European Business News (EBN), 97-05-13

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

Page last updated Tue, May 13 5:54 PM CET

CONTENTS

[01] Deutsche Telekom posts first quarter pretax profit of $1.3 billion

[02] Eurotunnel safety procedures criticised

[03] Aerospatiale attacks DASA for its support of Lagardere in the Thomson privatisation sale

[04] Novartis buys $910 million crop protection business from Merck

[05] Bank of England says that Britain must consider raising rates again

[06] US April retail sales data weaker than expected

[07] Allied Domecq reports flat profit for first half

[08] Schering first quarter operating profit jumps 39%

[09] Veba to spend $2.4 billion on North American acquisition

[10] EU officials voice objections to Boeing-McDonnell merger

[11] EU reportedly will approve BT/MCI merger with two conditions

[12] BOC first half profit falls, hit by strong pound

[13] Norway changes guidelines on $60 billion Petroleum Fund

[14] Corporate and Economic Briefs

[01] Deutsche Telekom posts first quarter pretax profit of $1.3 billion

The company said that group pretax profit was 2.2 billion marks for the first quarter. Group sales over the same period rose 8% to 16.3 billion.

The compoany also predicted that its 1997 pretax profit could be at least 8.8 billion marks, adding that a forecast of 8.8 billion is a 'negative view' of the company's earnings prospects. But a company spokesman stressed later that Kroeske didn't say 1997 pretax profit would exceed 8.8 billion marks.

As previously reported, Telekom said it will pay a dividend of 1.20 marks per share for 1997 and 0.60 marsk for 1996.

Shares in Deutsche Telekom dropped, partly correcting their surge of recent days, after the release of 1996 figures which dealers said matched expectations, but did not surprise.

'The numbers were fine, not at all bad but maybe not wonderfully good either,' said a Frankfurt dealer.

'People are taking profits after yesterday, there's no more to it than that.'

[02] Eurotunnel safety procedures criticised

'The incident was more serious than it should have been because the emergency procedures were too complex and demanding and the staff on duty had not been adequately trained to carry them out,' said Roderick Allison, chairman of the Safety Authority that monitors safety in the undersea tunnel.

The Safety Authority made 36 recommendations for changing safety procedures in the tunnel, but stopped short of calling for expensive design modifications to the train cars that carry the freight trucks.

The carriages have open-lattice sides, rather than being enclosed, which Safety Authority member Jeremy Beech, the county fire officer of Kent, had warned years earlier could be a problem if they allowed air in to feed a fire with the train speeding through the tunnel.

'Clearly, I would prefer having a closed design,' Beech said.

Beech was overruled by other members of the Safety Authority. He acknowledged the Safety Authority could not tell Eurotunnel, the operating company, how to design its equipment. The Anglo-French authority can only review what Eurotunnel proposes and decide whether safety standards seem reasonable.

Eurotunnel says it is correcting any deficiencies and hopes to be hauling the freight trucks between England and France by mid-June, following testing to begin shortly.

'There isn't anything in this report we find surprising,' Eurotunnel spokesman John Noulton said. Before running the freight truck services again, Eurotunnel must gain clearance from the Intergovernmental Commission that regulates its operations.

The so-called 'chunnel' was shut down after the fire on one of the freight truck shuttle trains on Nov. 18. French authorities are still investigating the cause and have not ruled out arson.

Passenger car trains, and through trains from London-Paris and London- Brussels were soon back in business with some delays as repairs are made to the damaged section of the tunnel.

Authorities said those services can operate safely, but they wanted to take a closer look at the shuttles carrying freight trucks, the only ones with the open-lattice design.

Among the recommendations of the Safety Authority:

-Eurotunnel should scrap its policy of seeking to drive trains out of the the tunnel during a fire and come up with new policies that would take into account the likelihood that the trains might fail or that trains moving behind the one on fire could have problems with the smoke.

-Eurotunnel should try to simplify its emergency procedures.

