European Business News (EBN), 97-07-03

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Page last updated Thu, July 03 5:31 PM CET

CONTENTS

[01] Northrop and Lockheed agree to $11 billion merger

[02] Strauss-Kahn sees France's deficit-to-GDP ratio around 3.5%

[03] Germany's deficit is expected to exceed budget plans by $5 billion

[04] UK Chancellor throws down the gauntlet to traders as sterling hits new highs

[05] Brown defends his budget as his decision to abolish dividend tax credit comes under fire

[06] U.S. jobless rate climbs 0.2%

[07] CBI survey shows retail sales bounce back in June

[08] BAA agrees to buy DFI for $674 million

[09] Renault reaches agreement with Vilvoorde workers' unions

[10] Philips looks for investors interested in acquiring its Grundig stake

[11] Pharmacia and Upjohn sees negative trends continuing in 1997

[12] Corporate and Economic Briefs

[13] World News Briefs

[14] Tobacco industry agrees to settle Mississippi suit

[01] Northrop and Lockheed agree to $11 billion merger

The transaction is valued at $11.6 billion. Northrop Grumman shareholders will receive 1.1923 Lockheed Martin common shares for each Northrop share.

The combined company will have estimated 1997 revenues of about $37 billion. Lockheed and Northrop expect the acquisition to close by the end of 1997.

Northrop Grumman Chairman, President and Chief Executive Kent Kresa will be named vice chairman of Lockheed Martin, and will be named a director along with two other members of the Northrop Grumman board.

Northrop Grumman shareholders will receive 1.1923 Lockheed Martin shares under the definitive agreement. Northrop Grumman has about 58 million shares outstanding. Therefore, shareholders will receive 69.2 million Lockheed Martin shares.

Based on Lockheed Martin's closing stock price of $104, the transaction is valued at $7.2 billion. The companies said the value of the transaction is $11.6 billion.

No one was immediately available to provide further details.

[02] Strauss-Kahn sees France's deficit-to-GDP ratio around 3.5%

As a result, measures to reduce the 1997 deficit by 'some tenths' of a percentage point will be taken, he said during his first press briefing since the socialists won parliamentary elections June 1. Strauss-Kahn said among the measures to reduce the deficit this year, the government is considering both taxes on corporations and households.

Strauss-Kahn said he was waiting for the audit of public finances, due July 21, before announcing measures that might be necessary to trim the deficit. He said if the deficit reduction continued its trend in recent years, the deficit ratio should be around 3.5% to 3.6% this year, after 4.2% in 1996.

If the audit shows the deficit running above the 3.5% to 3.6% level, as he believes it will, then 'the government will be forced to take measures.... Some of the measures being considered include corporate taxes and household taxes.'

Strauss-Kahn did say, however, that the government wouldn't raise overall tax revenues this year. He ruled out keeping the 12.5 billion ($2.2 billion) income tax cut for 1998 planned by the prior, conservative government, noting that it had been financed by commensurate cuts in spending.

He also noted that should there be additional corporate taxes levied in order to reduce the budget deficits in both 1997 and 1998, the new taxes would have to have 'no influence on investment, or better yet, come with other measures which would encourage investment.'

Strauss-Kahn said a lack of investment in France was a principle reason for the country's low growth during the past several years. He declined to comment on remarks by German Chancellor Helmut Kohl that Germany would have a 3.0% deficit-to-GDP ratio.

'You'll note that he was speaking about Germany, not about France,' Strauss- Kahn said. France would 'apply the (Maastricht) Treaty, all the treaty, and nothing but the treaty.'

He declined to respond on whether the budget criteria should be interpreted along trend lines rather than on a strict numerical basis. Strauss-Kahn also said that when the decision is made on which countries enter European economic and monetary union, all five Maastricht Treaty criteria will be considered with no one criteria more important than another.

He was making an oblique reference to Germany's total debt being above 60% of GDP and heading higher. The Maastricht Treaty calls for countries to reduce their total debt to 60% and to be heading in the right direction before entering EMU.

France's debt is expected to be 57.5% of GDP in 1997 but also heading higher.

[03] Germany's deficit is expected to exceed budget plans by $5 billion

Meanwhile, Bundesbank council member Reimut Jochimsen was quoted as saying it would be wrong to give the timetable for European monetary union precedence over meeting the Maastricht treaty membership criteria. And Bundesbank chief economist Otmar Issing said Germany had a lot of 'homework' ahead on its budgetary position in order to qualify for the launch of Europe's single currency in January 1999.

German Foreign Minister Klaus Kinkel said it was time for German politicians who have raised doubts about the single European currency to 'stop quacking on about the euro'.

