European Business News (EBN), 97-09-26

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Page last updated Fri, September 26 7:15 PM CET

CONTENTS

[01] UK stockssurge to record gain on reports UK may join EMU soon after 1999 start

[02] Kohl aides seek to revive plan to cut Solidarity tax and may try to avoid parliamentary involvement

[03] T&N discusses $2 billion takeover proposal from Federal-Mogul

[04] US economy grew slower than reported in second quarter

[05] Alitalia reaches the black for the first time in ten years Italian carrier says restructuring effects are

[06] German August producer prices rise at an annual rate of 1.5%

[07] GAN and CIC could be privatised as early as November

[08] Marubeni to invest $827 million with Generale des Eaux

[09] Apple narrows search for new chief executive officer

[10] Blackstone to buy $650 million American Axle from Park

[11] Total Petroleum North America to merge with Ultramar Diamond Shamrock

[12] US & China fail to narrow differences on WTO

[13] Digital broadcasters agree to support open standards

[14] Corporate and Economic Briefs

[01] UK stockssurge to record gain on reports UK may join EMU soon after 1999 start

The Financial Times report, which dragged the pound sharply lower, said the government would make a statement shortly, probably in late October, 'that sterling is likely to join (EMU) at an early opportunity after the 1999 launch'.

The blue-chip FTSE 100 share index closed up 160.8 points at 5226.3 points and provisional volume for the whole market was 1.05 billion shares. The FTSE 100 index touched a high of 5244.3 points at 1319 GMT and a low of 5101.5 points at 0730 GMT - the session's opening bell.

Some analysts warned there is still a long way to go before the UK will actually join the single currency, with the result of a referendum - to which the Labour government is committed - probably too close to call.

If the government made such a move, UK interest rates would fall in order to hit convergence criteria. Up until now, economists have expected interest rate rises to keep growth in check.

'It's clear this (early EMU entry) is what the market wants to think,' said Eric Fishwick, senior analyst at IBJ International in London. Sterling was still viewed as being too strong for EMU entry at present levels and 2.75 marks might be better, he said.

'This is a bullish story for UK assets in general,' said BZW head of European strategy Richard Kersley.

British exporters have complained that the pound's strength, largely based on the belief that Britain would not join EMU in its early stages, had severely damaged their business.

[02] Kohl aides seek to revive plan to cut Solidarity tax and may try to avoid parliamentary involvement

With the advent of European economic and monetary union, analysts said, German companies will now look abroad for investment opportunities rather than stay in the local high-tax environment.

Gerhard Grebe, chief economist at Bank Julius Baer in Frankfurt, said the failure to introduce Finance Minister Theo Waigel's plan to cut 30 billion marks ($17 billion) in taxes and reform the system had profound repercussions for Germany as a financial centre.

'The collapse of tax reform plans is bad for the overall economy and for the image of Germany. The trend in the rest of the world is to cut taxes, but not here. We will have no structural reform to help cut the jobless figures,' Grebe said.

Germany's European neighbours had introduced sweeping tax reform programmes and had seen investment boosted as a result, Grebe said.

One London analyst said: 'People will look at this and think, if they cannot get tax reform through, then how can they hope to make Germany attractive as a financial centre?'

'How is corporate Germany going to react to this? The imminent euro is putting on the pressure, because once the euro is introduced the domestic base becomes Europe and not Germany. The attraction to do things abroad is greater,' he said.

In recent years many German companies have set up regional offices and subsidiaries in Luxembourg, Dublin and other sites to take advantage of favourable tax regimes.

A change to the tax system would have led to some of these companies coming back, analysts said.

Analysts said that there was no chance of any serious tax and welfare reforms in Germany until 2000 at the earliest, breeding a climate of uncertainty in the country which would also cause difficulties for German firms.

The failure of tax reform would not necessarily hit Germany's fledgling share ownership culture, but only because investors would not miss what they never had.

'Share investment will not be unduly affected because it was expected that the talks would collapse. The small investor did not really grasp what the reform would have meant for them,' Haffner said.

Meanwhile, Wolfgang Schaeuble, Kohl's closest adviser, said that Germany will make a separate law to facilitate the planned 1998 reduction of Germany's so-called solidarity tax surcharge. The original tax cut bill had included a lowering of the surcharge.

