European Business News (EBN), 97-09-15

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CONTENTS

[01] C&W aims to spend $1.6 billion on expanding network

[02] Dalgety plans major overhaul to renew investor confidence

[03] Tietmeyer fuels speculation rates will rise in the near term

[04] American Home, Interneuron withdraw miracle diet drug from shelves

[05] Sara Lee plans to restructure, raise $3 billion by selling assets

[06] Dresdner's supervisory board chairman under investigation over alleged tax evasion

[07] OMV acquires stake in Borealis, aiming to bolster its plastics operations

[08] Rallye chief defends takeover bid for Casino shares

[09] Analysts' welcome KNP BT's sale of Leykam stake

[10] Inchcape first half profit falls 14% to $103 million

[11] GAN chief expects insurer to just break even in the first half

[12] Thorn to appeal against US court ruling

[13] Enel will be privatised next year, Italian official says

[14] French budget deficit narrows to $43 billion

[01] C&W aims to spend $1.6 billion on expanding network

The announcement came as the company, formed earlier this year by a four- way merger, launched a �50 million advertising blitz aimed at raising its profile with British consumers.

Chief Executive Graham Wallace said the �1 billion investment would go on the company's core telecoms network and on connecting a further 600,000 households in its cable franchise areas. This will see the network 70% completed by the end of March with service available to 4.2 million homes. The rest of the network, which has 6 million franchise homes in total, will be completed by 2001.

C&W also said that quarterly sales to June 30 rose 13% on a pro forma basis to �551 million from the like period a year ago. The company said it expected cost savings of over �100 million this year.

'We will achieve over �100 million in synergy savings this financial year compared with the stand-alone plans of the separate companies,' Wallace said. 'We will continue to rationalise the business, and already anticipate ongoing annual cost savings in excess of that �100 million.'

Wallace said C&W had 'effectively completed its integration' since the April merger and that the new management team, which is 40% smaller than in the original companies, is now in place. One-off costs of the reorganisation are expected to hit �200 million, about half of which is the cost of transforming systems and operations related to customer service.

Though cable television penetration grew by 1% to 19.8% and telephone penetration rose 2.5% to 22.6%, Wallace said he expects the proportion of customers taking service to eventually reach 35%. He said, however, that devoting attention to network construction had delayed effective marketing to customers.

Wallace also ruled out engaging in further merger and acquisition activity anytime soon. 'We've got more than enough to do with improving our network and customer service and marketing,' he said. said.

[02] Dalgety plans major overhaul to renew investor confidence

Dalgety also said Chief Executive Richard Clothier would resign and be replaced by former finance director Ken Hanna. Clothier was seen by analysts as a casualty of a major review that will see Dalgety concentrate on just three key areas: pet foods; Pig Improvement Centre, its pig breeding- stock business; and agriculture.

Hanna will oversee the disposal of Dalgety's food-ingredients operation and Martin Brower, a food distributor supplying McDonald's restaurants in the U.S. and Canada. These units should sell for a total of between �300 million and �400 million, according to analysts.

The company didn't give any details about the timing or form of the return of cash to shareholders.

'Certainly, Ken Hanna is not hanging around here,' food analyst Sally Jones of broker Credit Lyonnais said, suggesting that the newly installed chief would move quickly with the restructuring of the group. The news of the strategic review was coupled with a poor set of results that reflected the group's ongoing difficulties in integrating the European pet food operations acquired from Quaker Oats Co. in 1995 as well as Britain's 'mad- cow' crisis, which ate directly into Dalgety's sales.

Pretax profit in the year to June 30 before exceptionals was as expected, declining to �66.2 million from �101.9 million last year. Sales dropped to �4.15 billion from �4.18 billion, and the final dividend, which will be paid as a foreign-income dividend, fell to 6 pence from last year's payout of 13.5 pence.

