European Business News (EBN), 97-10-15

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CONTENTS

[01] GTE expected to make $25 billion counter-offer for MCI

[02] World Stock and Bond markets lower on interest rate hike fears following strong US retail sales data

[03] EU approves Guinness, GrandMet merger

[04] Ford Motor third quarter earnings surge 64%

[05] UK jobless total falls to 17-year low

[06] Yeltsin agrees to co-operate with parliament on 1998 budget talks

[07] German September wholesale prices edge higher

[08] Siemens unit plans nuclear venture with BNFL

[09] Suez Lyonnaise des Eaux posts first-half profit of $372.8 million

[10] Time Warner doubles revenues, staunches loss

[11] SGS-Thomson third quarter profit falls 26%

[12] Deutsche Babcock halves loss

[13] Caterpillar profit climbs 24% in third quarter

[14] Solidarity activist presented as candidate for Polish Prime Minister

[15] Black & Decker third-quarter earnings rise 18%

[16] Corporate and Economic Briefs

[01] GTE expected to make $25 billion counter-offer for MCI

The board of GTE is meeting to vote on the offer, say people tracking the situation. A GTE spokesperson said the company wouldn't comment.

Terms couldn't be determined, but the cash offer is believed to be in the range of $37 or $38 a share. That would make it the biggest all-cash offer ever, topping RJR Nabisco $25 billion sale in 1989.

The offer is believed to be less than the WorldCom offer, which is valued at $41.50 a share in stock, or around $30 billion. GTE is likely betting that a cash offer would be more attractive than WorldCom's stock offer.

The GTE bid for MCI Communications move would be yet another stunning development in the MCI saga. British Telecommunications had reached an agreement almost a year ago to acquire MCI for $23 billion.

But as a result of MCI's problems in local and long distance, BT in August cut the price it would pay for the remaining 80% it doesn't own to about $18 billion in stock. It purchased 20% of MCI in 1993 and obtained board seats.

[02] World Stock and Bond markets lower on interest rate hike fears following strong US retail sales data

The US government reported that the pace of retail sales slowed somewhat in September, but activity in the retail sector remains strong.

Following the news, a drop in US Treasurys had a knock on effect with both the dollar and US Stocks falling amid increased speculation that the economy may be growing rapidly enough to force the Federal Reserve into raising interest rates.

Retailers saw their sales increase 0.3% in September to a seasonally adjusted $215.51 billion. That followed revised increases of 0.6% in August and 1.2% in July. The August and July rises previously were reported as 0.4% and 0.9% respectively.

Weakness in general merchandise, apparel, and restaurant sales were the main factors behind the deceleration in sales in September, according to the Commerce Department.

A modest 0.6% rise in sales at auto dealers, meanwhile, suggests some 'catch-up' after sluggish unit sales, said Steven Wood, an economist at BancAmerica Robert Stephens.

But despite the slowdown in retail sales, the level activity remains solid, analysts said. Excluding automobiles, overall retail sales rose 0.2%, in September. 'When you strip out autos you still have relatively good retail sales,' said Kathy Bostjancic, economist at UBS Securities. 'We came in at a very high level in the third quarter and we're exiting at that same level, ' she said.

Sales had slumped in March, April and May as unseasonably chilly weather kept shoppers home. Retailers said unseasonable warmth, on the other hand, discouraged customers from buying new fall clothing last month. And the death and funeral of Princess Diana had some watching television instead of shopping.

The median forecast of 20 economists surveyed by Dow Jones Newswires was for an unchanged performance in September retail sales.

In the light of today's figures, market participants remain concerned about signs the economy may be overheating, especially after Federal Reserve Chairman Alan Greenspan's comments last week that strong labour markets suggest that the economy is on an 'unsustainable track.' Bostjanic said.

Greenspan's comments were viewed as a warning that the Fed may have to raise short-term interest rates in order to slow economic growth and head off the possibility of renewed inflation.

[03] EU approves Guinness, GrandMet merger

In particular, GMG agreed to sell two of its Scotch whisky brands, Dewar's and Ainslie's, 'on a Europe-wide basis.' Dewar's is also sold in the US, but the Commission's statement didn't address its market position there.

The companies also agreed to place with a third party the distributorship of Gilbey's gin in Belgium and Luxembourg and to end their distribution pacts with other companies in relation to Wyborawa vodka in the same countries.