Schaueble, who is head of the Christian Democratic Christian Social Union parliamentary group, said the financing of a lower solidarity surcharge will be within the bounds of the 1998 German budget.

The much-disputed solidarity surcharge is a 7.5% surcharge on income tax used to fund the reconstruction of eastern Germany.

German Finance Minister Theo Waigel, meanwhile, was vague about exactly how the cut in the solidarity surcharge is to be financed without upsetting the 1998 budget. But he did rule out the possibility that the government would sell more shares in Deutsche Telekom.

'That is not open to debate,' Waigel told journalists.

Originally, the 7.5 billion-mark cut was to be financed for the most part by a widening of the tax base within the context of the planned overall tax reform.

Waigel has more or less been forced to implement lowering of the solidarity surcharge in its own right because minor coalition partner the Free Democratic Party has based its election platform on lower taxes.

Waigel said the surcharge reduction is more likely to be financed through spending cuts rather than an increase in revenues.

In addition, Waigel said the government may construct the tax-lowering law in such a way that it doesn't require approval by the upper house.

'Alternatively, we'll come up with a law that the (opposition Social Democratic Party) can't refuse,' the finance minister said.

[03] T&N discusses $2 billion takeover proposal from Federal-Mogul

The proposed price represented a 29% premium to the British engineering group 's closing price Thursday on the London Stock Exchange and sent the company's shares soaring 30% on Friday.

One analyst said after talking to T&N's advisers earlier that the approach was made this morning. He said the adviser said the bid had not been agreed and that 'there is a chance Federal Mogul will have to pay more'.

A spokesman for T&N said the deal was currently being considered by the board and its advisers N.M Rothschild & Sons, but he refused to elaborate on whether it would be backed, renegotiated or ditched.

Speculation is swirling in the market that Federal Mogul could face a counter-bid. In the past newspaper reports have said that Dana Corp of the US and British engineering group GKN could also be contenders. A spokeswoman for GKN refused to comment.

[04] US economy grew slower than reported in second quarter

Real second quarter gross domestic product gained by a revised 3.3% rate, after rising at a 4.9% rate in the first quarter, the Commerce Department said.

Previously, the agency had reported a 3.6% rate of increase in second quarter GDP.

The revised data had little affect on the US stock, bond and currency markets.

The second-quarter GDP increase was more than accounted for by gains in exports of goods and services, producers' durable equipment, consumption expenditures for services and inventory investment.

Real exports of goods and services rose 18.4% in the second quarter from 9.9% in the first.

Producers' durable equipment increased 23.0%, compared with an increase of 6.7% in the previous quarter.

The smaller rise in real GDP in the second quarter compared to the first was more than accounted for by a downturn in personal consumption expenditures for goods and by a deceleration in inventory investment, it said.

Real personal consumption expenditures rose 0.9% in the second quarter, after a rise of 5.3% in the first.

The real change in business inventories added 0.8 percentage point to the second-quarter change in real GDP, after adding 1.8 percentage points to the first-quarter change, Commerce said. Businesses increased inventories $77.6 billion in the second quarter, after an increase of $63.7 billion the first.

Inflation was somewhat stronger than had previously been reported for the second quarter.

The chain-weighted GDP price index was at a rate of 1.8% in the second quarter, after a 2.4% rate in the first. It had previously been reported as 1.5%. The GDP implicit price deflator was also 1.8% in the second quarter, after a 2.4% rate in the first. It was also previously reported as 1.5%.

But the rise in the revised chain-weighted GDP price index for the second quarter was still the smallest increase since a 1.4% rise in the third quarter of 1992.

[05] Alitalia reaches the black for the first time in ten years Italian carrier says restructuring effects are

The Italian national airline Alitalia posted net profit of 163 billion lire ($94.27 billion) for the first half, compared with a loss of 310 billion lion lire the year before.

The profit is a result of the carrier's efforts to effect a sweeping reorganisation, which was launched last year. The airline noted, however, that extraordinary items amounting to 156 billion lire contributed to the first half performance.

Consolidated turnover during the half amounted to 4.074 trillion lire, up from 3.769 trillion lire in the first six months of 1996. The airline cut its personnel costs by 12% to 854 billion lire, largely due to staff reductions, contract revisions and a reorganisation of personnel policies.