Credit Lyonnais' Jones reckons the news will have a two-fold effect, showing the company is serious about returning shareholder value but also possibly making it a takeover target. 'A slimmed down Dalgety would have its attractions to a purchaser,' Jones said.

Bidders might include Swiss giant Nestle, which has long been touted as a potential buyer. H.J. Heinz or Ralston Purina Group, which has raised $1.5 billion from a wave of disposals, are also candidates, analysts say.

The competition authorities will more than likely rule out a bid from Associated British Foods, which also is thought be interested.

Ian Lyall. Dow Jones Newswires, London

[03] Tietmeyer fuels speculation rates will rise in the near term

Tietmeyer said it was theoretically possible for the Bundesbank to change interest rates in the run-up to European monetary union on January 1, 1999 but added that after EMU members are chosen in the spring of 1998, 'the room to manoeuvre gets narrower'.

Financial markets interpreted the remark as the clearest sign yet that the Bundesbank had only limited time to raise interest rates and some dealers said a rate hike in the near term now looked more likely.

But many market participants say it will be hard for the Bundesbank to justify a rate increase while unemployment remains at record levels and opinions remain divided on when a rate move will come.

Speculation about an interest rate increase have grown in recent months due to an uptick in consumer inflation which in August reached 2.1 percent, exceeding the 2.0 percent level the Bundesbank deems acceptable.

And adding to rate hike fears was the release of German wholesale price data, which supported recent concern over returning inflationary pressures. August prices rose a higher that expected 0.7% from July and were up 3.3% from a year ago, the Federal Statistics Office said. 'The clear increase in the index is especially due to strong price rises for agricultural and petroleum products,' the office said, while also warning that the figures are usually volatile.

Bundesbank officials have recently been warning that price trends have been moving in the wrong direction and that the period of low inflation may be coming to an end, pointing to possible interest rate rises ahead. And sooner rather than later.

Tietmeyer also warned that there is still plenty of chance for economic and monetary union to go wrong even if the European Union succeeds in getting EMU underway. However, 'this doesn't mean that a rate decision wouldn't be possible anymore thereafter,' he said.

At an informal meeting of European Union finance ministers and central bankers this weekend, Tietmeyer said central banks must co-ordinate interest rates more closely in order to defend bilateral foreign exchange rates after their pre-announcement in spring 1998. Asked about that statement, Tietmeyer said, 'The room for independent and un-coordinated rate moves will become smaller.'

Tietmeyer warned that 'discipline in monetary and fiscal policy aren't just entry conditions for EMU, they must be practised in the long run.'

The Bundesbank president's remarks fuelled a bout of mark gains.

'The dollar is looking very soft,' said Paul Coughlin, chief trader at American Express Bank in London. 'Everybody is reading the Tietmeyer comments as suggesting they are going to raise rates and against this backdrop we could quite easily see 1.72 (marks).

An EBN Interactive Roundup

[04] American Home, Interneuron withdraw miracle diet drug from shelves

The action was based on new findings from doctors who have evaluated patients taking these two drugs with echocardiograms, a special procedure that can test the functioning of heart valves.

'These findings indicate that approximately 30 percent of patients who were evaluated had abnormal echocardiograms, even though they had no symptoms. This is a much higher than expected percentage of abnormal test results.'

The Federal Drug Administration said people who are using the drugs should stop immediately and consult their doctors.

Wyeth-Ayerst Laboratories, a subsidiary of American Home Products., which makes fenfluramine under the name Pondimin, and the closely related drug dexfenfluramine under the name Redux, as well as Interneuron Pharmaceuticals, which also makes dexfenfluramine, both agreed to withdraw the drugs.

The companies said the moves come on new preliminary information regarding heart valve abnormalities in patients using these medications, most often in combination with phentermine, another weight loss medication.

Last July, the Mayo Clinic, a research institute, reported 24 healthy patients had developed heart-valve disease after taking a combination of weight loss medication pills, which included Redux and Podimin.

