European Business News (EBN), 97-10-20

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Page last updated Mon, October 20 7:49 PM CET

CONTENTS

[01] Ernst, KPMG agree to merge to create world's largest accounting firm

[02] Sterling gains, UK shares and gilts fall over Brown's EMU remarks

[03] ITT agrees to Starwood's $13.3 billion bid

[04] Italy sets 11,200-lire share price for Telecom Italia

[05] France Telecom offering helps build up firm for competition, Bon says

[06] General Accident pays $433 million for Canadian insurer

[07] AT&T beats expectations with third-quarter earnings

[08] Unilever announces $930 million Brazilian ice cream deal

[09] SKF posts 17% drop in 9-month pretax profit

[10] Japan's trade surplus balloons in September

[11] Gehe reports a 12% rise in third-quarter earnings

[12] Norsk Hydro announces 10% rise in third-quarter operating profit

[13] Corporate and Economic Briefs

[14] Sports Update from The Big Game

[01] Ernst, KPMG agree to merge to create world's largest accounting firm

Just last month, fellow Big Six companies Coopers and Lybrand and Price Waterhouse agreed to merge. That combined company will have $13 billion in annual revenues, which placed it temporarily on top of the list.

In an interview Sunday, Philip A. Laskawy, Ernst's 56-year old chairman and chief executive officer, said he initiated merger talks last month with a phone call to Stephen G. Butler, 590, chairman and CEO at KPMG. Laskawy said the firms had actually been looking at each other as possible merger partners for two years, which is why things moved quickly once formal talks began.

`We concluded that our global practices, our personality and our chemistry matched perfectly,' said Laskawy, who will be chairman of the merged firm with Butler as CEO.

The moves are a reflection of the changing focus of the industry into a one- stop service that combines the traditional auditing and accounting or companies with consulting. Neither combination has announced what its new name would be.

Ernst and Young chairman Philip Laskawy will become chairman of the combined firm until he retires in the year 2000.

KPMG's chairman Stephen G. Butler will serve as chief executive and will succeed Laskawy as chairman until 2002. At that time, Butler will retire and Ernst and Young's deputy chairman William L. Kimsey will replace Butler as chief executive.

The firms had combined fiscal 1997 US revenues of more than $7.5 billion and 47,500 employees.

The firms have 12,800 partners, who earn a share of the company's profits. Those partners must approve the deal, and it must receive regulatory approval from the US Justice Department and European antitrust regulators.

Officials at the European Union confirmed Monday they will investigate the deal. The EU routinely probes mergers involving companies with global sales of over 5 billion European Currency Units, or $5.58 billion. It can demand changes to mergers involving non-EU companies if they have an impact on markets within the 15-nation European bloc.

[02] Sterling gains, UK shares and gilts fall over Brown's EMU remarks

The confusion over Britain's EMU policy contributed to just over 1% in value being clipped off London's FTSE 100 index of leading shares during the day. The pound remained buoyant as a result of anticipation that British interest rates would remain higher than those of other key EU members.

Britain's FTSE 100 index of leading shares tumbled, though they managed to bounce well above their morning lows in a volatile session that also introduced new computer trading to the market. They closed with a loss of 60.1 points at 5,211.0. Prices had lost 2.3% of their value in the early going, after the exchange switched on a new computer that will automatically match buy and sell orders, cutting out the traditional middlemen of the London market. Volume came to a light 461.4 million shares, compared with 569.9 million on Friday.

UK gilts responded to the EMU uncertainties by closing up to three quarters of a point lower, after consolidating losses made early in the session. European government bonds ended mixed, while sterling firmed against the German mark.

Speaking at the launch of the new trading system, which coincided with the tenth anniversary of the Black Monday crash in October 1987, UK Chancellor Gordon Brown said it was unlikely Britain would join EMU in 1999. And British entry would only occur after the UK economy had met his five economic tests including debt and public borrowing ratios.