The airline made peace with its unions last year, after a prolonged battle over a plan to turn the company around that included job cuts.

Alitalia lost 1.2 trillion lire in 1996 and is currently being recapitalised in the amount of 2.75 trillion lire. The Italian state paid an instalment of 840 billion lire of this cash injection last August, following the European Union's approval in July of the plan.

Alitalia is currently searching for an international partner and wants to close an agreement by the end of the year. There has been talk of a deal with either Dutch carrier KLM Royal Dutch Airlines or French airline Air France.

Alitalia said its passenger load factor rose to 70.4% from 67.5% in the half, while the overall number of passengers increased by 6.9%. The carrier swung to an operating profit of 115 billion lire from a loss of 86 billion lire last year.

Alitalia, which is 90%-controlled by state holding company Istituto per la Ricostruzione Industriale, reaffirmed its goal of returning to profitability for all of 1997. In the longer term, the government is looking to privatise the airline, although no timetable has yet been established.

[06] German August producer prices rise at an annual rate of 1.5%

The results were largely in line with expectations.

A Dow Jones survey conducted prior to the data's release brought estimates for an average 0.2% rise on the month and a 1.6% increase from August 1996.

Traders said the data was in line with forecasts and had little impact on later trading. Producer prices in Germany were 0.2% higher in August than in July and rose 1.5% on the year.

'While there will still be some negative sentiment for Bunds, the PPI data could at least steady the Bunds and calm inflation fears after Thursday's high import prices,' said Rosi Haroun, a trader at Bank of Tokyo in Frankfurt.

In western Germany, producer prices rose 0.3% in August from July and were 1.6% higher than a year earlier. The index for the region was at 104.6 from 104.3 in July.

Eastern German producer prices rose 0.5% on the month and were up 2.2% on the year, the statistics office said. August's index stood at 111.0, up from 110.5 in July.

The office also provided some specific producer price changes for August compared with July.

[07] GAN and CIC could be privatised as early as November

'We are heading towards separate privatisations of GAN and CIC, in an industry sale, and doubtless starting with the bank,' he told the daily Liberation.

'I expect to collect the advice of all the partners, including local political representatives and the trade unions, to reach an efficient solution by early November,' he said.

Strauss-Kahn stressed that the partial flotation of about 20-25% of capital in France Telecom now under way is not a privatisation.

[08] Marubeni to invest $827 million with Generale des Eaux

Marubeni and Generale des Eaux are scheduled to sign a formal agreement later Friday in Paris, a spokesman at Marubeni said. Generale des Eaux is a diversified municipal services and construction group.

Each company will contribute $2.5 million to set up a feasibility-study group for the infrastructure development project, and plan to spend more than 100 billion yen in the coming two years, he said.

Areas covered in the social-infrastructure development business would include drainage work, sewage disposal, garbage disposal, and management of hospitals and rehabilitation centres.

'Public-sector social development business is expected to grow in Asia' where the governments began to emphasize the need for social infrastructure and as they increasingly promote market deregulation, the spokesman said.

Marubeni and Generale des Eaux already have a strong relationship in the power generating business. The Japanese trading company took a 30% stake in Generale des Eaux's U.S. independent power producer subsidiary Sithe Energies Inc. in March 1996.

[09] Apple narrows search for new chief executive officer

A handful of prominent industry executives have emerged as candidates to succeed Gilbert Amelio, who was ousted by the beleaguered Cupertino, Calif., computer maker, people familiar with the situation said.

The candidates include Samuel J. Palmisano, a fast-rising star at International Business Machines who is that company's PC chief; Ed Zander, president of a major division at computer maker Sun Microsystems Inc.; David Dorman, an executive vice president of SBC Communications Inc., a major regional phone company; and Joe Costello, president and chief executive of Cadence Design Systems Inc., a software maker in San Jose, Calif. Representatives of the four executives either declined comment or could not be reached.

The Apple board's search panel was supposed to start screening candidates last week. One person familiar with the process said the search had been narrowed to about have a dozen people. But another knowledgeable executive said at least a dozen remained under consideration, stating the board continues to talk with candidates at the rate of 'one or two' a week.

