European Business News (EBN), 96-11-26

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

Page last updated November 26 1700 CET

CONTENTS

[01] Clarke increases Britain's forecast for next year

[02] UBS bows to Ebner pressure and launches restructuring

[03] OPEC says Iraq flow won't alter group's production ceiling

[04] Pearson to buy U.S. publisher for $333 million

[05] French consumer spending shows expected drop as car incentives end

[06] Deutsche Telekom expects standard European digital decoder soon

[07] Bitain's Major initiates investigation into leaked budget documents

[08] Bonn to let some corporations adopt IAS accounting rules

[09] Severn Trent posts 4.2% rise in first half earnings, plans buyback

[10] National Grid says it will continue streamlining programme

[01] Clarke increases Britain's forecast for next year

Clarke said growth this year will be 2.5%.

Clarke's forecasts were part of the government's budget for the fiscal year beginning April 1997. The 1997 forecast was higher than the last official forecast, in July 1996.

'I intend to ensure that healthy growth continues without inflationary pressures emerging,' Clarke said. 'That is what I have always promised - no return to boom and bust.'

Clarke's new forecast for 1997 growth matched the median forecast from a Dow Jones survey of U.K. market economists. The Chancellor himself said that 'few serious commentators' would disagree with his forecasts.

Economists' forecasts for 1997 ranged from 3% to 3.75% growth, with the median at 3.5%. The median forecast for 1996 growth was 2.5%.

In July, the treasury forecast GDP would grow 3.25% in 1997 and 2.50% in 1996.

The July forecast for 1996 had represented a downward revision from the 3.00% growth forecast in last year's budget statement.

On the tax front, the budget cuts the basic rate of income tax to 23%, from 24%, for the financial year starting in April 1997.

The move was part of a package of tax cuts offset by £2 billion in spending cuts.

Clarke also increased the basic personal allowance by £280, widened the lower tax rate band by £200, and raised the basic rate limit by £600.

If he had not taken these measures, Clarke said, he could have cut the basic rate of tax by two percentage points, to 22%, instead of just one.

Taxes on motor gasoline and diesel will rise by 3 pence a liter, while taxes on cigarettes will rise 15 pence a package.

And the budget doubles the duty on air travel. Clarke said air travel has been under taxed in the past because it has proven difficult to get an international agreement to tax its fuel.

Clarke also said that the British economy will meet the Maastricht criteria for joining European economic and monetary union in 1997.

'My decisions are always taken solely in British interests to benefit the British economy. But my decisions in this budget also mean that, by happy coincidence, we will meet the Maastricht debt and deficit criteria in 1997 and will do even better in the medium term. It is a happy coincidence because those criteria make sound economic sense, with or without a single currency,' Clarke said.

The Maastricht Treaty calls for countries joining a single currency to reduce their budget deficits to 3% of GDP while total government debt can't account for more than 60% of GDP.

The Chancellor also said that Britain's for the 1997-98 financial year, which starts next April, will total £19 billion ($31.7 billion).

This is lower than the £23.1 billion The Treasury estimated in July, but above the £15 billion forecast in last year's budget.

The PSBR is the amount the government, including local governments and public corporations, needs to borrow to cover the gap between its spending and revenues.

Clarke also said the budget deficit in the current fiscal year, which ends in March next year, will total £26.5 billion, a downward revision from £26.9 billion in the Treasury's summer forecast.

The budget is expected to be 'broadly in balance' in 1999/2000, Clarke said.

Clarke said the government remains on course to meet its target of getting underlying inflation to 2.5% or below ''and keep it there.''

The government's target for underlying inflation, which excludes mortgage interest payments, applies from the start of the next parliament in May 1997 at the latest.

Clarke said that 3.3% annual rise in underlying inflation seen in October ''should not have surprised anybody.'' He argued that it was a ''temporary and inevitable reflection of the exceptional falls in the price level twelve months before.''

The underlying retail price index in October was, at 153.6, unchanged from September.

Clarke gave a number of reasons for his confidence in reaching his inflation targets.