Brown's remarks followed earlier assurances that he wouldn't make a statement on the subject of monetary union, after a confusing weekend in which he refused to confirm that he was ruling out UK membership in EMU before the next election, while UK Treasury officials were privately briefing the British press that this was in fact the plan.

German blue chips bounced off the day's lows but still finished bourse trade in negative territory, weighed down by indications Britain would not be in the first wave of economic and monetary union.

'We're largely down on the back of EMU in England,' one dealer said.

France's CAC-40 share index closed lower, with the market dominated by the first day of trading in France Telecom shares, traders said. The CAC-40 index closed at 2946.71, down 11.31 points, or 0.38%.

[03] ITT agrees to Starwood's $13.3 billion bid

Starwood Lodging has a pending buyout of the Westin hotel brand and is one of the world's biggest real estate investment trust concerns. By combining with ITT, whose properties include Sheraton hotels and Caesars casinos, Starwood would control one of the world's biggest hotel companies with some 650 hotels in 70 countries and revenues of over $10 billion.

Starwood is offering $82 a share in cash and stock for ITT shares. Its offer includes $15 a share in cash and the remainder in Starwood shares. Hilton Hotels has offered $70 a share in cash and stock for ITT with 50.1% of the offer in cash. There was no immediate reaction from Hilton, based in Beverly Hills, California.

Starwood and ITT said they expect to save about $100 million a year from sharing technology and reservation systems and by purchasing services and promoting each other's hotels as well as through other efficiencies arising from the merger. The deal is expected to close in the first quarter of 1998, subject to approval from shareholders, gaming regulators and antitrust officials.

Starwood's Barry S. Sternlicht will continue as chairman and chief executive of the combined companies. Sternlicht said Starwood intends to retain 'a significant number of ITT senior executives' after the deal is completed.

ITT's chairman and chief executive, Rand Araskog, is expected to be named as one of four ITT representatives on the Starwood board.

'This is the right structure for our assets, the right transaction for our shareholders, and the right opportunity for our employees,' Araskog said.

Sternlicht said the deal 'complements our current holdings in every part of the world by strengthening our presence in key markets, including Europe, Latin America and Africa.' He said the combination of Starwood, Westin and Sheraton will create the leading hotel company appealing to upscale travellers.

ITT faced a Nevada court ruling that required the company to let shareholders vote on planned changes, giving Hilton an opportunity to unseat ITT's entire board, all of whom face reelection Nov. 12. It remained unclear what the new company's name would be. Starwood had already announced plans to change its name to Westin Hotels and Resorts Worldwide.

[04] Italy sets 11,200-lire share price for Telecom Italia

The final price for the offer will be made Oct. 25, while the offer is set to run Monday to Friday, the ministry said.

In early trading, Telecom Italia shares opened up 0.93% at 11,265 lire ($6.52).

The Treasury Ministry said the sale of the stake is expected to bring in about 26.3 trillion lire.

The public offer to Italian retail investors will involve a minimum 700 million shares. An additional 220 million shares are for public offerings in the U.S. and Canada, while 160 million shares are for investors in the rest of the world.

The sale will be Europe's largest-ever secondary share offering begins Monday, and despite its size, it looks set for success with retail investors.

'There should be very strong demand' for shares of Telecom Italia, says Luca Comi, an analyst at Milan brokerage house BPIV Sim. 'The ad campaign has been good, they've distributed the prospectus everywhere - and the fundamentals are good.'

And the timing isn't bad either, as the market bull run hasn't been interrupted by this month's government crisis.

The Italian Treasury is unloading 28.5% of Telecom Italia in an offering valued as much as 16.8 trillion lire ($9.84 billion), based on the maximum price per share of 11,200 lire announced by the government on Saturday. The final price will be announced on Oct. 25, after the offering closes. Last Friday, Telecom Italia's stock closed at 11,161 lire, down 196 lire.