-Eurotunnel must test the locomotives and separate cars that truck drivers ride in, to make sure they are unlikely to fill with smoke during a fire. During the Nov. 18 fire, no one was killed but all 33 people aboard suffered from smoke inhalation.

-Eurotunnel must better train its staff for handling emergencies, with periodic refresher training. Staff who fail any tests should be removed from critical duties until they can pass.

-Eurotunnel should record all radio and telephone communications to and from its control centers, where more staff should be added.

[03] Aerospatiale attacks DASA for its support of Lagardere in the Thomson privatisation sale

In an interview published in French business daily Les Echos, Michot said it ends Aerospatiale's view of long-term cooperation between the two companies.

'DASA has put an end to a common world vision in favour of 'case-by-case' vision...We will therefore move to a short-term view. Each operation will be evaluated on its own merits. Sometimes we will be allied, sometimes in competition,' Michot said.

Aerospatiale was barred from officially putting in a joint bid for Thomson- CSF with France's Alcatel Alsthom and Dassault. However, with Aerospatiale and Dassault scheduled to be merged, DASA's support for Lagardere's bid was seen as a direct blow against Aerospatiale.

Aerospatiale and Lagardere unit Matra are traditional rivals.

Aerospatiale and DASA currently have a series of major joint projects, including their interest in Airbus Industrie.

The companies also have joint ventures in helicopter manufacturer Eurocopter and a missiles venture called Euromissile.

Michot also called for Airbus to be reorganized into an integrated company and suggested a limited partnership form in which Aerospatiale would be the principal partner.

[04] Novartis buys $910 million crop protection business from Merck

The acquistion confirms Novartis' postion as a leader in crop protection, which accounted for 73 percent of its 1996 agribusiness sales of $5.2 billion. In a statement, Novartis said the deal includes the world-wide rights to Merck's business, which had 1996 sales of $200 million, and about $21 million in product inventories.

Novartis said it entered into a long-term supply agreement but will not be buying any of Merck's manufacturing plants. Novartis said Merck is divesting the crop protection business as part of its decision to combine its Animal Health and Poultry Genetics business with Rhone Poulenc Rorer Inc.'s Animal Health business to form the joint venture Merial. The closing of the deal is subject to government approvals and other customary closing conditions, Novartis said.

[05] Bank of England says that Britain must consider raising rates again

Chief economist Mervyn King, releasing the bank's quarterly inflation report, said Britain must seriously consider raising official interest rates -- currently 6.25 percent -- in coming months.

If monetary policy were not to be tightened further, annual underlying inflation - which excludes mortgage interest payments - would be 'more likely than not' to overshoot the government's target of 2.5% in two years' time, the Bank warned.

Speaking of last week's move by Chancellor of the Exchequer Gordon Brown making the Bank of England operationally independent the Bank said the move 'should improve the credibility of monetary policy'. The announcement of that change lowered long-term market expectations for inflation 'by around half a per cent'.

At a press conference, Bank of England economics director Mervyn King said the Bank had known of its impending independence and 'took it into account' in making its policy recommendation last week to raise interest rates by O.25%.

Under the new regime of Bank of England independence, the Bank governor will lead a nine-member monetary policy committee charged with meeting the inflation target, which however will continue to be set by the government.

Bank of England Governor Eddie George was quoted in Sunday newspapers saying that he was happy with the current 6.25% level, and that the Bank has no intention of using its independence to push base rates up quickly and sharply.

The first meeting of the monetary policy committee will be in the first week of June.

On the factors propelling inflation, the Bank noted that domestic demand is a much larger element than net exports, and that demand growth is sufficiently strong - at around 4% a year - that output growth is likely to remain above trend.

[06] US April retail sales data weaker than expected

Retail sales fell 0.3% in April, while sales excluding autos fell 0.1%. The median forecast, according to survey of 22 economists by Dow Jones Newswires, was for overall sales to have declined 0.3%, but for sales excluding autos to have risen 0.2%. March sales, meanwhile, were revised lower. Overall sales, originally reported to have risen 0.1%, were revised down to unchanged, while sale excluding autos were revised lower to a rise of only 0.1% instead of the originally reported 0.5% rise.

