European Business News (EBN), 96-10-16

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated 0900 October 16 CET

CONTENTS

[01] French government prefers Lagardere bid for Thomson

[02] Cie.de Suez swings to 1H profit

[03] Kirch Gruppe is negotiating a digital deal with Deutsche Telekom

[04] British unemployment shows an unexpectedly large decline in September

[05] French current account surplus narrows in July

[06] Germany's planned bailout of Vulkan shipyard sparks questions at the EU

[07] Italy's factory output dropped 11.3% in August

[08] CSX and Conrail agree to $8.4 billion merger

[09] Smiths Industries profit gains 24% in the 12 months

[01] French government prefers Lagardere bid for Thomson

A spokeswoman for Prime Minister Alain Juppe said, "the government has expressed its preference for Lagardere," over competing bidder Alcatel- Alsthom. The government's preference will now have to be ratified by the Privatization commission.

The government also said it would recapitalise Thomson for 11 billion francs ($2.1 billion), taken from the state's privatisation receipts. The government said it had taken its decision because of the synergies of a merger between Lagardere's Matra defence unit and Thomson-CSF in which Thomson has a 58% stake.

The state will keep a special share in Thomson out of national security reasons. It said Lagardere aimed to leave the share capital of semiconductor maker SGS-Thomson Microelectronics, in which Thomson-CSF has a 20% stake. Lagardere and Alcatel have described the broad outlines of their business plans for Thomson but not the financial details or amounts of their bids.

Lagardere, a conglomerate with interests ranging from media to defence, would control Thomson-CSF but sell minority holdings to British Aerospace, GEC and perhaps Daimler-Benz Aerospace. It has lined up South Korea's Daewoo to run Thomson Multimedia. Daewoo's chairman said he saw synergies in the components businesses and promised to create jobs in France.

Alcatel Alsthom wants to turn Thomson-CSF into the second-most important defence company after Lockheed Martin but ahead of GM Hughes Electronics Corp. It plans a 'wide-scale partnership with another major industrial player' in Britain, Germany or both to achieve that goal.

[02] Cie.de Suez swings to 1H profit

Suez posted net profit of 772 million francs ($154 million) in the six months, compared with a loss of 3.98 billion francs the year before. The turnaround resulted from a sharp reduction in real-estate losses and a one- time gain from the sale of some assets.

The company's Bank Indosuez unit showed net profit of more than 100 million francs in the h alf, but the parent wouldn't provide details. “The bank's profit had a very weak impact on Suez's capital,” said Suez's Financial Director Francois Jaclot. Suez's net profit doesn't include the Indosuez figures.

As reported, Suez made a first half profit of 772 million francs, but that figure doesn't include profit from Banque Indosuez. The company said it wouldn't release details of the investment bank's results until an audit is completed before the end of the year in order to evaluate the exact sale price of Banque Indosuez to Caisse Nationale de Credit Agricole.

Separately, Suez's Belgian unit, Societe Generale de Belgique said it sold 1.4% of Suez "at market prices." At Suez's Tuesday closing price of 208.3 French francs the transaction is valued at about 454 million French francs. A spokeswoman for SGB said the sale represents "nearly all" of the unit's holding in Suez. The sale is part of a sell-off of SGB's non-strategic assets and is designed to fund its purchase in September of a 24.4% stake in engineering and power company Tractebel from Groupe Bruxelles Lambert.

Real estate writedowns during the first half of this year totaled 795 million francs, compared with 4.1 billion a year earlier. Net one-time gains totaled 381 million francs, compared with a loss of 810 million a year before. That includes a gain 570 million francs from asset sales, offset by nearly 200 million francs in new restructuring charges.

Operating profit after financial charges rose to 1.19 billion francs in the first half from 910 million a year ago. The company said its board of directors had approved in principle the sale of the 5% of its capital currently held in its treasury.

[03] Kirch Gruppe is negotiating a digital deal with Deutsche Telekom

Both sides are locked in tough negotiations and Kirch said "it's all a matter of price." Kirch Gruppe is hoping for an agreement with Telekom in time for its year-end marketing push. DF-1 says it already has 10,000 digital subscribers, but analysts' estimates run far lower.

Analysts expect the two to make a deal. An alliance with Deutsche Telekom would give Kirch Gruppe access to cable viewers, which the company needs to meet its ambitious viewer targets for digital pay-TV. So far, only viewers with a specially equipped satellite dish can see DF- 1. According to a recent report by Hypo Bank, some 60%, or 19.5 million German households, use Telekom's cable network, while less than 20% have satellite dishes.

While Telekom has the cable network that Kirch needs, Kirch owns the programming that Telekom wants to fill that network. Kirch is currently the only German company to offer a range of digital TV channels. "I think they will reach an agreement because it's the most logical step for both of them, " said Marialuisa Taddia, a research analyst with Kagan World Media Ltd. in London. "To generate a large subscriber base, Kirch absolutely has to get onto cable. And if Telekom wants to broadcast something, they need Kirch's films," she told the Wall Street Journal Europe.

Whatever the outcome of the negotiations, experts say, the German pay- TV market will pose a problem for antitrust authorities. Competition watchdogs are unlikely to welcome an extension of Telekom's extensive operations into pay-TV. Yet that may be what's necessary to end Kirch's current monopoly in that sector.

An alliance between Kirch Gruppe and Deutsche Telekom would be the latest in a series of shifting alliances in Germany's digital-TV market. A deal with the German phone monopoly would bring in cable viewers to Kirch's digital service, and help him reach his target.