Apple faces a tough task in recruiting top-flight talent to run the company, in view of its marketing problems and the fact that co-founder and interim CEO Steve Jobs is likely to retain such influence over Apple's directions.

Indeed, a knowledgeable person said the board may ask Jobs to serve as Apple's non-executive chairman for a period after the new CEO is named. Some people close to the recruiting process say Jobs is having second thoughts about the type of executive the company needs.

Until now, Apple has been targeting senior technology executives with strong sales and marketing backgrounds 'because the company needs to be reinvented,' one knowledgeable executive said. But 'there's a high probability this whole search will take a different direction' soon and instead focus on an individual with strong operational skills, said another person familiar with the situation.

Jobs declined comment yesterday. Jim Carlton And JoAnn S. Lublin

[10] Blackstone to buy $650 million American Axle from Park

Blackstone confirmed that it had signed an agreement, but declined to comment on the price tag. Rumors had swirled in Detroit that the price would be close to $1 billion. GM has signed off on the Blackstone deal and will continue to use American Axle as a supplier of drive-line parts.

American Axle was sold to an investor group by GM's big automotive parts supplier three years ago. American Axle's well-respected chief executive officer, Richard E. Dauch, will continue to run the company under Blackstone. Blackstone is acquiring the closely held company from Park Corp., whose chief, Ray Park, is a Cleveland industrialist.

'One of the key elements of our investment strategy is to back excellent managers, and there is no question that Dick Dauch is one of the most outstanding talents in the automotive industry,' said Stephen Schwarzman, president and chief executive of Blackstone.

American Axle was formed in 1994 when General Motors sold its axle-making business as part of a continuing restructuring of its parts-making unit. With annual sales of more than $2 billion, the company supplies nearly all the rear- and four-wheel-drive axles used in GM's highly profitable pickups and sport utility vehicles, such as S-10, Blazer, Suburban, Tahoe and Yukon.

The company also makes axle shafts for Ford Motor Co.'s rear-wheel-drive vehicles. The company has 8,500 employees in six plants in Michigan and New York.

The auto industry has paid close attention to American Axle's success outside of GM because it is one of the first companies formed by the auto maker's continuing shedding of operations.

Earlier this year, American Axle reached its first agreement with the United Auto Workers independent of GM, preserving nearly all of the pay and benefits. The UAW, however, allowed American Axle to take more than three years to bring new employees to full pay and benefits.

Mr. Dauch was a well-known ally of Lee Iacocca during Chrysler Corp.'s comeback. Last year, Mr. Dauch was honored as the Automotive Hall of Fame's 'Industry Leader of the Year.'

For Blackstone, American Axle could also be a platform for additional acquisitions in the industry. Consolidation in the auto-supply industry has reached a fevered pitch, as major players such as Lear Corp., Johnson Controls Inc. and Magna International Inc. bulk up through acquisitions.

'In the future, Blackstone may also consider additional acquisitions in other areas of the automotive supplier business that are complementary to AAM's strengths,' Mr. Schwarzman said.

Other financial investors have found interest in Detroit. Joseph Littlejohn & Levy controls Hayes Wheels International Inc., a wheel manufacturer based in Romulus, Mich., and has made a number of related acquisitions. In addition, it formed a company, Peregrine Inc., to purchase four parts plants from GM's Delphi Automotive Systems division last year. The plants had more than $1 billion in sales.

Blackstone, founded by Peter G. Peterson and Mr. Schwarzman, makes investments in both corporations and real estate and provides financial advice. It recently purchased CommNet Cellular Inc., a rural cellular-phone provider.

[11] Total Petroleum North America to merge with Ultramar Diamond Shamrock

'TOPNA shareholders, who had already approved the transaction at their annual meeting on June 24, 1997, become UDS shareholders by tendering their shares to the UDS offer,' Total said in a statement. The agreements were signed on Thursday.

The share swap gives Total an 8% stake in UDS, making it one of its major shareholders, the French company said.

Ultramar Diamond Shamrock Corp and Total Petroleum (North America) Ltd said on April 15 that they expect annual savings and synergies at $50 million.

The deal will add 150,000 barrels per day of refining capacity to Ultramar Diamond Shamrock, bringing the total to 650,000 barrels of oil per day.

The merged company will have 6,381 branded outlets in 19 states and six Canadian provinces, 5,679 miles of crude oil and refined products pipelines, and over 23,000 employees.