Interneuron said it expects to take charge in the fourth quarter ending Sept. 30 of $8 million to $12 million for expenses related to the discontinued operations related to Redux.

The company said a significant portion of its revenues have been derived from Redux sales, and it anticipates it will not incur certain previously planned expenses related to the development of a once-a-day formulation and other activities relating to Redux.

American Home Products expects to take a charge of between $200 million and $300 million, or 20 to 30 cents a share, to cover the costs of recalling its weight-loss drugs Pondimin and Redux.

The pharmaceuticals giant also said it expects the withdrawal of the products to cut earnings by 2 cents a share for each its third and fourth quarters. The company said it expects the recall of the drugs to cut 10 cents a share from its 1998 earnings.

American Home also said it may have to take further charges to cover the costs of defending or possibly settling suits regarding the drugs, which have been linked to valvular heart disorders. American Home said it expects more suits will be filed and said it can't currently determine the possible extent of claims it will face in the actions.

[05] Sara Lee plans to restructure, raise $3 billion by selling assets

The US-based food and consumer products company said it will use the money to buy back its stock in the open market.

Sara Lee will record an after-tax charge of $1.6 billion for fiscal 1998 as a result of the restructuring, related to the sale and write-down of assets. The company has not determined the amount or composition of the write-off, but expects to finish it by the end of the third quarter.

As part of the first phase of the restructuring, the company said it entered talks to sell its knit-related yarn and textile operations, a move that Sara Lee expects will generate $500 million in cash over the next three years.

The company said it plans to sell other assets, including food and non-food businesses, in subsequent deals over the three-year period.

The company expects to save $25 million to $50 million in 1998 from its restructuring efforts, with savings rising to $100 million to $125 million by the year 2000. Sara Lee said its earnings will grow as a result, but it will also use the money it saves to increase sales through investments and marketing programs.

Sara Lee said it is also considering the sale of some businesses with revenues of less than $1 billion, but will not sell any unless it receives 'economically attractive' offers.

The company said selling its knit-related operations will reduce its manufacturing presence in order to focus on building and marketing its leading core brands.

'This program will significantly reduce the capital demands on our company, enhance our competitiveness and let us focus even more sharply on our mission of building brands,' Chairman John Bryan said in a statement.

Sara Lee's restructuring comes on the heels of similar announcements from Campbell Soup and H.J. Heinz.

Earlier this month, Campbell said it plans to spin off seven 'nonstrategic' business lines in order to focus on its more profitable soup, sauce and biscuit operations. H.J. Heinz last March announced Project Millennia, a reorganisation and growth plan.

William Leach, who follows Sara Lee for Donaldson Lufkin & Jenrette Securities, said the plan will not materially change the business mix of Sara Lee, which will not be unloading any of its core businesses.

'The businesses (to be sold) aren't bad, it's just that they got lost in the shuffle at Sara Lee,' Leach said of the businesses with sales of less than $1 billion, which includes the company's Coach leather unit, among others.

Deutsche Morgan's Ramey said Sara Lee's returns on invested capital should grow at least four percentage points by fiscal 1999, to 20%. He also said the company's earnings growth should increase to a range of 13% to 15%, up from the current 10% to 12%.

'This restructuring program is aimed at fundamentally reshaping Sara Lee for the future,' said the company's chairman and chief executive, John Bryan. 'While Sara Lee is currently operating at record levels by every measure of financial performance, we always seek to further improve results and enhance shareholder value.'

[06] Dresdner's supervisory board chairman under investigation over alleged tax evasion

Wolfgang Roeller, former chairman of the management board, is suspected of hiding funds in an account at a charitable foundation in Liechtenstein.

A spokesman for the Duesseldorf public prosecutor's office said the investigation of Roeller resulted from a long-standing probe into accusations of tax evasion by customers and staff of Germany's second- largest bank.

In addition, a legal complaint had been filed against Roeller by a person who chose to remain anonymous, the spokesman said. He declined to reveal details.

