European Business News (EBN), 97-07-17

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Page last updated Thu, July 17 6:25 PM CET

CONTENTS

[01] Hints of a trade war emerge as transatlantic tensions build over Boeing deal

[02] France says that there will be no 'belt-tightening' austerity plan

[03] Russia's Mir space station loses all power after the crew accidentally disconnect a vital cable Mir problems at a glance

[04] Granada takes majority control of Yorkshire-Tyne Tees

[05] SGS-Thomson Microelectronics first half profit plunges 48%

[06] Nestle's first half sales grow 17.5% on year

[07] McDonnell Douglas reports stronger second quarter profits up 5.3%

[08] Coke's second-quarter earnings rise 26%

[09] UK Chancellor calls for more competition in Europe

[10] Japan posts trade surplus 28% up on last year, well below expectations

[11] German 'wise man' says EMU should be delayed if member countries do not meet Mastricht criteria

[12] Grand Metropolitan adapts to new U.K. dividend rules

[13] IAB nears $3.5 billion deals for Asian oil refineries

[14] Corporate and Economic Briefs

[01] Hints of a trade war emerge as transatlantic tensions build over Boeing deal

Meanwhile hints of an intentional trade war begin to emerge from the US as President Clinton threatened to go to the World Trade Organisation or impose sanctions on Europe if it blocks the proposed merger, and Congress denounce the European stand as outrageous and ludicrous.

The most prominent leader to speak out against the US comments was French President Jacques Chirac. He urged his European Union partners to stand firm in their opposition to the merger, if a solution isn't reached between the Commission and the aircraft makers by next week.

EU Commission president Jacques Santer said the Commission had examined the merger purely on the basis of objective criteria and looked at 'its implications for strengthening a dominant position on our markets.' 'The Commission will be maintaining its stance there and it will not give into pressure that people might attempt to exert,' Santer told journalists.

Earlier Van Miert - via his spokesman - also said that the Commission's analysis of the megamerger had been conducted solely on competition grounds and hadn't been politically motivated.

Yesterday, an EU antitrust panel recommended that the EU reject the $15 billion deal on grounds it would thwart global competition. The full EU will vote on the merger next week.

From Washington President Clinton said 'it would be unfortunate' if the disagreement evolved into a trade war between Europe and America. 'It would be unfortunate if we had a trade stand-off with them,' Clinton said, mentioning the new World Trade Organisation as a possible way to resolve differences. 'We have some options ourselves.' The EU could not actually stop the merger, but it could impose hefty fines on the American companies and prevent them from doing business in Europe, a major market for U.S.- built aircraft.

Earlier members of Congress denounced the EU stance over the Boeing- McDonnell merger stance as outrageous and ludicrous, and the Senate has unanimously approved a measure condemning the European Union for its expected rejection of the merger. 'We could be heading for a major trade war with the EU over this,' Representative Norm Dicks, a Washington state Democrat said.

But Boeing said it hopes to resume talks with the European Commission. Talks between the EU and Boeing were suspended on Tuesday.

Chirac said that he told Santer and Van Miert that France was 'extremely attached' to the Commission's 'determination to safeguard European interests against any attacks which don't comply with spirit of a society based on free competition.'

But there is still hope that some sort of a deal can be reached. Boeing's Vice-President for European affairs Jim Frank told Reuters 'Our discussions with the Commission have been suspended but they may resume at any time'.

[02] France says that there will be no 'belt-tightening' austerity plan

Trautmann and other officials in the seven-week-old leftist government have repeatedly banished the word 'austerity,' a term they applied pejoratively to the preceding conservative government during election campaigns.

Nevertheless, the government of Prime Minister Lionel Jospin last week unveiled some 11 billion francs ($1.82 billion) in new spending measures which were offset in part by spending freezes elsewhere.

The government on Monday is expected to announce a special corporate tax hike on healthy companies, an abolishment of an income tax cut, and a tax increase for wealthy individuals. Those moves would be made to trim the 1997 deficit to around 3.4% of gross domestic product, from the 3.6% or 3.7% deficit the audit is likely to project should no action be taken.

However earlier today the Paris economic think-tank Observatoire Francais des Conjonctures Economiques said it expects France to end 1997 with a budget deficit of 3.4% of gross domestic product anyway.