Producer price inflation is 'at its lowest levels since the 1960s,' Clarke said, with producer input prices lower than a year ago.

'Any risk to this recovery from inflationary pressures reemerging remains a good way off,' Clarke said.

'Any risk to this recovery from inflationary pressures reemerging remains a good way off,' Clarke said.

Public spending plans will be cut by £7 billion over the next three years, Clarke added.

Clarke also said the government will meet its target for general government spending as a 40.% share of GDP in the 1997/98 fiscal year, which begins in April, down from 41.25% in 1996-97.

In July, the Treasury forecast general government spending, which excludes privatization proceeds and spending financed by the national lottery and measures interest on a net basis, at a ratio of 40.5% in 1997-98.

'One reason why I continue to concentrate so heavily on public sector borrowing in setting policy is because money spent on paying the interest on our debt would be better spent in public services and to reduce taxes,' the Chancellor said.

[02] bows to Ebner pressure and launches restructuring

The bank in mimicking a similar move by rival Swiss Bank, said it will take a one-time special charge of 3 billion Swiss francs ($2.3 billion) to cover dubious domestic loans.

UBS said this will result in a loss of around 500 million francs this year. But given the 'good operating result' so far this year, the board plans an unchanged dividend, the bank said.

UBS' management, under pressure for years from dissident shareholder Martin Ebner to boost return on equity through restructuring, said it hopes the return will rise to 12% by 1999 from 7.5% in 1995.

Ebner has urged the company to tighten its domestic retail structure and enhance its more profitable operations.

Kurt Schiltknecht, a director of Ebner's BK Vision, told AP-Dow Jones that 'I think we will study the facts before we do anything. That's a normal approach of everybody,' he said. 'When you get the news, you study the news.'

BK Vision as of the end of August had 9.2% of UBS' registered shares and 5.5% of its bearer stock for a total market value of nearly 2 billion francs, Schiltknecht said.

Schiltknecht said BK Vision's board will decide whether to react to the UBS measures, and this included any implications for the investment group's long-running legal battle with UBS' management. BK Vision is fighting UBS over the bank's plan to introduce a single-share category and other issues.

UBS said the one-time charge of 3 billion francs to earnings 'will cover the provisioning requirements expected over the next two to three years.' The bank said this requirement stemmed from 'further deterioration in the quality of domestic loans already identified as at risk.'

The bank viewed the one-time provision as a way to 'provide a long-term solution' to the domestic loan problem, which grew of out the slumping Swiss economy.

Further, the company said it will restructure its Swiss operations to meet the changes in the market and in the needs of customers.

The revamp will mean the loss of around 800 jobs, or 3.7%, in the domestic workforce.

From 1998 onwards, UBS expects the measures will improve earnings by 200 million francs a year.

UBS Chief Executive Mathis Cabiallavetta said he expects 1997 to show a ''pleasing'' increase in the bank's profit.

Cabiallavetta said the gain will come against a background of reduced shareholder equity and lower provisions after the charge for bad loans.

Regarding Union Bank's majority stake in utility Motor Columbus, he said some decision will ''certainly come soon'' and reiterated the bank's commitment to its core banking business. While saying the situation is in flux, he said the probability of any influence on Union Bank's 1996 figures from a decision on the utility was low. But he hinted that an announcement may still be made this year.

The restructuring prompted Standard & Poor's to put the long-term AAA ratings of UBS and its units have been placed on CreditWatch for possible downgrade. The short-term A-1-plus ratings for UBS and its units have been affirmed.

S&P said noted that UBS has announced 'several positive initiatives' designed to improve the profitability of its Swiss operations, but the agency said these maneuvers won't make a positive contribution to group earnings until 1997.

[03] OPEC says Iraq flow won't alter group's production ceiling

But some delegates and analysts see a drop, though not a collapse in prices, if Iraq's return looks to be certain. Some delegates also are raising the possibility that Organisation of Petroleum Exporting Countries will have to hold an emergency meeting in the first quarter to rein in overproduction, if prices start collapsing as the winter season winds down.