The new deficit plan, to be presented in a supplementary budget by Finance Minister Theo Waigel next week, will still be in line with the Maastricht guideline of 3.0% of gross domestic product, the source said. In 1998, the federal deficit will fall back below the level of government investment, in line with the constitutional requirement, the source said.

Jochimsen was responding to France's admission that its budget deficit will probably exceed in 1997 the Maastricht target limiting the shortfall to 3% of gross domestic product. Issing declined to comment directly on statements made earlier by French Finance Minister Dominique Strauss-Kahn on France's 1997 budget deficit-to-GDP ratio trend.

That is well above the 3% limit set by the Maastricht treaty for countries hoping to participate in the 1999 launch of Europe's planned single currency. Strauss-Kahn said he is waiting for the audit of public finances, due July 21, before announcing measures that might be necessary to trim the deficit.

Issing stressed that the sustainability of the criteria is essential to the project.

'I can't imagine that if the convergence criteria aren't met that that wouldn't harm confidence in the single European currency,' Issing said.

[04] UK Chancellor throws down the gauntlet to traders as sterling hits new highs

Meanwhile the UK Chancellor Gordon Brown threw down the gauntlet to traders who have propelled sterling to its highest level in six years. But traders made it clear that he's got a tough fight on his hands.

'Sterling was a wild ride today, like being on a Coney Island roller coaster,' said Jesse Torres, chief dealer at the New York branch of Bank Austria. 'It fell then rolled all the way past its highs.'

Chancellor Brown publicly protested against the pound's double-digit relentless surge this year against the currencies of Britain's main trading partners, a move which is beginning to distress UK exporters.

Sterling bulls took heed but are not about to back off without a fight from what has been effectively a one-way bet for the past year.

Economists said Brown passed up the opportunity to use his maiden budget speech on Wednesday to curb domestic demand. That leaves interest-rate policy to bear the brunt of fighting inflation in the coming months.

[05] Brown defends his budget as his decision to abolish dividend tax credit comes under fire

But surprisingly the City of London reacted well to the measures. When trading on the London Stock Exchange began, shares rallied after an initial fall. The reaction surprised many observers. It had been estimated that the abolition of the dividend tax credit received by pension funds could cut the fundamental value of UK stocks by around 13%. One senior member of the government said the Stock Exchange was 'bonkers'.

Shares began sharply lower as traders took the view that Brown did not tighten fiscal policy enough to curb Britain's booming economy, raising the prospect of a rise in interest rates next week to cool consumer demand.

Prices then rallied as the conviction took hold that the budget held no major shocks for industry, despite Brown hitting utilities with a stinging windfall tax.

Investors in the U.K.'s biggest privatised utilities gave two thumbs up to the fine print details of the £5.2 billion windfall tax unveiled in the budget.

But shares in export-oriented firms, however, fell sharply as investors bet that sterling's foreign exchange market gains will continue and further undermine their profitability overseas. Other market sectors encouraged by the budget included property shares - whose relative yield attractions grew - and food retailers, which are expected to benefit from continued strong growth in consumer spending.

A key move in Brown's budget - which reduced the government's deficit while offering incentives for business - was a cut in tax credits for institutional investors like pension funds on dividend payouts.

The Conservatives, routed in Labour's May 1 election landslide, seized on the move, saying it would hit pensioners in the years to come.

The main opposition party said individuals would have to make higher pension contributions and local authorities would have to increase local taxes to make up pension shortfalls.

But Brown was dismissive. 'We are not raiding pensions, that is just ridiculous. The Tories (Conservatives) are getting increasingly desperate,' he told a BBC interviewer.

Saying pension funds currently had large surpluses, he added: 'Pensioners, in my view, will not lose out over this in the way that people are suggesting.'

[06] U.S. jobless rate climbs 0.2%

Following the release of the somewhat weaker-than-expected employment data for June, U.S. Treasurys extended their gains, providing the backdrop for a sharp rally in New York stocks.

'The (payrolls) number was lower than expected and the unemployment rate was higher than expected,' said Mark Sauvigne, a trader at Chase Securities Inc. in New York, explaining the market's gains. Sauvigne said the numbers seem to validate the Federal Reserve's recent decisions not to raise interest rates and 'right now one's certainly got to bring into question whether there's going to be any tightening in August.'

Payrolls for May were revised upward to an increase of 166,000 from an initially reported gain of 138,000. Taken together, the June and May payroll increases were largely in line with the recent average monthly job gain of 236,000, BLS said.

Average hourly earnings rose four cents in June to $12.22 per hour, while average weekly earnings increased by 0.6% to $424.03.

BLS Commissioner Katharine Abraham noted that the eight-cent rise in hourly earnings during the second quarter was 'somewhat lower' than the increase in each of the previous quarters. Overall, private sector employment created 151,000 jobs in June.