Commenting to journalists on the OCFE's latest semi-annual economic outlook, Gerard Cornilleau, a senior OFCE economist, estimated that the deficit will rise slightly to about 3.5% of GDP in 1998. Cornilleau noted that the 1997 projection assumes a social-security deficit of FF50 billion ($8.25 billion) and a supplemental tax on profits in the fourth quarter of FF15 billion.

Separately French President Jacques Chirac reaffirmed France's commitment to qualifying for the euro and took issue with those who claim that France and Germany are at odds over the aims of the single currency project. At a press conference here with Jacques Santer, president of the European Union Commission, Chirac said that France and Germany share a 'complete convergence of views on what Europe should be tomorrow,' including the shape of E.U. monetary union. He was speaking after meeting with Santer and other members of the E.U. Commission.

[03] Russia's Mir space station loses all power after the crew accidentally disconnect a vital cable Mir problems at a glance

'Today we had a very bad situation, serious trouble,' mission control chief Vladimir Solovyov told a news conference. 'We have lost all energy.'

But he stressed that the crew was safe and was working to restore power in the Mir, which has been plagued by accidents and serious malfunctions in recent months. Solovyov said the crew was making routine preparations to repair the Mir's already damaged power system when they accidentally disconnected a cable supplying power to the orientation system, which directs the solar panels to the sun.

Solovyov said the Mir was twisting chaotically and its solar panels were not oriented toward the sun, but some energy was still reaching them. The error lead to virtually a complete power cut in all systems - electricity, orientation, life support and communications, Solovyov said.

'It was a human error, but everyone can make a mistake and we should not judge the crew too harshly,' he added.

However, the crew can communicate with Mission Control from the Soyuz escape capsule, which has systems independent from the rest of the Mir.

Asked if space officials are considering an evacuation, Solovyov said, 'We have not approached this stage yet.'

The Russian official said the U.S. space agency NASA was 'rendering us very effective help.' NASA is providing 'all possible means of communications to ensure the communication with the station,' Solovyov said.

That includes switching on NASA's ground stations so the Mir can communicate with Russian or American space officials at all times.

Solovyov predicted that by this evening, 'we will be able to charge the batteries and start switching on the orientation system.'

The latest problem adds to the Mir's long list of woes and comes at a time when the crew was already preparing for a difficult repair mission designed to restore the troubled spacecraft to close to full power.

[04] Granada takes majority control of Yorkshire-Tyne Tees

Granada added 14 pence to close at 786 while Yorkshire gained 2.5p to 1102.5p. The Granada cash and share offer values Yorkshire at 1132p per share.

Share analysts said Granada was paying a full price but appreciated the commercial logic of a deal which will give it control of a swathe of northern England from Liverpool in the west to Newcastle in the east.

Dresdner Kleinwort Benson said Granada could boost annual revenues by £30 million by abolishing the discount at which advertising airtime is sold in Yorkshire's two licence areas.

They also pointed out the potential boost to programme production, a key activity at a time when the number of channels to be supplied is multiplying.

'I think it's an excellent purchase for Granada. The virtue is that it will strengthen what is already a strong programme-making capacity,' said Jason Crisp of brokerage SocGen. He said the medium-term benefits should outweigh any marginal short-term impact on earnings.

The offer was backed by the Yorkshire board but there were suggestions that a number of its institutional shareholders might hold out for a higher bid.

However, Granada said their bid was a final offer, and no rival suitor emerged.

The deal is part of the latest wave of consolidation in ITV, which remains Britain's leading channel despite growing competition from new channels.

ITV, a network of 15 regional licensees, is dominated by four companies -- Granada, Carlton Communications Plc and United News & Media in England and Wales and Scottish Media Group north of the border.

United has recently agreed to buy HTV in a deal valuing the Wales and south- west England broadcaster at 372 million pounds while Scottish Media is acquiring northern neighbour Grampian Television .

The moves have been prompted by an easing of media ownership laws, the previous two-licence cap being replaced by a limit of 15 percent of television audience.

The big players argue that economies of scale are essential in the face of competition from satellite broadcaster BSkyB and the Channel 4 and Channel 5 commercial terrestrial networks.