The sale comes on the heels of successful share offerings by France Telecom and Portugal Telecom. Because of the offer's sheer size, Telecom Italia may have some trouble attracting more institutional investors, especially following a private placement last month of a 9% stake to a group of 14 investors, mainly Italian financial institutions.

This time, the company has earmarked for institutional investors, including those in overseas markets, 800 million shares out of a total of 1.5 billion shares in its latest offering; the rest will offered to retail investors in the domestic market. Individual investors are being offered both a 3% discount on the final price, and a bonus share for every 10 shares held for a one year.

Although the offering is expected to go smoothly, analysts said Telecom Italia shares could fall temporarily if many investors sell the shares they currently own and subscribe for new stock at the discounted price.

With this offering, the Treasury will be disposing of its entire stake in Telecom Italia and will receive total proceeds of 24.6 trillion lire, including proceeds from last month's private placement.

Analysts point to the company's aggressiveness and growth potential and other fundamentals as its main selling points, as well as its controlling stake in of one of Europe's most attractive companies - cellular operator Telecom Italia Mobile, known as TIM. 'And there is still room to become more efficient in terms of costs, especially labour costs,' says Settimio Stigliano, a fund manager at Arca in Milan.

[05] France Telecom offering helps build up firm for competition, Bon says

'Jan. 1, 1998, is the date we are eagerly waiting for - that's the day the competition begins,' Bon said.

Bon said France Telecom's IPO would give it financial muscle and transparency ahead of opening and competition.

Nearly 10 million France Telecom shares were traded in the first 10 minutes, with the share setting a high of 215.20 francs ($36.25) and a low of 213 francs.

Pascal Samaran, an official with the Societe des Bourses Francaises, said that 1.5 billion francs worth of orders for France Telecom shares had been placed before trading began, a Paris stock market record.

France Telecom shares opened at 215 francs and quickly rose to 215.90 francs, an 18% premium over the subscription price offered by the government to individual investors and a 15% premium over the subscription price offered to institutional investors. France Telecom shares have since retreated to 210.5 francs, down 2.1% from the open.

'All the volume is in France Telecom,' said a trader with a Paris-based brokerage. 'We've had about 4.7 million francs worth of France Telecom shares change hands since they started trading.'

Stock market authorities said the number of buy orders placed before the market opened was a record in France and the volume during the first half- hour of trading exceeded that of any other French initial public offering.

That delayed start of one-half hour from the rest of the stock exchange will likely last for one or two weeks, a spokesman for the SBF said, as is usually the case with state-owned companies being sold on the stock exchange.

[06] General Accident pays $433 million for Canadian insurer

The deal, which observers called sensible but expensive, will immediately enhance earnings and will create annual cost savings of C$75 million by 1999, primarily through staff cuts, General Accident said.

General Accident said it will merge General Insurance's operations with its own Canadian operations, resulting in a one-time charge of C$45 million in 1998.

Insurance analysts praised the deal as a shrewd strategic move but said General Accident paid top dollar for the Toronto-based bolt-on.

'It's a very good acquisition at a high price,' said Trevor May, analyst at Salomon Brothers International in London. 'At a multiple of 2.6 times to book value, it's not deemed cheap.'

'It's an excellent move in Canada for General Accident,' said James Pearce, insurance analyst at investment bank Fox-Pitt Kelton. 'They've been underperforming in that market in the bread and butter business, and this is a stronger management story which really enhances critical mass.'

In a meeting with analysts, Chief Executive Bob Scott hinted the company might make further niche acquisitions in the country. General Accident already owns Pilot Insurance in Ontario, which it said will continue to operate separately.

[07] AT&T beats expectations with third-quarter earnings

The earnings release, which analysts described as encouraging, was coupled with the company's announcement that it has chosen C. Michael Armstrong, chairman and chief executive of Hughes Electronics Inc., as its new chairman and chief executive. AT&T named its top internal candidate, John D. Zeglis, president.

Enthusiasm over earnings, the selection of Armstrong and the retention of Zeglis drove AT&T's NYSE-listed shares up 2 7/16, or 5.3%, to 47 9/16, topping the 52-week high of 47 7/16 they reached Oct. 8.