Initial claims for state unemployment insurance rose 5,000 in the week ending June 28 to a seasonally-adjusted level of 337,000, the Labor Department said.

The drop in initial claims was in line with analysts' expectations. Analysts polled by Dow Jones Newswires this week forecast claims to rise by 3,000. Jobless claims for the previous week, which ended June 21, were revised to a decline of 16,000 from an initially reported drop of 14,000.

The June 28 week four-week moving average for claims - a closely-watched barometer of labour market conditions - fell 250 to 339,000.

Continuing claims for unemployment insurance rose 81,000 to 2,351,000 in the week ended June 21. The four-week moving average for continuing claims rose 18,750 to 2,290,000 in that week.

[07] CBI survey shows retail sales bounce back in June

The upbeat outlook for consumer spending implied by the survey is likely to increase pressure on the Bank of England for a sharp rise in interest rates this year.

Financial markets are convinced that responsibility for restraining demand now rests with the central bank after Chancellor of the Exchequer Gordon Brown failed to raise taxation on the consumer sector as much as the markets thought necessary to contain strong consumer growth.

Some 58% of retailers questioned said they sold more goods in June than in the same month a year earlier. This compares with 19% who said they sold fewer. The difference between the two, a net balance of 39 percentage points of retailers reporting annual sales growth, was higher than the 32 points predicted and well up from 21 points in May.

The CBI said similar growth is expected in July, with a net balance of 37 points expecting to sell more goods than a year ago. The three month average indicates that underlying sales growth picked up slightly in June to its fastest rate since January, the CBI said.

Alastair Eperon, chairman of the CBI's distributive trades survey panel, said 'June's pickup in volumes leaves retailers regarding business as above average for the time of year to the greatest extent since December 1996.'

'Encouragingly, the improvement in retail trade is broadly based with retailers in nearly all sectors benefiting from consumers spending more freely,' he added. 'If sales growth in July keeps pace with expectation, business is expected to remain well above average. At first glance, the budget measures seem unlikely to upset these expectations.'

[08] BAA agrees to buy DFI for $674 million

BAA said the acquisition it is a major step in its strategy to expand its core duty and tax free business internationally.

The combination of Duty Free International, the fifth largest duty free business in the world, with BAA's business will promote the airport management group to the second largest tax-free retailer.

BAA's Chief Executive Sir John Egan said: ''By acquiring another large business unaffected by the possible loss of European duty free, we will be able to protect and enhance profits, bring improved merchandising to Duty Free International, build on a range of synergies, and further develop the business through a growing number of international airports.''

[09] Renault reaches agreement with Vilvoorde workers' unions

RTBF radio reported that 400 administrative jobs will remain with the factory.

The majority of idled workers will receive a lump sum payment of between $27,000 and $40,000 - depending upon the length of their employment with Renault.

Labour officials said the two sides agreed that no new cars will be assembled at the factory before it shuts its doors for good.

The date of that final closing was yet to be determined.

The accord also provides pensions for laid-off workers who are 50 years old or older, and salaries for up to two years for the others.

RTBF said the agreement must still be approved by rank-and-file workers Friday.

French labour leader Marc Blondel told Belgian radio that the agreement sets 'an interesting precedent.'

'This plan is going to cost a lot of money - but so much the better for the workers who are going to benefit from it,' said Blondel, secretary general of the union Force Ouvriere - or Workers' Force.

After the Socialists swept to power in French elections June 1, hopes were raised - but quickly dashed - that the closure of the plant could be avoided.

Renault, which is partly owned by the French government, definitively announced the closure of the factory last Saturday.

[10] Philips looks for investors interested in acquiring its Grundig stake

A spokesman said Philips was in talks with the Max Grundig Foundation about the Foundation's option to sell Philips its 52% stake in Grundig for 411 million Deutsche marks ($241.8 million) in 2004.

'Anticipating the completion of the negotiations with the Grundig Foundation about their put option of 52% we are investigating possibilities to sell that 52% to interested third parties,' said spokesman Ben Geerts.

'If the amount of interest is beyond 52%, Philips is prepared to reduce its 31.6% stake in Grundig as well,' he added.

Geerts was responding to questions about a report in the Frankfurter Allgemeine Zeitung newspaper that Philips might sell its Grundig stake to small London merchant bank Botts & Co, which could lead to a private placement.

Philips is still in discussions with the Grundig family and the Max Grundig Foundation about disentangling links forged with Grundig in 1984, when the German business had a formidable brand presence in audio-visual products.

Last month the German firm, saddled for years with poor performances, reported a 631 million mark loss for 1996, compared to a 598 million mark loss the year before.

At the heart of the talks is the Max Grundig Foundation's put option and Philips' commitment to pay a 46 million mark a year dividend to the Grundig family heirs.