In recent months, strong competition and high start-up costs of digital TV ventures have eliminated other contenders for the nascent market, including Bertelsmann and Pro Sieben Media, leaving only Kirch and Telekom with major digital ambitions.

[04] British unemployment shows an unexpectedly large decline in September

The decline was more than double the 15,000 that economists had expected.

The September total of just over 2 million unemployed was the lowest since February 1991. The monthly decline was the largest since December 1994.

[05] French current account surplus narrows in July

On an unadjusted basis, the July current account surplus was 8.5 billion francs, up from a surplus of 3.2 billion francs a month earlier.

July's seasonally adjusted surplus came in well below market expectation levels of an 8-billion-franc surplus.

The Finance Ministry noted a sharp decline in France's goods trade balance, largely due to a strong pickup in imports, which dropped to a seasonally adjusted surplus of 2.78 billion francs, compared to a surplus of 7.36 billion francs in June.

The balance on the services account widened to show a seasonally adjusted surplus of 7.56 billion francs from June's 5.5-billion-franc surplus.

The ministry noted a rise in net interest payments from other countries allowed for a narrowing in France's investment revenue deficit, to 2.79 billion francs in July from 6.36 billion francs in June.

Over the first seven months of 1996, France's current account produced a seasonally adjusted surplus of 58.57 billion francs, down slightly from a 59.38-billion-franc surplus in the same period of 1995. On an unadjusted basis, the seven-month surplus narrowed to 58.52 billion francs from 60.60 billion francs.

[06] Germany's planned bailout of Vulkan shipyard sparks questions at the EU

The office of E.U. Competition Commissioner Karel Van Miert has received partial notification of the subsidy from the German government and is awaiting final details, according to the Wall Street Journal Europe.

But E.U. investigators already have big questions about the bailout, which - considering the Bremer Vulkan connection - is sure to prove controversial.

The new aid request comes as part of a restructuring package meant to ensure the long-term viability of the two yards.

The two yards - Meeres-Technik-Werft in Wismar and Volkswerft in Stralsund - were at the center of a state-aid scandal earlier this year that contributed to Bremer Vulkan's collapse.

The Bremen-based parent, once Germany's leading shipbuilder, has been accused by E.U. and German officials of diverting at least 700 million marks from Wismar and Stralsund to Bremer Vulkan's ailing western divisions.

However, final E.U. approval of the bailout plan could be several months away. Commission officials are still trying to determine how the original aid was misspent and may not be eager to clear further subsidies until that picture becomes clearer.

The new aid faces the usual commission clearance, but as an added step, Van Miert has said he intends to submit it to the E.U. Council of Industry Ministers. The ministers meet just once more this year, on Nov. 14.

'I don't think this will be ready for November,' said a commission official familiar with the case, referring to the council meeting date. 'It's mid- October and there still are many question marks. I think we will be dealing with this for weeks and weeks.'

In May, Bremer Vulkan declared bankruptcy. In June, German prosecutors raided 29 Bremer Vulkan offices in eastern and western Germany, as well as the homes of company officials as part of a broad investigation into misconduct. The two eastern yards have since been returned to state custody.

The German request is sure to draw ire from shipbuilders in other E.U. countries, such as Denmark, which is attempting to wean its industry of subsidies.

[07] Italy's factory output dropped 11.3% in August

Italy's state statistical agency Istat said that, adjusted for the one less working day, the August drop would have been 8.2%. The agency didn't provide any explanation for the August decline.

Industrial production in the eight months of the year slid 1% from the year before. Capital goods production fell 21%, consumer goods output dropped 8.3% and intermediate goods slid 10% in the month.

[08] CSX and Conrail agree to $8.4 billion merger

A combined CSX and Conrail would serve the eastern half of the U.S. from Chicago and New Orleans to Boston, New York and Miami. The deal continues a drive by railroads to broaden their reach and cut costs by buying each other.

Burlington Northern bought Santa Fe in 1995 and Union Pacific's purchase of Southern Pacific was approved earlier this year. Both railroads have more than 48,000 kilometres of track, surpassing the 47,430 kilometres that would result from a merger of CSX and Conrail.

"Our new company will provide new single-line rail service to major markets east of the Mississippi,' said John W. Snow, CSX chairman. 'We will have the financial strength to make substantial infrastructure investments and service improvements."

The companies said there would be job losses as a result of consolidation and eliminating duplicated functions, but provided no specifics. The companies said they expected to realise $550 million in cost savings and higher traffic from the merger.

The deal would give Conrail shareholders $92.50 worth of cash and CSX stock for each of their shares. Conrail, which the government created in 1970 from the remains of the Penn Central and other bankrupt railroads, was sold to the public in a 1987 public offering at about $15 per share.

The transaction is expected to be completed late next year.

Mr. Snow would be chairman and chief executive of the combined company and David M. LeVan, Conrail's chairman, would be No. 2 as president and chief operating officer.

Under the agreement, 40% of Conrail's common and preferred stock shares would be acquired for cash at $92.50 a share. The other 60% would be acquired for stock at a ratio of 1.85619 CSX shares for each Conrail share.

[09] Smiths Industries profit gains 24% in the 12 months

Before a one-time gain of £5 million, pretax profit rose 19% to £165.4 million.

Smiths Industries said all three of its operating groups are doing well and have strong positions in their sectors, while recent acquisitions are adding to overall performance.

“ I am optimistic about the upturn in the aerospace sector. We kept our aerospace group on a tight rein during the recession and even a modest improvement in sales will enhance profits,” said Sir Roger Hurn, chairman and chief executive officer.

He added that he expects sales, profits and dividends to increase for the next year.

The company increased its capital expenditure during the year, while spending on acquisitions amounted to £98.3 million.

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