Although many market participants think the slower pace of sales means the Federal Reserve can afford not to raise interest rates in May, they remain cautious ahead of key inflation figures later in the week and still see further rate increases possible later in the year.

'Our view is probably where most people's views are: It doesn't mean it takes them out of the picture, it just takes them out of the picture (this) month,' said Bill Hornbarger, fixed income strategist at A.G. Edwards & Sons Inc. in St. Louis.

[07] Allied Domecq reports flat profit for first half

That meant the company's pretax profit for the six months to Feb. 28 stayed unchanged at £317 million.

'Numerous initiatives have been taken or are in hand and it is the measurable results of these as they go forward which underpin our confidence,' said Allied Domecq's Chairman Sir Christopher Hogg.

Hogg added the main strands of Allied Domecq's strategy are concentrating on the long-term growth of its major brands in major markets, improved customer service, tight control of costs and active management of capital employed and cash.

Chief Executive Tony Hales told Dow Jones further industry consolidation is 'inevitable' following yesterday's merger of Grand Met and Guinness. He said Allied Domecq will consider any deals which enhance shareholder value.

In the meantime, Hales said Allied Domecq has three major strategies to expand its spirits and wine business. These are to grow core international brands through more concentrated marketing activity, achieve preferred category-supplier status with key customers through a high-quality salesforce and service and to achieve industry best-practice standards.

The dividend was maintained at 9.44 pence per share rather than a slight increase as many had anticipated. For the year as a whole, Hogg said, there would be an estimated adverse impact from currency translation of about £28 million.

'The challenge for Allied now is to demonstrate that it can deliver improving financial performance - particularly in the spirits business where market conditions remain testing,' said Hogg.

Spirits and wine turnover was up one percent but trading profits were down 2% at £239 million. Sales in Europe were down 3% and in America 1% lower.

In Europe, volume increases in Spain and Germany were offset by declines in volume in Britain, Greece and Italy.

In Britain, Teacher's whisky lost volume in the face of tougher pricing by competitors but sales of Courvoisier brandy improved. The company concentrates its marketing effort on four core brands - Ballantine's, Beefeater, Kahlua and Sauza.

Trading profit from the group's retailing division fell 1% to £105 million with growth in its managed pubs being offset by lower profits from off- licence chain Victoria Wine.

[08] Schering first quarter operating profit jumps 39%

In the first quarter of 1997, operating profit jumped 39% to 273 million Deutsche marks ($158.3 million), bolstered by those same factors, Schering said. Including net interest income, which was lower than the year-earlier period, pretax profit rose 25% to 292 million marks.

In its interim statement, Schering said, 'On the basis of improved currency relationships we expect sales to continue to develop favourably.'

It added that positive influences would continue to affect the company's profits in the course of the year.

'We therefore expect profit growth of 10-15% for the full year,' the report said.

Schering shares were trading lower in spite of the positive report. Dealers said the results were in line with expectations.

Including the first quarter consolidation of Schering's acquisition of its Leiras and Jenapharm units, sales climbed 21% to 1.47 billion marks in the first three months of the year.

Schering noted that the sharply higher earnings also boosted its tax burden, resulting in net profit rising just 16%.

[09] Veba to spend $2.4 billion on North American acquisition

The report cited Veba management board chairman Ulrich Hartmann as saying that Veba planned to expand in the region through acquisitions and organic growth.

Hartmann said the flotation was 'one piece of the mosaic' of internationalisation, and said he hoped U.S. holdings would rise above 15 percent following the listing from their current level of 12.5 percent.

He went on to reiterate what he had said previously about the group not needing to raise capital to finance its growth programme.