Granada chairman Gerry Robinson said he believed that ITV would ultimately be owned by one company but that may be 10-15 years down the line.

[05] SGS-Thomson Microelectronics first half profit plunges 48%

The Franco-Italian group said its first half net income fell 48% to $182.6 million from $351.1 million, while for the second quarter it also dropped by about 48% to $92.1 million from $176.1 million.

The per share figure for the second quarter was $0.66, in line with the company's profit warning on June 5. SGS-Thomson Microelectronics said the recovery of the semiconductor industry is 'progressing,' albeit at a slower rate than the company had anticipated.

SGS Chairman Pasquale Pistorio said the company expects its gross profit margin to be between 40% and 42% in 1998. That's up from 38.5% in the second quarter of this year. Asked whether the company could hit a 40% margin by the fourth quarter of this year, Pistorio said 'that would be desirable but difficult.'

The company said it is entering the third quarter with the order backlog slightly higher than the comparable backlog at the beginning of the second quarter. In addition, its fourth quarter backlog has increased significantly since early June.

Based upon this data, SGS-Thomson said it expects to show 'progressive, sequential improvement' in net revenues in the third quarter, with an acceleration in the fourth quarter. SGS-Thomson said as a result of the increased backlog and the corresponding expected revenues, the company plans to increase its level of investment in research and development and capital expenditures to support future growth.

At the same time, however, the company said the current pricing environment is likely to continue into the third quarter, resulting in a gross margin for the third quarter in the same range as that of the latest second quarter.

SGS-Thomson said it expects the gross margin to improve in the fourth quarter.

[06] Nestle's first half sales grow 17.5% on year

But its shares dipped because investors had expected even stronger volume growth. Analysts said the shares could remain under pressure for a few days before regaining momentum on good longer-term growth prospects.

'The favourable foreign exchange rates contributed nearly 11% to the increase in consolidated sales,' the world's biggest food company said from its Vevey headquarters. Profit figures for the period will be announced in September, the firm said.

Nestle previously reported a net profit of 3.4 billion francs (then $2.52 billion) for all of 1996 on sales of 60.5 billion francs.

Growth in the first six months of this year was particularly high in North America and in Eastern Europe, as well as in the Middle East and Southeast Asia, Nestle said.

Petcare products, including the Alpo brand of dog food in the United States; the Perrier-Vittel mineral water group; and Alcon eye care all showed 'significant progress,' it said.

Volume of coffee sales also grew even though the price of green coffee increased on the world market, Nestle said. Nestle has set a sales goal of 100 billion francs by the year 2000, but has conceded that it will fall short of the target.

[07] McDonnell Douglas reports stronger second quarter profits up 5.3%

Profits for the first six months of 1997 fell to $376 million from $386 million, while revenues rose to $6.8 billion from $6.4 billion. However, earnings per share climbed to $1.79 from $1.76, as McDonnell Douglas' weighted-average shares outstanding slid by 4.5 percent as a result of the company's stock repurchase plan.

McDonnell Douglas suspended the repurchase plan in December 1996 as a result of the pending merger with Boeing.

'I am pleased to see that we kept our eye on the ball, and did not let the merger distract us from running our business,' said Harry Stonecipher, president of the company.

Operating earnings for the second quarter edged down to $320 million from $328 million, and fell to $641 million from $675 million for the first six months.

[08] Coke's second-quarter earnings rise 26%

Soft-drink giant cites further expansion of its world-wide bottling system for its higher income

Coca-Cola second-quarter earnings rose 26%, reflecting the soft-drink giant's further expansion of its world-wide bottling system.

Coca-Cola earned $1.31 billion or 53 cents per share in the April-June quarter, compared with $1.05 billion or 42 cents per share in the second quarter last year, the company said. Revenues for the quarter were $5.08 billion this year, down 4% from $5.29 billion in the second quarter of 1996.

While world-wide gallon shipments grew 9% in the second quarter and there were selective price increases, the company attributed the 4% decline in revenues to a stronger U.S. dollar and the sale in 1996 of previously consolidated bottling operations in France, Belgium and east Germany.