Libya's Oil Minister, Abdalla Salem el-Badri, who's expected to become OPEC's president at tomorrow's meeting, said he believes the market could handle the return of Iraqi crude now.

'We will find a way out,' el-Badri said, referring to how OPEC would accommodate the Iraqi barrels.

Iraq said it has reached a 'full agreement' with the U.N. on outstanding issues of the oil-for-food sale plan. Iraq's U.N. Ambassador Nizar Hamdoon said he believes oil could flow in December, but other diplomats said they expected the process to take until January.

Other steps in the process, such as the U.S. signing off on the pricing plan and a report from U.N. Secretary-General Boutros Boutros-Ghali, are expected in coming days and could lead to the first flow of Iraqi oil to the world market - albeit limited - since the August 1990 invasion of Kuwait and subsequent U.N. embargo.

Many analysts and OPEC delegates remained sceptical after repeated false alarms on the Iraqi return over several years. OPEC, in fact, at its June meeting increased its output ceiling to 25.033 million barrels a day, to allow for up to 800,000 barrels a day of exports from Iraq, on the belief that the flow would resume in September. The plan was put on hold then by Boutros-Ghali after military moves among Kurdish factions in northern Iraq, in which the Iraqi military became involved.

But overproduction by other OPEC members, led by Venezuela and Nigeria, has pushed output to a 16-year high of 26.03 million barrels a day, 1 million barrels a day above the ceiling, according to the International Energy Agency.

Other OPEC members have more than filled the gap left for Iraq, but record low stocks in the U.S. and Europe have kept prices extremely strong. The price of OPEC's basket price of crudes was up 46% in October from a year ago and ministers gather for the start of talks tomorrow with the basket above its $21 target for the first time since emergency meetings after Iraq invaded Kuwait.

One OPEC delegate said, 'I don't think this will be a problem for us now. Nobody will believe it until we see it. Remember what happened in June.'

But this delegate and others said if Iraq returns, overproduction by other members isn't expected to stop. Assuming Iraq pumps around 500,000 barrels a day to meet the $1 billion every 90 days level under the oil-sale-plan, OPEC output would climb to 26.5 million barrels a day.

'I think it wouldn't be such a problem for the first quarter, the market could take it, depending on the weather. But it would be a problem after,' this delegate said.

He added OPEC would likely need to call an emergency meeting to crack down on quota cheats ahead of the second quarter.

According to the IEA, demand for OPEC oil and stocks will be 26.5 million barrels a day in the first quarter, but will drop off sharply to 24 million barrels a day in the second quarter.

[04] Pearson to buy U.S. publisher for $333 million

The £200 million ($333 million) acquisition also brings Penguin into third place among U.S. trade book publishers. Putnam Berkley's authors include Tom Clancy, Patricia Cornwell, Dick Francis and Kurt Vonnegut.

'This is a terrific acquisition for Penguin,' said Michael Lynton, who takes over as chairman and chief executive of Penguin Group at the end of the year.

'The two businesses complement each other extremely well in terms of both authors and people and will create great opportunities for the future. It is a marvellous way to start at Penguin,' he added.

Pearson said it expects the acquisition will be 'earnings enhancing' from the first year of ownership.

The acquisition doubles Penguin's share of total U.S. trade book sales (estimated at 6%), according to Pearson. Putnam reported sales of $276 million for the year ended June 30, 1996. Penguin is part of the entertainment division of Pearson, which also includes Pearson Television, The Tussauds Group, Pearson New Entertainment and Mindscape.

Putnam is currently a unit of MCI.

[05] French consumer spending shows expected drop as car incentives end

But weakness in retail sales growth may hurt the government's hopes to promote economic growth and narrow its budget deficit.

Meanwhile, the country's trade surplus continued to expand in the nine months and the government said the surplus could reach as much as 120 billion francs ($23.26 billion) for the year.

The October fall followed a revised fall of 1.6% in September. Spending on cars plummeted 25.8% after the expiration of government incentives for car buyers, data from statistics institute Insee showed.