[11] Pharmacia and Upjohn sees negative trends continuing in 1997

'Even though negative sales and profit trends will likely continue in 1997 and the result in the second quarter of 1997 may not be better than the first quarter's, we expected to take advantage of these measures in the beginning of 1998,' it said.

The Swedish-U.S. drug company said in a statement the company planned a series of measures to simplify its structure and decision making systems, clarify division of responsibilities, and concentrate investments on research and developments.

The measures were only the first of several important decisions about strategy, operations and management, P&U said.

[12] Corporate and Economic Briefs

French producer prices rose 0.1% in May, but were down 1.0% for the trailing 12 months, the national statistics institute said. The rise follows an 0.3% rise in April. INSEE said mineral prices rose 0.3% in May after a stable month in April. The agency said wood and paper product prices were overall nearly stable, rising as a group 0.1% from April.

German industrial orders fell by 0.8% in May from the previous month, breaking a four-month uptrend which had culminated in a 3.7% rise in April, the Economics Ministry said.

German wholesale sales in May fell by a real, or inflation adjusted, 6% from a year earlier, the Federal Statistics Office in Wiesbaden reported. The data are preliminary. In the first five months of 1997, wholesale sales were down a real 1% compared to the previous like period, the agency said. 'Nearly all areas of the wholesale sector were affected by falling sales in May,' the agency remarked.

Spain's producer price index rose 0.8% in May from the same month in 1996, the national statistics institute said.

French pharmaceutical and chemical company Rhone-Poulenc said that it sold its distribution unit Fiprochim to the Netherlands' Caldic International Beheer, a chemical products and food additives distributor. A company official declined to comment on the sum of the transaction. Fiprochim has distribution units in France, Spain, the Netherlands, the U.K. and Italy and sales of 2.4 billion French francs.

NEC Corp. is to establish a telecommunications company in Russia with Japanese trading houses Mitsui & Co. and Sumitomo Corp. and Telecominvest of Russia. The company will make, sell and maintain telecommunications systems. NEC will have a 45% stake in the $6.1 million-capitalized company, Mitsui and Sumitomo will each have a 10% share and Telecominvest the rest.

Switzerland's retail sales in May rose a nominal 2.8% year on year and increased 2.2% on a real basis, the government's statistics office said Thursday. As reported previously, nominal retail sales rose 2.0% in April and fell 1.5% in May of last year. For the first five months of this year, retail sales registered no change from the same period in 1996 on a nominal basis and fell 0.5% when figured in real terms.

PTT Post, the postal division of Koninklijke PTT Nederland, is planning to strengthen its position in southern Europe and Asia, Ad Scheepbouwer, general director of the postal unit, said in an interview with German newspaper Handelsblatt Thursday. The expansion into these areas, together with filling the 'white spots' in the U.S. and Japan, will mainly come about via acquisitions, Scheepbouwer was quoted as saying.

On the last day in the bookbuilding period for shares in German television broadcaster ProSieben Media, the shares are being traded between 112 marks and 116 marks per share in grey market dealings. This price is well above the official price range of 66 marks to 72 marks at which the shares are being offered to investors. An official at Bayerische Hypotheken- und Wechsel Bank, a member of the banking consortium for the initial share offering, declined to give an indication of how many times the offering is likely to be oversubscribed. However, an equities salesman at a Frankfurt- based bank said institutional investor demand for ProSieben's shares is outstripping supply by 'between 40 and 60' times.

[13] World News Briefs

India's Prime Minister Gujral's Janata Dal party is on the verge of a split after senior leaders failed to patch differences with the party chief, who is facing corruption charges.

Indian government scientists say India will continue its nuclear research program despite new U.S. pressure on three companies.

The U.S. Commerce Department is expanding its export crackdown beyond nuclear weapons technology to materials for making chemical weapons and missiles.

With a summit of NATO leaders only days away, France failed to reach an agreement to rejoin the alliance's military command.

Australia's Communications Minister will hold talks with U.S., U.K., Japan and Ireland on trade on the Internet and on-line regulation, his spokesman says.

[14] Tobacco industry agrees to settle Mississippi suit

The settlement comes only five days before Moore, who led national negotiations between states and the tobacco industry that ended with a $368.5 billion out-of-court settlement proposal involving 40 state lawsuits, was to take cigarette makers to court in Mississippi.

Moore filed the state lawsuit in 1994 seeking $940 million in compensation for Mississippi tax money spent on smoking-related illnesses. That lawsuit set the stage for talks between attorneys general and tobacco companies.

Earlier, Moore had set a deadline of this afternoon, saying a settlement had to be reached by then or the trial would begin Monday. He said he figured Mississippi's share of the national settlement should be about 1%.

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