European Business News (EBN), 97-05-20

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

Page last updated Tue, May 20 7:07 PM CET

CONTENTS

[01] British aerospace shares fall as U.K. delays Eurofighter missile system

[02] Deutsche Bank's new chairman plans to reduce domestic shareholdings

[03] Nomura Securities scandal deepens as prosecutors raid Dai-Ichi

[04] Brown presents plans to reform Bank of England, UK financial sector

[05] EU will tell UK government that BA alliance would harm fair competition

[06] Marks and Spencer profits rise to a record billion pounds

[07] The world's markets await the Fed's next move with bated breath

[08] Swiss Re sees a good outlook for this year's profit despite weakening underwriting conditions

[09] Enso first quarter profit drops 28%, but stays above expectations

[10] Air France hit by four-day pilots' strike

[11] Corporate and Economic Briefs

[01] British aerospace shares fall as U.K. delays Eurofighter missile system

The U.K. government said another year's work must be done on the missile systems proposed for the Eurofighter plane, while in the U.S., proposals have been made to Congress to dramatically cut back on defence spending.

At 1356 GMT, BAe shares are down 40 pence at 1211.5 pence on volume of 4.01 million shares.

However, Barnaby Wiener, analyst at Merrill Lynch, said the price movement has been overdone.

'In the case of Eurofighter, the concern is overblown. People should be more worried about whether the project goes ahead at all rather than on the details of the missiles,' said Wiener.

The Eurofighter project is being jointly developed by a number of European countries, but the German government has been reluctant to commit funds as it struggles to meet single currency criteria.

Wiener said Eurofighter is likely to happen, but there are concerns about how it will be funded if the German government pulls out.

John Spellar, Parliamentary Under Secretary of State for Defence, said that more work needs to be done on reducing technical risk on the weapons systems for the Eurofighter project.

[02] Deutsche Bank's new chairman plans to reduce domestic shareholdings

Breuer, who takes over as chief executive after Deutsche's annual shareholder meeting, was quoted as telling a British newspaper in an interview that there could eventually be a 50-50 balance between holdings in Germany and abroad.

And announcing first quarter profits for 1997 the bank, said group pre-tax profit rose 28% to 1.29 billion marks in the first quarter of 1997.

The bank said in a mandatory statement released before its annual shareholders' meeting that group operating profit after risk provisions rose 21% to 1.40 billion marks.

Trading profit rose by 43% in the period to 1.0 billion marks while loan loss provisions fell 29% to 288 million marks, the bank said.

[03] Nomura Securities scandal deepens as prosecutors raid Dai-Ichi

Dai-ichi Kangyo Bank Ltd. said the action was ''regrettable'' The loans made by Dai-Ichi Kangyo and an affiliate to Ryuichi Koike since the 1980s were used to buy stocks, including those in Nomura Securities Co. and three other major brokerages.

Koike, 54, and his brother Yoshinori, 52, were arrested last Thursday on suspicion of receiving about 50 million yen ($433,000) in illegal profits from Nomura in 1995 in exchange for allowing Nomura's shareholders meeting to proceed smoothly.

Known as 'sokaiya,' the racketeers, usually gang members, extort money from companies by threatening to disrupt shareholders meetings.

A spokesman at the Tokyo Public Prosecutors office refused to confirm the raids. But NHK TV showed dozens of prosecutors wearing dark suits solemnly filing into the bank's headquarters. Dai-Ichi Kangyo confirmed the raids were taking place, but refused to comment on the reports on the loans.

In addition to Dai-Ichi Kangyo's main office, another Tokyo office, the offices of Daiwa Shinyo, a non-bank affiliate, as well as the homes of some Dai-Ichi Kangyo executives were also searched, the reports said. The reports, quoting unidentified investigators, said Dai-Ichi Kangyo and the affiliate had provided about 30 billion yen ($26 million) in loans to Koike.