Separately, Guinness and Grand Met agreed to modify their distribution agreements for Bacardi in Greece and to 'dispose of certain interests' in the distribution of spirits in Ireland.

The Commission said in a statement it would 'closely monitor' the sale process. It added that the conditions 'will ultimately reduce the companies' market shares and strengths in the national and product markets of concern' to remove competition concerns.

The Commission opened a detailed inquiry into the Guinness-Grand Met merger in June because of concerns that it would smother competition in certain national EU markets. It was particularly troubled about the market share GMG would have for certain spirit types, mainly Scotch whisky, gin and vodka in Greece, Spain, Ireland, Belgium and Luxembourg.

The EU competition authority said the sale of Dewar's 'will address the concerns about the companies' strength in whisky markets in Greece and Spain.' It added that the sale 'will also allow the new owner to develop the brand in the other European markets.'

Ainslie's, meanwhile, is an 'important brand' in Belgium and Luxembourg, and the Commission said its sale will remove potential competition problems in those markets.

In Greece, the agreement regarding the distribution of Bacardi will also remove competition doubts about the combined company's 'portfolio power ... given their strong pre-existing positions' in the sale of various spirits, the Commission said.

Finally, in Ireland, the company's commitment to modify its spirits distribution will 'ensure continued competition,' the Commission noted.

[04] Ford Motor third quarter earnings surge 64%

The US's second biggest automaker earned $1.12 billion, or 93 cents a share, in the July-September period, up from $686 million, or 57 cents a share, a year ago. Sales for the quarter were $36.1 billion, compared with $34 billion a year ago.

The earnings were a record for the quarter and were above analysts' expectations. The average estimate of 17 analysts surveyed by First Call was 83 cents a share. Ford said its focus on fundamentals continues to contribute gains in quality, lower total costs and speed of new product offerings.

'Each of the past six quarters has shown solid improvement,' Ford Chairman Alex Trotman said. 'But anyone who thinks that we're letting up is very mistaken.'

Ford said earnings also benefited from strong car and truck sales in the United States, a smaller loss in Europe and a return to profitability in South America.

The 1996 results included a one-time charge of $39 million for early retirements of some salaried employees in the United States, and a $76 million gain for the sale of Ford's USL Capital subsidiary. That netted a gain of $37 million, or 3 cents a share.

Nine-month earnings were also a company record. Ford earned $5.1 billion, or $4.26 a share, for the first nine months of 1997, compared with $3.2 billion, or $2.71 a share, a year ago. For the first nine months of the year, revenues were $112.6 billion, compared with $108.2 billion a year ago.

Ford has been the only one of the Big Three automakers to report improvement in its earnings for the third quarter.

[05] UK jobless total falls to 17-year low

UK unemployment fell to a seventeen-year low of 1.47 million as 27,800 jobs were created in September, taking the unemployment rate down to 5.2%. The figures coincided with the release of Wage data which showed underlying average earnings grew 4.5% in the year to August, the same rate as the month before.

As reported by the Office for National Statistics, the decline in the jobless total was smaller than the median forecast in a Dow Jones survey where economists predicted unemployment to fall by 35,000. Vacancies notified to the government's employment offices rose by a seasonally adjusted 8,800, to reach 300,900 in September.

'It supports the Bank of England's current monetary stance,' said Edmund Nonis, UK economist at Nikko Europe.

Some insight into that stance, with the official dealing rate held at 7% since August, was provided by today's release of minutes of the Sept. 10-11 meeting of the BOE monetary policy committee, which showed the MPC unanimous it its decision to keep rates steady following a quarter-point rise in each of the previous four months.

The BOE council minutes considered the conundrum of falling unemployment with steady wage growth, saying that it could mean the jobless level consistent with stable prices is 'lower than previously thought' - or that, as in the late 1980s, earnings might shoot up 'after a long period of stability.' The MPC called this an 'upside risk' for prices.

Sterling lost about half a pfennig after the release of the monetary minutes, on the back of comments by that council that survey results showed windfall payments from building societies posing a smaller upside risk of inflation than previously believed, and that 'a more confident market view' of Europe's planned single currency 'may have lessened the attraction of sterling as a safe haven currency.' Audrey Childe-Freeman, economist at CIBC Wood Gundy, said the survey data suggest 'there is still some upside potential for earnings.'

'You've got labour shortages across all sectors,' said Ian Amstad, senior UK economist at Bankers Trust. 'It's not at all clear' wage growth will remain slow, he concluded.