A spokesman for Dresdner declined to comment, saying the matter concerned Mr Roeller himself rather than the bank. Roeller could not immediately be reached for comment.

Tax authorities have since 1994 been investigating Dresdner Bank and several other banks for allegedly helping customers evade tax by transferring funds to tax havens like Luxembourg.

The banks, which also include DG Bank , Commerzbank among others, have consistently denied the accusations.

The probe moved to include top executives at Dresdner earlier this month when management board members at the bank's Frankfurt headquarters had their offices searched.

Like many of its rivals, Dresdner has been accused of helping clients hide funds in hard-to-trace accounts to circumvent tax authorities.

[07] OMV acquires stake in Borealis, aiming to bolster its plastics operations

'We think it's slightly positive for the company,' said Folker Wintersberger, an analyst with Creditanstalt Investment Bank in Vienna. 'It makes sense to be a partner in a larger company than in smaller production sites.'

OMV said it and the United Arab Emirates' International Petroleum Investment, an arm of the Abu Dhabi National Oil Co. and 20% shareholder in OMV, would each buy a 25% stake in Borealis from the Finnish energy group Neste.

The deal is worth about 4 billion Finnish markkaa ($751.2 million), Borealis said. Also as part of the deal, OMV will transfer its plastics subsidiary PCD Polymere to Borealis.

OMV said the various companies involved with the deal signed a non-binding letter of commitment and the final agreement is expected to be completed by the end of the year.

'It remains to be seen just how quickly this will bear fruit,' said Friedrich Mostbach, head analyst for Die Erste Invest Consult in Vienna. 'For the OMV group, this will have mid- and long-term benefits.'

'It makes sense to see it as only slightly positive,' Wintersberger at Creditanstalt Investment Bank said. 'It's only a letter of intent.'

Although he said it's a sign of OMV's confidence that they announced the letter of intent, he stressed that a final agreement isn't expected to be completed until the end of the year.

In late 1995, OMV seemed about to form a joint venture with Spain's Repsol, forming Europe's third largest plastics group, but the deal went sour when, in OMV's words, the two companies 'did not reach a common understanding on their strategic approach.'

But analysts said if this deal holds, OMV's position in the plastics sector should improve.

'I think this certainly should be judged as positive,' said Mostboeck at Die Erste. 'A while ago, OMV said it wanted a strong partner in the sector.'

As partner to Europe's largest producer of polyolefine, OMV will have more control of prices and costs, as well as improved capacity, he said.

The companies estimated annual production at Borealis, once PCD is integrated, could be more than 3 million metric tons, raising Borealis' ranking among global producers to second or third from fifth.

In Copenhagen, Borealis Chief Financial Officer Svein Rennemo, said, 'We welcome IPIC and OMV as new owners. Together with Statoil, they offer Borealis an international ownership base, as well as competitive feedstocks.'

Norway's Statoil holds the remaining 50% of Borealis. Even though Neste's sale of Borealis was widely expected, the divestment is also regarded as good news for the Finnish energy company.

'We have waited a long time for Neste to sell Borealis, now Neste can return to its core operations and could use the money for Borealis to invest in oil and gas operations around the Baltic Sea,' said Karita Meling, analyst at Swedish Handelsbanken's branch in Helsinki.

Also, market watchers said the price paid for Neste's 50% stake is higher than expected.

'The 4 billion markka is more than I had expected. I believed that Neste had put the value of Borealis, which is a very cyclical company, too high,' Meling said. Roger Malone, Vienna, Dow Jones Newswires

[08] Rallye chief defends takeover bid for Casino shares

Some analysts and the local French press have criticised the Rallye offer as too complicated.

'I think the offer that we are making is a substantially better offer than Promodes,' Naouri said, adding 'It's actually extremely simple.'

One of its benefits, he said, includes not forcing a takeover but allowing Casino to exist as a separate entity. 'The goal is not control,' he said.