The nationally circulated Yomiuri newspaper reported Tuesday that Dai-Ichi Kangyo had also provided Koike with an additional loan of 600 million yen ($5.12 million) to help him pay overdue interest on loans he had already taken out.

That loan was provided without collateral, the Yomiuri said. Last week, Tokyo prosecutors arrested three Nomura officials on suspicion that they illegally funnelled money to Koike as trading-loss compensation.

[04] Brown presents plans to reform Bank of England, UK financial sector

Speaking in the House of Commons, Brown fleshed out measures proposed in the Labour Party's election manifesto.

Among them, he said that the Bank of England would no longer oversee regulation for the country's banking sector, focusing instead on guiding monetary policy. Just a few weeks ago, Brown gave the bank operational independence to set interest rates.

The central bank, he confirmed, must set base lending rates to hit a government-set inflation target. Brown said the target, now an underlying 2.5%, will be reviewed annually by the government in its budget.

The chancellor also formally announced changes to the country's financial regulatory system.

In its manifesto, Labour proposed merging the Personal Investment Authority, the Securities and Futures Authority and the Investment Management Regulatory Organization with the senior regulator, the Securities and Investments Board.

Brown reiterated the need to simplify the regulatory system, adding that he will table legislation to that end in the near future.

Brown also said he has asked Howard Davies, currently deputy governor at the Bank of England, to take over for Sir Andrew Large as chairman of the SIB. Large had already made public his plans to retire.

Davies' move will leave open two deputy governor posts to fill at the newly reformed central bank.

Brown will speak tonight at a dinner held by the Confederation of British Industry.

[05] EU will tell UK government that BA alliance would harm fair competition

The sources, who asked not to be named, said the Commission will issue a statement later this week formally detailing its competition concerns with the transatlantic alliance. Such a statement means the airlines would have to modify their link-up in order to win the E.U. seal of approval.

In reponse to the reports, however, British Airways said that it would be surprised if the European commission would tell the UK government that its proposed alliance with American Airlines will harm competition.

The development follows a meeting early today in London between E.U. Competition Chief Karel Van Miert and the new U.K. Trade and Industry Secretary Margaret Beckett.

'Van Miert went to visit Beckett to inform her' of our plans, the spokesman said. Later this week 'we will have a formal indication of what our doubts and objections are,' he added.

The BA spokesman said that the commission told it at the end of April that the commission had not finished its analysis of the competition issues associated with the proposed alliance. The spokesman said, 'In the commission's own words, this work will take some time to complete. It would be very natural for the commission to discuss their concerns with us before reaching a conclusion and this they have not done.'

The European Commission said earlier that it had no comment on a meeting between Karel Van Miert and British Trade Secretary Margaret Beckett on the BA/American plan.

[06] Marks and Spencer profits rise to a record billion pounds

The retailer, which has stores in Europe, North America and Asia, said trading so far in its current year had been in line with expectations.

Pretax profits rose 10.9% to £1.1 billion ($1.8 billion), on sales up 8.7% to 7.84 billion. The total dividend was up 14% to 13 pence a share.

Chairman Sir Richard Greenbury said the group's strong performance included significant increases in UK clothing and home furnishings. The company's overseas businesses did well despite the strong pound, generating sales of £1.3 billion, up £9 million and operating profits of 91 million, an increase of 23%.

'We are now well on the way to establishing ourselves as a successful global retailer,' Greenbury said in a statement.

But the group predicted that next year, based on current exchange rates, profits would be reduced by about 20 million pounds because of the strength of sterling.

M&S plans to add about half a million square feet of new selling space in Britain in 1997/98 and anticipates taking on around 1,700 new staff to support further sales progress.

Financial services, an increasingly important part of the group, contributed £76 million to overall profit. Food sales increased by 6% to £2.7 billion. Marks said it held its market share and maintained margins in what it described as a 'fiercely competitive environment.'