AT&T's third-quarter earnings bore out the company's promise at the end of the second quarter that its recent earnings slump was turning around.

Including a one-time gain from the sale of a submarine system, the nation's largest long-distance provider earned $1.22 billion, or 75 cents a share, on revenue of $13.38 billion, compared to profits of $1.43 billion, or 89 cents, on revenue of $13.23 billion a year ago.

Earnings from continuing operations were $1.15 billion, or 71 cents a share, compared to $1.36 billion, or 84 cents, a year ago.

Although the year-over-year comparison is bleak, this was the company's first sequential quarterly increase in operating earnings since last year's second quarter.

Analysts surveyed by First Call Inc. had expected the AT&T to earn 65 cents a share from continuing operations.

In a conference call with analysts, the company's Chief Financial Officer Dan Somers said the company is comfortable with estimates of $2.95 to $3 for 1998. AT&T expects fourth quarter earnings to be in line with the third quarter, Somers said.

<h3>By Shawn Young, New York (Dow Jones)</h3>

[08] Unilever announces $930 million Brazilian ice cream deal

The consumer goods conglomerate said it will become the biggest player in the Latin American ice cream business after buying Kibon from Philip Morris, although executives would not say how big their regional market share will be.

Kibon, based in Sao Paulo, controls 60% of the Brazilian ice cream market and last year showed an operating profit of $75 million on sales of $332 million.

The deal with Philip Morris will also give Unilever a 50% stake in a smaller ice cream business, Sorvane, based in Recife, northeast Brazil, with sales last year that came to $68 million. The other half of Sorvane is owned by Brazil's Tavares de Melo family.

Unilever said it sees room for much growth in Brazil's ice cream market, where each person consumes about 1 liter a year, compared with 3.3 litres per year in neighboring Argentina or 4.5 litres per year in Chile.

Europeans eat between 5 and 8 litres per year, depending on the country, while US citizens consume about 20 litres a year.

Unilever has operated since 1929 in Brazil, where its Gessy Lever consumer goods business is the country's 10th largest company.

[09] SKF posts 17% drop in 9-month pretax profit

During the third quarter SKF made a provision of 750 million kronor for ongoing and approved efficiency improvement measures. It said a programme had been launched a couple of years ago to improve the group's efficiency. This combined with other rationalisation measures was expected to lead to cuts of more than 2,000 jobs in 1998-99. Most of the units affected were in western Europe. The 750 million kronor provision was in place to cover the cost of these projects.

'Most of the group's Western European units are affected,' SKF said adding that a few units outside Western Europe also will be subject to work force reductions.

Meanwhile, third quarter pretax profit rose to 423 million kronor from 374 million a year earlier, the company said. When completed in two years, SKF's measures of improving the efficiency of its administration and sales process, will reduce annual costs by around 700 million kronor, SKF said.

Included in the nine-month pretax profit is a capital gain of 760 million kronor from the sale of FlexLink Systems. Changes in foreign exchange rates of around 250 million kronor also had a positive impact on pretax profit.

In its outlook SKF said that 'the severe pressure on prices is expected to continue.'

[10] Japan's trade surplus balloons in September

September's unadjusted surplus, which is measured as goods pass customs but before adjustment for seasonal factors, was lower than the average forecast of 1.26 trillion yen by Tokyo-based economists surveyed by Nikkei News and Dow Jones.

Japan's politically sensitive trade surplus with the U.S. widened to 518.32 billion yen in September from a year earlier.

Vice Finance Minister Osamu Watanabe conceded that the country's trade surplus is showing a rising trend, reversing the downtrend seen in the past four years. But, he added, it is unlikely that the ratio of the surplus to the nation's gross domestic product in fiscal 1997 will reach levels seen in fiscal 1992 and 1993, when trade friction mounted between Japan and the US.