'I wouldn't rule out that we would raise capital in the future (if any big acquisition came along) but according to our current plans we can finance any acquisitions ourselves,' Hartmann told the newspaper.

Veba aims to develop its phenals plant in Mobile, Alabama. It also intends to grow its presence in the transportation of electronic systems and components, and in manufacturing wafers for computer chips, the report said.

Hartmann said that he expected some minor acquisitions, but he said that chemicals acquisitions are overpriced in the U.S. market.

[10] EU officials voice objections to Boeing-McDonnell merger

The EU appears certain to call on Boeing to modify or scrap its long-term purchase 'exclusivity' agreements recently reached with Delta Air Lines and American Airlines, a unit of AMR Corp. Those accords give the carriers favorable pricing on new orders in exchange for agreeing to buy only Boeing aircraft.

In Stockholm, EU Competition Commissioner Karel van Miert reiterated his objections to the exclusive purchase pacts, saying they were 'totally unacceptable' because they severely restrict competition.

One person familiar with the EU's position said that Boeing will 'have to come up with remedies' or the EU will try to block the proposed $14 billion combination. The EU is reviewing the proposed combination because both Seattle-based Boeing and McDonnell Douglas, based in St. Louis, do business in Europe. However, beyond threatening fines or trying in other ways to apply pressure, it's unclear what the EU can do to force changes to the combination if U.S. regulators give their approval to the deal.

Indeed, the EU is entering uncharted territory in its approach to the Boeing-McDonnell Douglas deal, especially as far as civil-aircraft manufacturing is concerned. In past contentious merger cases, the EU has required one or more of the merging companies to sell some of their units to another company that competes in the same market, in order to prevent undue concentration.

But Europe's Airbus Industrie is the only global competitor left for a merged Boeing-McDonnell Douglas in the big-jet sector, so there are few structural remedies to consider. As a result, the commission appears to be focusing on market behavior, and Boeing's long-term exclusive deals present what some officials see as juicy targets.

According to people familiar with the developments, the EU is looking not only at the Delta and American agreements for hundreds of Boeing aircraft for periods as long as 20 years, but is also considering whether other airlines' purchasing patterns also contribute to a reduction in competition. British Airways, for example, has never bought an Airbus plane, though it operates some that it inherited in its takeover of British Caledonian Airways.

'We're not talking about some marginal airlines,' said one person familiar with the probe. 'We're talking about some of the biggest airlines in the world, which comprise a very substantial share of the market.'

A spokesman for Boeing said the plane maker continues 'to ask that the case be judged on its merits and not on political or trade considerations.'

In St. Louis, a spokesman for McDonnell Douglas said the company believed Mr. van Miert was repeating earlier remarks. In any case, he said, 'We would hope that the issue would have an impartial hearing on both sides of the Atlantic.' The spokesman added, 'We don't believe that the proposed merger has any antitrust implications.' He declined to comment on Boeing's arrangements for long-term contracts.

[11] EU reportedly will approve BT/MCI merger with two conditions

The conditions, expected to be announced tomorrow and signed by commissioners, concern transatlantic submarine cable capacity and teleconferencing, according to a source involved in the discussions. Teleconferencing is a small market, and the commission wants to ensure that BT and MCI don't dominate it.

Meanwhile, the commission will insist on safeguards to ensure other phone companies have access to submarine cables owned by BT and MCI. New cables are under construction, but BT and MCI currently own about 30% to 40% of existing trans-Atlantic cable capacity, according to Konnie Schaefer, a submarine cable expert based in Washington.

Sources say the commission's final decision will make no mention of equal access, industry jargon for the preselection of competing long distance and international carriers.

The FCC is also looking at the bundling of services in the local loop, the last mile of the telephone network. In the U.K., customers have to go directly into a switch owned by BT, Mercury Communications or a cable company.

It isn't possible to rent capacity on the line without also paying for the switching facilities. Some say that hampers competition. Others say there is no incentive to build infrastructure if other phone companies can get a free ride.