Other market watchers said the employment data actually took some of the pressure off the Bank of England to raise rates, because the drop in unemployment undercut forecasts.

'On the margin, it does tone down expectations for a rate increase,' said Nonis.

[06] Yeltsin agrees to co-operate with parliament on 1998 budget talks

Facing the prospect their proposal would fail, hard-line lawmakers backed down after Yeltsin promised to co-operate in talks on revising an austere 1998 budget plan that has caused weeks of wrangling.

After discussing the no-confidence issue for more than two hours, the State Duma or lower house voted 228-137 to postpone a no-confidence vote until next Wednesday. Yeltsin, holding the upper hand, waited until the debate was under way before offering the communist-led opposition somewhat of a face-saving way out. 'I don't want confrontation, early elections,' he was quoted as saying by Duma speaker Gennady Seleznyov. 'Don't put me in a difficult position' - a clear reference to his right to end any stand-off by dismissing parliament.

The postponement meant Communist leader Gennady Zyuganov was unable to muster enough support to vote no-confidence in the government and put the brakes on his proposed economic reforms.

'Respected members of the Communist Party faction, how are you going to look into the eyes of the people who collected (so many) signatures for the government's resignation?' liberal lawmaker Yelena Mizulina said after Zyuganov agreed to the one-week delay.

The showdown had been building for weeks as the Communist Party and other opposition groups in the Duma expressed bitter resistance to Yeltsin's economic policies. A no-confidence vote is usually a painless way for lawmakers to register disapproval in the government - the measure has no legal effect under Russian law unless followed by a second ballot within 90 days. But Prime Minister Viktor Chernomyrdin said Tuesday he may submit his resignation if the no-confidence motion is approved, a move that could provoke a full-blown political crisis.

There are no signs that Yeltsin wants to get rid of his close ally Chernomyrdin. But the prime minister's resignation could set in motion a political chain reaction that would eventually allow the president to dismiss the Duma, parliament's lower house.

With Russia awash with problems, neither side relishes the prospect of risking their jobs and putting their popularity to the test in fresh elections. First Deputy Prime Minister Anatoly Chubais, one of the main architects of Russian economic policy, said a no-confidence vote would be 'a powerful financial blow to the country.'

After six years of decline, the economy appears to be stabilising and there are prospects for modest growth next year. Chubais said that's actually bad news for government opponents, led by the communists.

'The coming growth would mean the political end for some forces in the country,' Chubais said. 'In order to prevent that, they are ready to rock the boat.

At least 226 of the 450 Duma deputies must vote no confidence for the measure to pass.

[07] German September wholesale prices edge higher

The figures didn't meet market expectations as a Dow Jones survey of economists estimated wholesale prices to decline 0.2% from August and rise 3.2% from September 1996. Among the price increases were seafood, up 23% and fresh vegetables up 12%.

The office also provided some month-on-month price changes. Among the price increases in September were seafood, up 23%, fresh vegetables, up 12%, organic materials and chemicals, up 4.1%, and heavy heating oil, up 1.5%.

The office also said wholesales prices for light heating oil fell 4.3%, diesel fuel prices fell 2.0%, and non-iron metal prices were down 2.8%.

[08] Siemens unit plans nuclear venture with BNFL

'Initial indications are that such cooperation would be commercially advantageous for both companies,' Siemens said in a statement.

The joint venture, with estimated annual sales of £900 million ($1.5 million), will be active in uranium procurement, nuclear fuel supply, reactor services and the construction of nuclear power plants and research reactors, Siemens said.

'The deregulation of the world's electricity markets is increasing the pressure on nuclear power plant operators to reduce costs and increase plant availability,' Siemens said in a press release. 'We want to explore whether a joint venture company will enable us to better meet our customers requirements by combining our technological and economic strengths.'

Siemens' existing cooperation with France's Framatome, which is now developing a new generation power plant called the European Pressurised Water Reactor, would be continued by the new company.

The new venture would not include, however, BNFL's Sellafield-based mixed- oxide fuel manufacturing business or its interest in the enrichment business of Urenco.

[09] Suez Lyonnaise des Eaux posts first-half profit of $372.8 million

Chairman Gerard Mestrallet said that the company was on pace to exceed the profit goals it set itself when Financiere de Suez and Lyonnaise des Eaux merged six months ago.

'The group is in the process of exceeding its objectives,' said Mestrallet.