The group said price deflation in fresh produce had affected cash values. Food sales (including VAT) in the second half increased by 4.5%, including inflation of 1%, which compared with a first half increase of 6.7%, including inflation of 3%.

Greenbury said the current year had begun as expected, but it was too soon to make further comment. 'The new financial year has started in line with our expectations, but after only a few weeks it is too early to comment.'

[07] The world's markets await the Fed's next move with bated breath

Interest rate moves in the United States are still far and away the most important event for global financial markets, and investors are as usual waiting with bated breath for the outcome of the Federal Open Market Committee meeting.

The key issue - whether the central bank, after taking into account the pace of growth and the level of inflation, will maintain the status-quo or tighten or loosen its grip on credit.

But why are U.S. rates so important for the rest of the world, and in particular financial markets?

The simple answer is that the U.S. is still the world's locomotive for growth and its bond market is the world's largest and most important financial market.

The link comes through two angles.

The first is the currency effect should the dollar, the world's reserve currency, move significantly after a rate change.

For example, the dollar may rally after a U.S. rate rise and if a country's currency weakens significantly it could start to 'import' inflation via more expensive dollar denominated imports.

The majority of the world's raw materials such as oil are priced in dollars.

A threatened rise in inflation via a weaker currency could well prompt a government to raise rates to counter the inflationary impact of a weaker currency.

The second link is the impact a rate change has on U.S. growth, in other words the economic locomotive effect.

If the locomotive slows down because rates have been raised or speeds up if rates are cut, the countries who are the 'wagons' slow down or speed up accordingly.

While it is true that producers tend to go and set up shop in the United States if that is their biggest export market, it is nevertheless still a massive market for many overseas producers.

So what is going to happen today? Unfortunately the experts are divided but after inflation figures that were a little higher than expected, analysts are tending to lean towards a rate rise.

[08] Swiss Re sees a good outlook for this year's profit despite weakening underwriting conditions

Swiss Reinsurance, also cited as helpful this year the 'further improvement in the balance sheet structure and the expansion of the scope of consolidation.'

The reinsurance group said major claims in the first quarter of this year were 'comparable to the previous year.'

However, it noted that conditions in the reinsurance underwriting business 'have weakened somewhat.' The company said it aimed to counteract this situation with a cautious underwriting policy and a careful assessment of risk. The inclusion of Mercantile & General Re will help diversify technical risks, while the life business' growth should aid in stabilizing 'the quality of profit.'

Turning to the financial markets, Swiss Re judged their development to be very positive from the beginning of this year, although 'they are unsettled at present.'

[09] Enso first quarter profit drops 28%, but stays above expectations

Reporting profit after financial items down to 480 million markka ($94 million) from 668 million in the year-ago period, Enso's profit was above the highest analysts' forecast of 470 million markka and clearly overshot the median of 351 million.

The company attributed the drop mainly to the decline in the market for publication paper, which started in the second half of 1996.

Echoing the caution of its compatriot rival UPM-Kymmene, Europe's largest forestry firm, Enso said it expected full-year 1997 earnings to be similar to 1996, when it made a 1.7 billion markka profit after financial items.

'The strengthening of short-fibre market pulp prices in the past few weeks will make it easier to raise paper prices. Prices are expected to rise during the second half of the year,' Enso said.

This was Enso's first quarterly report, shifting from four-monthly interims, and proforma figures were not made available ahead of the news.

Its net financial costs showed a dramatic fall to 199 million markka from 325 million in the year-ago period.

Earnings per share fell sharply to 1.36 markka from 2.06 markka: net sales slipped to 6.5 billion from 6.7 billion.

Enso repeated its earnings and cash flow would be boosted by its acquisition this year of 50.4% of German paper-maker E. Holtzmann for 1.8 billion markka.

'The deal will improve the group's per-share cash flow immediately and earnings per share as the synergy benefits materialise,' Enso said.

It said its majority Holtzmann holding was consolidated on April 28.