For the first half of the year, earnings were $2.3 billion or 93 cents a share, compared with $1.76 billion or 71 cents per share in the first half of 1996. Six-month revenues were $9.21 billion, down 3% from $9.51 billion in 1996. 'The company's results in the first half of 1997, highlighted by a 31% increase in earnings per share, leave the company poised for a year of unusually strong growth,' Coke Chairman Roberto C. Goizueta said.

Analysts said the third quarter should be a strong period for the beverage industry, since much of the world didn't start feeling the warmer weather until this month. 'The summer really began July 1,' said Credit Suisse First Boston Corp. analyst Martin Romm.

With the hotter temperatures driving consumers to drink more beverages and an easy comparison from its year-ago third quarter, Coke is in store for some strong gains in volume, said Levy, the analyst at Schroder & Co. For example, she said, unit volume in the United Kingdom was down 17% in the year-earlier period.

[09] UK Chancellor calls for more competition in Europe

'The key is combining effective supervision with a rigorous and open competition,' he said during a speech at the Royal Institute of International Affairs.

He said Britain will encourage 'a more imaginative approach' to investment projects in Europe by taking its public/private partnership initiative to the continent.

Brown also revealed that the government is planning to set up an advisory group to give advice to business on what it should be doing to prepare for the single currency.

A Treasury guide on the implications of the project for business will be released next week. 'My overriding aim is to help British businesses make the most of opportunities in Europe, many of which will depend on being ready for the single currency whether or not the U.K. joins,' he said.

Brown also announced publication of a report on the pros and cons of the single currency project by Lord Currie, a Labour economist. Press reports earlier in the day suggested that the Confederation of British Industry will come out in favour of the principle of the single currency next week.

However, the CBI is likely to oppose the U.K.'s entry at the scheduled starting date in 1999, according to the reports. 'I welcome the lead they are setting to business and I look forward to the CBI's forthcoming survey of business views,' Brown said.

He also repeated his often stated claim that Britain will only join a single European currency if economic conditions are right, not on the basis of a timetable that has been set politically.

He also repeated that what Britain needs is an 'open and intelligent debate' on the single currency. 'Until now the debate on our economic role in Europe, and especially EMU, has been dominated by extreme views on either side,' Brown said.

[10] Japan posts trade surplus 28% up on last year, well below expectations

It was the third monthly year-on-year increase in Japan's surplus in merchandise trade, following a 222.2% climb in May and a 164% jump in April, the Finance Ministry said.

The politically sensitive trade surplus with the United States, Japan's biggest trading partner, rose 26.8% to 373.14 billion yen for the ninth consecutive monthly rise.

Analysts said the smaller rate of increase was a good sign for those concerned that Japan's trade surpluses might be ready to balloon again, renewing frictions with Washington.

For the first half of the year, Japan's overall surplus showed the first year-on-year increase on a six-month basis in four years, climbing 28.4% to 3.982 trillion yen.

Japan's trade surplus with the United States totalled 2.234 trillion yen in the six-month period, up 48.8% from the same period of last year.

[11] German 'wise man' says EMU should be delayed if member countries do not meet Mastricht criteria

In an interview with a newspaper, Horst Siebert said that if it came to a delay to the euro's birth, there should be no legal problems. 'Contracts which are impossible to fulfil cannot be honoured,' he said.

The Maastricht Treaty calls, among other things, for budget deficits in participating countries to be reduced to at most 3% of gross domestic product and national debt levels to be not more that 60% of GDP.

Siebert, who is also president of the IfW economic research institute in Kiel, said pushing the scheduled 1999 euro start date back, if executed in a credible and structured way, would not have the grave consequences feared by some.

He suggested that if Maastricht entry criteria were not strictly met, the launch of the euro could be postponed for two years with its future ensured by the implementation of the stability pact before the currency was brought into being.

The stability pact, which was finally agreed at a meeting of European Union leaders in Amsterdam in April, is designed to ensure fiscal discipline. It sets limits for deficits which must not be overshot other than in exceptional circumstances, and includes a fining procedure for those who overspend.

But Siebert said he would have favoured automatic fines, rather than the current system under which countries decide on whether or not fines should be imposed.

'I would have liked to have seen a stability pact with more automatic aspects. That would have done a lot for credibility,' he said.

[12] Grand Metropolitan adapts to new U.K. dividend rules

The dividend of 6.25 pence per share will be paid on Oct. 6 to all shareholders on the register on July 25.