The new company, which was formed with the merger of Financiere de Suez and Lyonnaise des Eaux in the first-half of 1997, did not provide comparable first-half figures. For the full-year 1996, the company said it posted a pro forma net profit of 2 billion francs.

Suez-Lyonnaise also said that because of growing international business it expects its full-year 1997 pre-item profit from continuing operations to come in above its forecast of 3.5 billion francs. It didn't specify by how much.

Income from continuing operations in the first-half of 1997 came in at 2 billion francs, with energy businesses showing a growth of 38% in operating earnings. Lyonnaise des Eaux owns Tractabel, a Belgian energy company. In the first half, Suez Lyonnaise said that sales came in at 91.1 billion francs. Sales outside of France and Belgium accounted for 24.2 billion francs.

The company noted that its net profit figures included a capital gain of 152 million francs, in part based on an 1.4 billion francs gain from non- strategic asset sales in Belgium and in France. That gain was offset by 523 million francs in provisions set aside to cover a 'windfall' tax in the UK as well as other restructuring charges and risk.

The company said net profit per share in the first-half of 1997 came in at 17 francs.

[10] Time Warner doubles revenues, staunches loss

The media and entertainment giant said it lost $35 million, or 20 cents a share, on revenue of $3.23 billion in the quarter. Time Warner third quarter results included contributions from Turner Broadcasting System, which merged with Time Warner in October.

The media conglomerate's Entertainment Group revenues included $1.4 billion from its Warner Brothers film division and $1.1 billion from the company's cable television systems. This compares to total Entertainment Group revenues of $2.72 billion in last year's third quarter, with $1.45 billion coming from its film division and $955 million from cable television systems.

Net income for the Entertainment Group was $80 million in the latest third quarter, up from $51 million last year. The group's earnings before interest, taxes, depreciation and amortization, or EBITDA, were $701 million in the third quarter, up from $600 million.

Time Warner publishing division's third-quarter revenues were helped by strong advertising performance at People, Fortune, In Style and Entertainment Weekly. The company said its music division posted lower EBITDA due to declining sales of recorded music and disappointing results from direct marketing.

Contributing to Time Warner's cable networks results were advertising revenue gains at branded networks, TNT, TBS Superstation and Cartoon Network, with increased subscriptions at TNT, Cartoon Network, CNN and Turner Classic Movies.

At Time Warner's Entertainment Group, the Warner Bros. filmed entertainment division benefited from higher revenues from international television distribution and first-run syndication. International theater revenues rose from 1996 levels, mainly because of the success of Batman & Robin, while the biggest domestic theater performers during the third quarter were Contact and Conspiracy Theory.

The Entertainment Group's third quarter gains at the cable systems division came from increases in basic cable, pay-per-view and advertising revenues.

[11] SGS-Thomson third quarter profit falls 26%

The figure means that net profit over the nine months to September has fallen 42% to $280.3 million from the same period in 1996, on a 42% slide in operating income to $353.0 million. Nine-month revenue was lower at $2.91 billion from $3.06 billion.

The Franco-Italian memory chip maker said the hard-disk business continues to suffer from stiff competition, falling prices and oversupply, although some market niches which SGS-Thomson supplies are showing moderate growth.

Operating income fell 26% to $123.7 million on a 1.2% increase in net revenue to $1.0 billion as operating costs and research and development spending increased.

'Our progress year-to-date has been steady, although slower than earlier signs would have indicated,' said Chief Executive Officer Pasquale Pistorio in a statement.

[12] Deutsche Babcock halves loss

The company posted a pre-tax loss of 400 million marks in the 1995/1996 business year. In fiscal 1996, Babcock had a pretax loss of 434 million marks and a 444 million mark loss after taxes.

A spokesman said the company will cut both of those numbers approximately by half in fiscal 1997.

He also clarified the company plans to break even on both a pretax and net profit basis in the current fiscal year.

Separately the chairman of German machinery group is likely to split the company into independent entities, according to an advance copy of an article to appear in the next issue of Germany's Capital magazine. Babcock Chairman Klaus Lederer sees such a move as the only way for the company to reach lasting profitability, the magazine said citing sources.

[13] Caterpillar profit climbs 24% in third quarter

Earnings pushed higher on increased sales of engines, construction and agriculture equipment

Caterpillar said its third-quarter earnings climbed 24% on increased sales domestically and abroad of engines, construction, mining and agricultural equipment.