[10] Air France hit by four-day pilots' strike

''One hundred percent of long-haul flights are assured,'' a spokeswoman for Air France said. However, only ''one-third of short- and medium-haul flights out of Orly airport and 40% of those flights out of Charles de Gaulle airport are assured,'' she added.

The pilots' unions called for a four-day strike last week to protest against Air France's planned double-tiered salary system for hiring new pilots, which would pay the new pilots 15% less than current crews.

The airline is planning to implement the pay cuts in a merger between the two airlines in order to make them more competitive as European airlines are opened up to cross-border competition.

According to the Air France spokeswoman, one of the pilots' unions is to discuss ending the strike. She said, however, the powerful SNPL union, ''doesn't show any signs of wanting to reach a compromise.''

The spokeswoman added that, as expected, the majority of those pilots who have walked out are from Air France Europe, formerly Air Inter. Some Air France Europe pilots have been on strike since April 25.

The strike is scheduled to last until Friday.

Air France Chairman Christian Blanc had urged pilots to ignore the strike, saying it could cost Air France up to 100 million francs ($17.4 million) a day and could largely erase the 500 million franc net profit for the group estimated for the current year, endangering the future of the state-owned airline.

Unions accused him of overdramatising the situation.

The Air France spokeswoman declined to comment on the financial repercussions of the strike.

[11] Corporate and Economic Briefs

BICC said its construction arm, Balfour Beatty, formed a joint venture with First Philippine Holdings to pursue construction business in the Philippines. Balfour will have 40% stake in the new company, First Phillipine Balfour Beatty Inc., while First Philippine will have a 60% holding.

U.K.-based international media group Cordiant said sterling's strength will hurt its first half earnings. Speaking at the the group's annual shareholders meeting, Chairman Charlie Scott said: ''Sterling's strength against continental European currencies has been particularly noticeable over the last nine months. This will affect 1997's first-half results as the underlying improvement in the group's performance is being offset by the translation impact of exchange rates.'

French carmaker Renault,complying with court rulings criticising the way it announced the closure of the Vilvoorde plant, will meet representatives of its European staff on June 3 to discuss the shutdown.

European Union farm ministers gather for three days of informal talks in the southern Dutch town of Middelburg next week, when reform of the bloc's milk policy will top the agenda. The meeting, from May 25 to 27, is informal in that no firm decisions will be taken, but it will act as a sounding board for members states' divergent views on how to amend the milk regime, which supports European prices and sets national output quotas.

Water reserves in Finland's 17 main watersheds have decreased to the seasonal average level for the middle of May, according to the Finnish Environmental Institute. Water reserves were approximately 5% above the seasonal average in April. 'Since then, the reserves have decreased to average seasonal levels and will drop to below-average levels during the next couple of weeks,' Bertel Vehvilanen, a senior hydrologist at the institute told Dow Jones Tuesday.

EU foreign ministers meet in The Hague to prepare an informal summit of EU leaders on May 23 ahead of major treaty renegotiations.

Europe's fifth largest power company, Swedish Vattenfall, reported an 18% drop in 1997 first quarter pretax profit to 3.28 billion kronor ($426.4 million) from 4.01 billion kronor. Net sales fell to 9.38 billion kronor from 9.72 billion. The slide is explained by lower electricity prices on the Swedish-Norwegian power exchange and lower volumes due to mild weather. Vattenfall's operating profit dropped to 3.75 billion kronor from 4.55 billion and the operating margin shrank to 40.0% from 46.8%. Vattenfall said that the lower margin was due to lower sales combined with higher operating costs.

British composite insurer Royal & Sun Alliance Group reported a 24% rise in first quarter profits. Pre-tax operating profits for the first three months of the year rose to £195 million ($320.6 million), up from £157 million in 1996. Results were helped by a strong performance in North America, where weather-related claims were reduced. The performance of the UK business was little changed from the previous year. Royal & Sun said in a news release that the first quarter results represent ''an encouraging start to the year.''

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

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