Watanabe said the latest data reflected slower import growth amid sluggish domestic demand following the April 1 consumption tax hike to 5% from 3%.

With the dwindling adverse effects of the tax hike, the rapid increase in the trade surplus is expected to slow later this year, he said.

While keeping a close eye on the surplus' course, the ministry will accelerate deregulation efforts in a bid to stimulate domestic demand, Watanabe said.

[11] Gehe reports a 12% rise in third-quarter earnings

Gehe also repeated its sales projection for the full year of 24.5 billion marks, after 21.4 billion marks in 1996, and the outlook for a 15% rise in pretax profit from 407 million marks in 1996.

Domestic sales suffered in the third quarter due to consumer price increases for prescription medicines at mid-year, Gehe said. Before that, health insurers had paid a big part of the bill for prescriptions.

'The managing board assumes that, also in the fourth quarter, the negative market development in Germany will be overcompensated by positive developments abroad, where about 75% of the group's sales are achieved,' Gehe said in a press release.

In Gehe's drugs wholesale division, British unit AAH/Lloyds and French subsidiary OCP continued their half-year growth while in Germany, third- quarter sales fell 8%, after rising 4.7% for the first half of the year, Gehe said.

[12] Norsk Hydro announces 10% rise in third-quarter operating profit

Norway's largest listed company recorded nine-month operating profits at 8.65 billion crowns ($1.2 billion) versus 7.90 billion crowns a year ago.

Before tax, the company booked profits of 8.54 billion crowns compared with 8.40 billion crowns in the 1996 nine-month period.

Earnings per share to September 30 were 18.90 crowns against 18.30 crowns.

The results fell slightly below expectations and Norsk Hydro was trading down 1.2% at 410 crowns on the Oslo bourse in thin activity.

'The strength of Hydro's diversity was again apparent in the third quarter, when the slide in earnings for agriculture was more than offset by improved results from oil and gas, light metals and petrochemicals,' the company's Profile newsletter said.

Norsk Hydro's agriculture division posted a nine-month operating profit of 1.56 billion crowns, down 31 percent from the corresponding year-ago figure of 2.28 billion crowns. The reduction in agriculture earnings was most pronounced in the third quarter, when operating income fell to 164 million crowns, around one-third of the year ago result of 526 million crowns.

The company said the slight rise in sales in the first three quarters was unable to compensate for the fall in prices, especially for nitrogen fertilisers.

[13] Corporate and Economic Briefs

New car registrations in Germany rose 14.1% in September from August and rose 1.1% from a year ago, according to preliminary figures released by the Federal Motor Vehicles Office. Including trucks and motorcycles, registrations rose 11.5% on the month and 3.1% on the year.

Lafarge said it will buy the 39.1% stake in Cementos Molins from Ciments Francais for around 800 million francs ($135 million). The French building materials company said in a statement that the acquisition will be made via its Spanish unit, Asland, which, at the request of the Spanish Stock Market Commission, will then launch a takeover bid. Cementos Molins, based in Catalonia, reported consolidated income of 1.4 billion francs for 1996, according to Lafarge.

[14] Sports Update from The Big Game

The New Zealand All Blacks rugby union team will be outfitted by international sportswear company Adidas for five years from mid-1999, in a deal worth $45 million.

Tottenham Hotspur held off a late challenge from Sheffield Wednesday to win 3-2 in the English Premier League.

AC Milan lost 2-1 at home to Lecce, slumping to fifth-from-bottom of Serie A with just five points from five games.

Luc Nilis scored a goal in each half as a depleted PSV Eindhoven overwhelmed NEC Nijmegen 4-0, moving within five points of league leaders Ajax.

France's Fabrice Santoro beat Tommy Haas of Germany in straight sets at the Lyon tournament, ending an eight-year wait for his first ATP tour title.

Sports aerobics will hold its first European championships in 1999. European club competitions for artistic and rhythmic gymnastics will be held in 2000.

From the European Business News (EBN) Server at http://www.ebn.co.uk/

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