Another potential problem, from the standpoint of U.S. authorities, is the transfer to Concert PLC - the company being formed by BT and MCI - of a direct broadcast satellite license that MCI acquired in a joint bid with Rupert Murdoch.

Earlier this month the executive branch of the U.S. government asked the FCC to examine the broader question of foreign ownership restrictions on direct broadcast satellites as part of its rulemaking on the proposed BTMCI merger.

Meanwhile, BT and MCI are progressing with their plans to merge the two companies. Within the last week, the appoint ments of about 100 senior vice presidents for operating units in the newly merged company were announced internally.

Last month, the two companies signed a wide-ranging accord with Telefonica de Espana SA, giving the partners a strong position in southern Europe and Latin America.

That deal still needs to pass inspection from the commission's antitrust authorities.

[12] BOC first half profit falls, hit by strong pound

BOC said first half pretax profit actually fell marginally to £216.4 million ($348.4 million) from year ago levels as sales fell 3.5% to £1.795 billion.

The company said that after adjusting for translation effects of sterling's rise, sales would have grown 5%, pretax profit by 6% and earnings per share by 7% compared to the year earlier period.

'BOC has made, and is making, good progress this year, with profits affected by translation of overseas results at stronger sterling rates.' group chief executive Danny Rosenkranz said.

Gases businesses are performing well on strong demand in the north Pacific region and in the U.S., BOC said. It also noted that health care market profits held up well under the competitive pressures of the U.S. anesthesia market and the relative strength of currencies in countries where BOC manufactures.

Meanwhile in the vacuum products operation, second quarter profit and order intake rose from first quarter levels.

[13] Norway changes guidelines on $60 billion Petroleum Fund

Norway's Finance Minister Jens Stoltenberg said the labour party minority government has changed guidelines for the State Petroleum Fund enabling it to invest also in securities.

Stoltenberg said up to 30-50% of the Fund's assets may be invested in equities and he estimated the fund at 425 billion kroner ($60 billion) by the end of 2001 compared with around 50 billion kroner currently.

Currently placed in low risk, government securities, the Fund acts as a national piggy-bank for budget surpluses generated by Norway's huge oil revenues.

Norway has run up a budget surplus for three consecutive years.

[14] Corporate and Economic Briefs

Digital Equipmenthas filed a lawsuit charging Intel Corp. with wilful infringement of 10 Digital patents in making, using and selling microprocessor products, including its Pentium, Pentium Pro and Pentium II microprocessors. In a press release, Digital said the suit, filed in U.S. District Court, District of Massachusetts, seeks an injunction and monetary damages. The company said ''Intel's patent infringement has caused Digital economic injury and, if not stopped, would cause irreparable harm.''

Pechiney said that first quarter sales rose 8.5% to 17.03 billion francs ($2.9 billion) from the year-ago period. The company cited a rise in its trading activity. Pechiney said the rise in the dollar in the first quarter boosted sales figures by nearly 1 billion francs. The company added that its aluminum trading activities also showed a rise in volume traded. Aluminium production sales fell to 5.17 billion francs from 5.33 billion francs; packaging sales rose to 5.61 billion francs from 5.35 billion francs; and trading operations sales rose to 5.47 billion francs from 4.18 billion francs, the company said. Sales at the company's Pechiney International unit rose to 5.61 billion francs from 5.52 billion francs.

German plant and engineering group Linde said it expected to report improved earnings and sales for 1997 after revenue rose 6.4 percent in the first four months of the year. Linde's sales in 1996, the best in company history, rose 6.2 percent to 8.8 billion marks ($5.2 billion) while net profit rose 10.4 percent to 396 million marks.

Berlin is selling a majority stake in its power utility Berliner Kraft und Licht because the city is nearly bankrupt and needs the money, Berlin's environmental minister said. Strieder, the Senator for the Environment, said in an interview with InfoRadio in Berlin that the city was broke because the federal government was failing to live up to its obligations.

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