Economists said that beyond the plunge in car buying, the data for retail spending showed a rise of only 3.1%, after a fall of 5.6% in September.

The government is counting on a revival in consumer spending and company investment to boost growth to 2.3% next year from 1.3% this year and help it reduce the budget deficit in preparation for European monetary union.

Meanwhile, France's trade surplus for the nine months expanded to 86.8 billion francs, compared with 72.3 billion francs the year before.

The September trade data includes the sale of six Airbus planes worth a total of 2.33 billion francs, compared with sale in August of six planes worth 2.14 billion francs.

French Trade Minister Yves Galland said the surplus for the year could expand to as much as 120 billion francs, with 1997's surplus likely to grow even more.

'This year's trade surplus has a potential of 120 billion francs and for 1997 it should be even more,' Galland said.

Among reasons for optimism, he said, were the export potential for water engineering, aviation and public transportation, energy, telecommunications and agriculture.

A trade surplus of 120 billion francs would be a new record, following a record surplus of 100 billion in 1995.

[06] expects standard European digital decoder soon

Torsten Kreindl, head of the German telecommunications group's cable TV activities, told a conference in Cologne that the company had shortlisted seven manufacturers of the decoder technology necessary for pay TV.

'We will make a decision about the decoder at the beginning of January,' Kreindl said.

'We are also talking with cable TV operators throughout Europe about the decoder conditional access system and could reach an agreement quickly that would affect all of Europe.'

The conditional access system is the part of the decoder that unscrambles encrypted signals for pay TV viewers.

Bavarian media mogul Leo Kirch has been trying to establish his DF1 digital pay TV service as so-called gatekeeper to the German pay TV market. Although DF1 has disappointed in its first four months of operation it remains Germany's only such system.

DF1 is only broadcast via satellite, and talks about cable network access have proved difficult. 'We have been negotiating with DF1 for months and we have made offers,' Kreindl said. DF1 was 'welcome, but not at all costs.'

Telekom, which was partially floated on the stock exchange earlier this month, is Europe's biggest telecommunications company.

Its current cable TV network has around 16 million subscribers, of which Telekom has 5.5 million directly under contract. The remaining subscribers are under contract to regional cable TV operators.

Kreindl said Telekom was talking with regional cable TV operators in Germany about co-operating to upgrade cable networks for digital pay TV. But he dismissed speculation about the formation of a joint venture company.

German press reports have said that Telekom and the regional cable operators were planning to form a company called Multimedia Service Organisation, which would provide access for digital pay TV operators to the cable TV network and manage their subscribers.

Telekom has also been rumoured to be planning to purchase film rights.

'Telekom never intended and does not intend to control content. We do not plan to buy film rights,' Kreindl said. 'MSO is neither existent nor is it a threat to anyone. There are a number of possible ways to cooperage, but we are far removed from forming a joint company.'

Telekom is also negotiating with German media regulators and regional cable TV operators on restructuring the way it charges transmission fees to carry programming in its network.

Telekom appears to prefer a model that would include between 10 and 15 so- called 'must carry' programmes. They would be determined by the regulators but would give cable TV operators the freedom to determine how to fill the 150 channels that will become available.

Until now, the German media regulators have determined what is shown in what order on Telekom's cable network.

'As soon as we have reached an agreement about these 'must carry' programmes, we will be able to be more flexible in our charges,' Kreindl said.

[07] Bitain's Major initiates investigation into leaked budget documents

The Daily Mirror tabloid said in Tuesday's editions seen late Monday that it had received 94 pages of budget documents, but decided not to publish them. Other papers published details implying they derived from the leak.

But on Tuesday, just hours before Clarke's budget speech at 1630 CET, sterling and gilts markets had largely shrugged off reports of possible tax adjustments as nothing more than had been expected.

'Most people aren't sure' if the reports are correct, said Michael Saunders, U.K. economist at Salomon Brothers in London.

'It's clear that the Mirror had a leak, it is not clear whether what everyone else has is a leak or not.'