GrandMet said that by paying the dividend as a foreign income dividend it will be able to recover the associated corporation tax payable of about £33 million ($55.4 million). In the budget, the Labour government reduced the value of conventional dividends in the hands of U.K. pension funds and certain other investors, who are no longer able to reclaim the tax credits on such dividends.

Furthermore, the budget also said that from April 6, 1999, companies will no longer be able to elect to pay dividends as foreign income dividends. GrandMet said FIDs are advantageous in that they allow companies to recover corporation tax and, in broad terms, the dividend can be matched with repatriated overseas profits on which overseas tax has been paid.

The company said this is particularly attractive to it given the high level of overseas profits generated by the group as a whole.

[13] IAB nears $3.5 billion deals for Asian oil refineries

The state-owned, Leipzig-based engineering and construction firm is in the process of privatising and has sought work in the Asian-Pacific region partly to sweeten its pot for bidders, said a Hong Kong-based source involved in financing for the proposed refineries.

Only one of the deals has been publicised so far, and all are at early stages, with construction unlikely to be completed before 2000. Sources close to the company conceded that there are many competing proposals for refineries in Asia, but they say at least two of the contracts IAB is seeking are likely to be signed by year end. IAB officials in Leipzig refused to comment on the projects.

During German Chancellor Helmut Kohl's visit to Brunei in early May, IAB signed a memorandum of understanding with the government of Brunei to build a 160,000 barrel-a-day refinery there at an estimated cost of $1.5 billion. A feasibility study is under way.

Although Brunei is a net exporter of crude oil, the refinery would be built to process imported crude and export products.

IAB is seeking similar turnkey contracts to construct oil refineries in China and Malaysia with the help of Gommann Holding, its Kuala Lumpur-based representative in Asia.

As IAB is a newcomer to the Asian market, Gommann has used its contacts in Asia to arrange the deals, said the sources.

In late May, IAB also signed a memorandum of understanding with an affiliate of China National Chemicals Import & Export to build a 90,000- barrel-a-day coastal refinery in northern China, in a turnkey project valued at an estimated $1 billion, said the Hong Kong-based source.

[14] Corporate and Economic Briefs

Britain's biggest clothing retailer Marks and Spencer said it will pay £192.5 million ($322 million) in cash to acquire 19 sites from privately held retailer and mail order firm Littlewoods. The acquired sites will give M&S an extra 600,000 square feet of selling space in key town and city centres. The group expects to start fitting out the stores next February and intends to begin opening them progressively through the year.

British Steel's planned share buy-back will total up to £155 million ($258 million), the company's broker said. The company - which at its last year end had net cash of £785 million - was granted shareholder authority to conduct a buyback of up to 10% of its share capital at an annual general meeting in July 1996. A British Steel spokesman said that the decision to implement a buyback was made in the light of the company's 'very depressed share price which dramatically undervalues the worth of the company.' The buyback will be carried out by broker Cazenove, which has been given an order by British Steel to repurchase up to 100 million shares - almost 5% of the share capital - at up to 155 pence a share.

U.K. media group EMAP said that sterling's 20% appreciation against the French Franc over the past year will hit earnings. Speaking at the group's annual shareholders meeting, Chairman Sir John Hoskyns said, 'our financing structures will continue to provide some hedge against this, but there will nevertheless be an effect on the sterling value of our French earnings.' Despite this, EMAP said that at an operating level the Group continues to perform in line with expectations. The U.K. advertising market is well ahead of last year and there are signs of an improvement in France. EMAP also said that a number of new products are in the advanced stages of planning, and investment in these areas will probably reach a new record.

Sears Roebuck & Co., helped by increased sales of higher-margin apparel and by cost controls, posted second-quarter results that were better than expected. The retail giant reported operating income of 78 cents a share, or $311 million, compared with net income of 67 cents, or $274 million, a year earlier. Analysts' consensus estimate had called for earnings of 74 cents a share, according to First Call Inc. The results exclude a $320 million charge related to the company's handling of its credit card program, and a gain on the sale of its Advantis data services business. Revenue for the period was $9.73 billion, a 6.6% increase from $9.13 billion a year earlier.

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