of African Unity. Arafat said his talks with Mubarak would focus on Egypt's recent mediation efforts to revive the peace talks, including Mubarak's meeting last week with Israeli Prime Minister Benjamin Netanyahu at Sharm el-Sheik. 'All parties will face a dramatic situation if the peace process collapses,' Arafat was quoted as saying by Egypt's Middle East News Agency during a stopover in Nairobi, Kenya, on his way to Cairo.

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