Budget 'details' printed by the other papers are very similar to the 'educated guesses' made by dozens of financial houses over the past month, he noted.

Political observers, meanwhile, suggested that while the leak is an embarrassment for Clarke in the longer run, it won't have any bearing on his position at the moment.

'Unless the leak can be traced back to circles around Clarke, he is not in any danger,' said John Barnes, government lecturer at the London School of Economics.

Barnes noted that even Gordon Brown, Clarke's shadow in the opposition Labour Party, had refrained from calling from resignation.

[08] Bonn to let some corporations adopt IAS accounting rules

Bonn will in December approve a draft law which should come into force in 1997, Herbert Biener, a senior civil servant in the justice ministry, told a conference organised by accountants KPMG Deutsche Treuhand and the German stock exchange.

Firms without global ambitions will for the time being have to continue reporting under the German Commercial Code but IAS is likely to become the norm eventually, Biener said.

Several large German companies, among them Deutsche Bank and Daimler-Benz , have already adopted internationally-accepted accounting standards but still have to file separate accounts under HGB -- a costly business which has so far prevented many major firms from following suit.

The justice ministry' plans are part of a host of government measures in recent years to make German companies and financial markets more attractive to foreign investors.

Bringing German accounting into line with international standards would make it easier for firms here to obtain capital in increasingly competitive global markets.

Biener said companies reporting group results under IAS would not have to file accounts under HGB rules, although the accounts must still satisfy the requirements of existing German and European Union guidelines.

The IAS accounts will have to be written in German and reveal at least as much about the company as HGB accounts would, Biener said.

'I expect that by 1999 companies throughout Europe will be reporting under internationally accepted standards,' Biener said. 'Double accounts under HGB and IAS have no future.'

As part of the current drive towards encouraging shareholder value in Germany, many market commentators have urged the introduction of IAS or U.S. Generally Accepted Accounting Principles to allow increased transparency.

Deutsche's switch to IAS, for example, led to the disclosure of about 20 billion Deutsche marks ($13.15 billion) of previously hidden reserves.

[09] Severn Trent posts 4.2% rise in first half earnings, plans buyback

The profit figures included an exceptional charge of £4.5 million related to the company's proposed acquisition of South West Water. That proposal has been rejected by regulators.

Severn Trent said it will seek approval at the annual meeting next July to continue its stock buyback programme in an effort to 'provide a more appropriate capital structure for the group.'

Severn Trent said its future direction was now clear in developing service and efficiency in water services, along with alliances with other utilities, and making its waste management company Biffa a leader in the UK.

[10] National Grid says it will continue streamlining programme

The British transmission company also said pretax profit in the fiscal first half edged up 4.9% on a pro-forma basis to £292.7 million ($489 million). The earnings figure was adjusted to account for the effects of increased net interest charges reflecting the costs of financing a restructuring and the effect of the demerger of the company's pumped storage business.

Profit from continuing operations eased to £329.8 million from £330.7 million, primarily because of a decline in electricity transmission. Noting its previously announced streamlining of the transmission organisation and management, National Grid said it expects to achieve 'further significant efficiencies.' Without detailing planned cost-cutting measures, the company said management is 'confident' that it will be able to cut controllable costs in the core business by an average of around 6% a year in real terms.

Transmission turnover in the half fell £17.5 million to £559.1 million. The company said the year-earlier period benefited from the recovery of £14.2 million of the previous year's allowed revenues.

National Grid said it is determined to find the right partnerships to strengthen Energis' position in the telecommunications market. The strength of the forward order book supports the view that Energis will be profitable before interest, tax and depreciation for the year ended March 1998.

The company said its acceptance of price cuts imposed by the Office of Electricity Regulation (Offer) has allowed for a period of greater certainty.

Successful marketing allowed the company's Energis unit to increase sales of all its products, with turnover more than doubling to £43 million, while its operating loss narrowed by a fourth to £30.3 million. The group said that the addition of significant new customers for Energis, including British Gas, Mirror Group and ICL, underpins future prospects.

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