[12] US & China fail to narrow differences on WTO

Treasury Secretary Robert Rubin and Chinese Finance Minister Liu Zhongli, in a joint press briefing, said they had a constructive discussion as part of the 10th Session of the Sino-US Joint Economic Committee.

The meeting between Rubin and Liu is a precursor to President Jiang Zemin's visit to Washington next month. 'I think the consequence was that really did achieve a great deal,' Rubin said in the press conference.

However, movement toward China's entry to WTO was not among the accomplishments.

Rubin repeated that the US strongly supports China's integration into the global economy, but only if it's conducted on what the US calls 'commercially viable terms.'

'We believe it has to be done on the basis of real market opening in China, ' Rubin said. Liu reaffirmed China's interest in joining WTO, but he stopped short of dictating what terms Beijing deemed unacceptable.

'If the requirements are too demanding then we will not join WTO,' Liu said. But 'if the requirements harmonise with China's situation, we would still like to join the WTO.'

US Treasury Secretary Rubin plans to present China's President Jiang with a letter from President Clinton Friday afternoon expressing the importance of economic issues in his forthcoming state visit to Washington.

Both finance ministers emphasised that their meeting Friday provided a forum to list topics Jiang and Clinton will discuss next month, as well as address areas of concern for officials overseeing the economies of the two countries.

[13] Digital broadcasters agree to support open standards

The agreement will encourage development of a new generation of multimedia digital decoders that will allow consumers to access all forms of digital services.

Canal Plus of France, BritishSky Broadcasting, Kirch Group of Germany and other key players came to an agreement in Geneva on Wednesday at a meeting of the steering group of the Digital Video Broadcasting consortium, a group that combines virtually all players in European television from broadcasters to regulators to makers of TV sets and set-top boxes.

The agreement is only a first step but 'could aid in avoiding multiple set- top-box platforms evolving in Europe,' said David Macavock, secretary of the DVB steering committee.

The consortium virtually controls the digital market in Europe because it is responsible for recommending technical standards. Although it has already determined digital-transmission standards and other essentials, it hadn't yet agreed on standards for set-top boxes.

The lack of a standard has led to market fragmentation, with equipment manufacturers unable to achieve economies of scale and consumers having to either stock their homes with a half-dozen set-top boxes or limit their access to broadcasters.

An open standard would change all that, allowing development of multimedia terminals for consumers that would permit access to all digital-TV broadcasters as well as to the Internet. These devices, yet to be developed, would be sold in stores and compete with network computers and personal computers.

The agreement to support the development of such devices based on an open standard means that set-top decoder boxes will be able to communicate and receive content from different digital sources.

At Wednesday's meeting, Canal Plus formally urged the DVB to adopt a common application-programming interface a language that would allow set-top boxes to communicate and receive content from different sources, said Henri Joubaud, Canal Plus's technical director. One strategy DVB is considering to standardize set-top boxes is to base a common operating system on Java, a programming language developed by Sun Microsystems Inc. that runs across platforms on the Internet and on a whole range of devices.

Canal Plus will be ready to launch such a device by mid-1998, Joubaud said. The device would coexist at least initially with the current devices, which are rented to consumers. Jennifer L. Schenker

[14] Corporate and Economic Briefs

Gross mortgage lending by major UK banks totalled £2.77 billion ($4.47 billion) in August, down 11% from £3.12 billion in July, the British Bankers' Association said. The BBA said the number of new approvals for loans, or mortgage commitments, fell to 37,381 from 45,043 in July. By value, new approvals fell to £2.2 billion from £2.7 billion. The average value of approvals fell to £59,300, some 4% higher than a year ago.

WH Smith Group said one million customers have signed up for its new loyalty card in the first month since its launch. The retail group, which earlier this month ended a lengthy search for a new chief executive by appointing internal candidate Richard Handover to the post, said the success of its 'Clubcard' was based on a television advertising campaign and the loyalty card's easy to use format. It said customers liked the simplicity of the sign-up process whereby cards can be used instantly.

The Czech central bank stifled rumours of a possible interest rate cut in response to the government's balanced 1998 budget draft, immediately boosting the crown, though dealers said the currency's outlook remained weak.

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