The heavy-equipment maker earned $385 million, or $1.03 a share, in the July-September quarter, compared to $310 million, or 81 cents a share, in the same period last year.

The results easily exceeded analysts' expectations of 92 cents a share, according to a survey by First Call. But Caterpillar stock fell $1.25 to $59.50 in early trading on the New York Stock Exchange.

Revenue rose 14% to $4.6 billion from $4.03 billion a year earlier.

'The superior performance and record results achieved over the past four years are excellent testimony to the new Caterpillar we have become,' said Donald Fites, chairman and chief executive.

The company predicted increased profits for the fourth quarter as well, which would mean a new record for the full year.

But it said 1998 sales will only 'slightly surpass' 1997's levels, partly because of lower demand in Japan, Australia and Russia. Demand in such places as Thailand and Malaysia also should decline, but Caterpillar said China should be a strong market next year.

[14] Solidarity activist presented as candidate for Polish Prime Minister

After receiving his party's nearly unanimous nod, with only six abstentions, Jerzy Buzek told reporters that his priorities as prime minister would be accelerating privatisation and reforms in social security and agriculture.

He also said he would concentrate on crime issues, health care and decentralising government, shifting responsibility to Poland's regional administrations.

'We have to start the changes very soon and complete them as quickly as possible,' said Buzek, 57.

Buzek's candidacy must be presented to President Aleksander Kwasniewski, who is charged with appointing the new cabinet within two weeks after parliament's opening session, scheduled for next Monday.

Buzek apparently also has the backing of the Freedom Union, the Solidarity bloc's likely coalition partner. Freedom Union leader Leszek Balcerowicz indicated after meetings Tuesday that the parties had reached consensus on the choice after four weeks of negotiations.

[15] Black & Decker third-quarter earnings rise 18%

The company said its tax rate was 35% in the latest third quarter, compared with 27% a year ago.

Black & Decker said it was encouraged by the level of sales growth in the latest third quarter, despite a difficult foreign exchange environment.

The company said the improvement reflected continued success of new products, which was offset to some extent by softer-than-expected sales growth in Asia and Latin America, as well as the elimination of some low- margin products in several of its businesses. Black & Decker said power tools and accessories sales strengthened in the latest third quarter, led by the new line of professional machinery tools and the new Woodhawk circular saw and Wizard rotary tool.

The maker of tools and small appliances said profitability in this business also increased as it continued to reduce costs and improve productivity.

Black & Decker also said excluding foreign exchange, sales grew in each of its other businesses, with the total outcome generating higher profitability than in last year's third quarter.

[16] Corporate and Economic Briefs

State-controlled engineering and aerospace group Finmeccanica is expected to report a net loss of 2.2 trillion lire ($1.27 billion), daily business newspaper Il Sole-24 Ore reported. Finmeccanica, which is slated for privatization after a reorganization, also is expected to push ahead with a global alliance between its Ansaldo transportation unit and South Korea's Daewoo group. According to the newspaper, Daewoo is favored over Germany's Siemens despite the South Korean group's position that much of Ansaldo's assets are of little value. Ansaldo has suffered from a lack of investment in new technology in recent years. Finmeccanica, which is 63%-owned by state company IRI, also owns aerospace group Alenia, which is in an alliance with British Aerospace.

A unit of Italian state-owned ENI said it's part of a joint venture which got a contract worth more than 1.3 trillion ($760 million) to build a fertilizer plant in Jose, Venezuela. Snamprogetti, a unit of Eni, said it is part of a joint venture controlled by Venezuela's Pequiven and Koch Nitrogen of the US which put in the winning bid. Venezuela's Emresas Polar also has a minority stake in the joint venture. The plant, which will be completed by 2000, will have capacity to produce 1.2 million metric tons a year of ammonia and 1.5 million tons a year of urea.

French pharmaceutical company Synthelabo, a fully-owned unit of L'Oreal, said its pretax profit excluding extraordinary items for first-half 1997 rose 19.7% to 850 million francs ($144 milion) due to better operating profit. Operating profit, after the portion reverted to US joint venture partner Searler, rose to 927 million francs in the first-half from 764 million francs a year ago. Operating profit increased because of improved margins and decreased operating charges. The company also said that in the first nine-months of 1997, it posted provisional sales of 8.6 billion francs, which it said was an increase of 13%.

Spain's broad M4 money supply rose 2.9% in September from August, the Bank of Spain said. The Spanish central bank added that lending to the private sector rose 10.7% in September from August.

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