Naouri also said that he expected approval from the stock exchange regulatory authority, the Conseil des Marches Financiers, throwing water on suggestions that the organisation would reject the deal because it is so complicated.

In an earlier statement, Promodes said it had no plans to raise its takeover bid and that it was awaiting the regulators decisions on the competing offers.

In a further defensive move, Rallye defended itself against Promodes' criticism of the Rallye offer. On Friday, Promodes spokesmen told reporters that the Rallye offer was merely financial, not industrial, and would likely be rejected.

Rallye board President Andre Crestey told reporters that the deal was not only good financially, but industrially as well.

The Conseil de Marches Financiers will announce sometime this week whether or not the offer is valid.

Rallye already owns 29% of Casino's equity and 36% of its voting rights. The Guichard family, which owns 8% of Casino's equity and has 16% of its voting rights, has also thrown in support for the Rallye offer. Both groups officially rejected Promodes' offer for their Casino shares. Rallye also rejected Casino's offer for the Rallye shares.

[09] Analysts' welcome KNP BT's sale of Leykam stake

'It's not hard to see that this will positively affect their earnings almost immediately,' said Okko de Jager, analyst with Suez Nederland Securities in Amsterdam, 'It's in line with their announced intention to move away from paper production activities, and gives them more room to expand in other areas.'

KNP BT announced the sale, saying it will receive approximately 1.5 billion guilders ($735 million) from the deal. Roughly half of this will be in cash, with the remainder to be paid in Sappi shares. As a result, KNP BT will hold a 15% stake in the South African company. The transaction also means Sappi will take on Leykam's substantial debts, which will amount to about 1.4 billion guilders by the end of this year.

Also, Sappi will acquire a 72% stake in Austrian holding company Leykam Muerztaler from KNP BT. KNP owns 70% of KNP Leykam, and Leykam Muerztaler owns the remainder.

'The price is a good one,' said De Jager, 'they've managed to get back the intrinsic value of the company, and that's not bad at all.'

While De Jager commented that the partial payment in shares is not quite the same as getting the whole sum in cash,' he noted that KNP BT's 15% stake in Sappi is worth holding on to.

'(Sappi) is of course one of the strongest players in the segment on a world-wide level,' said De Jager, 'And if you look at where the paper cycle is at the moment, the share certainly has potential.

Simon Philipse, Amsterdam Dow Jones

[10] Inchcape first half profit falls 14% to $103 million

The group took a charge of �12.7 million on the sale and termination of operations in the first half, compared with a charge of �11.9 million a year earlier. A gain of �0.3 million on disposals and investments also compared unfavourably with a �4.4 million gain a year earlier.

Inchcape said pretax profit would have been �4.6 million higher if translated at the average exchange rates prevailing in the comparable period.

The group said its recovery is on track, with profit on continuing businesses up 6%. Pretax profit also benefited from a fall in the net interest charge to �3.9 million from �19 million, mainly due to interest earned on the proceeds of divestments. Total operating profit at the motors division was up 15% to �60.8 million. The import and distribution business increased its market share in the UK and Australia, while in Hong Kong the operation benefited from stronger market conditions.

The bottling division's performance improved, although further growth in South America was offset by start up costs in Russia. By the end of the year, Inchape said it will have exited from a number of under performing businesses representing 34% of sales and 16% of assets employed in the Asia- Pacific marketing business in 1996.

In doing so, Inchcape expects to incur total exceptional costs of �55 million in 1997. The group said its disposal program should be 'broadly cash neutral' and will increase profit by about �9 million a year.

[11] GAN chief expects insurer to just break even in the first half

He said GAN will make a provision during the first half of around 500 million French francs ($82.8 million) to account for changes in the indemnification of UK retirement plans and another 500 million francs linked to financing for a major real-estate company.

Pfeiffer declined to name that company.

He also noted that CIC's first-half net banking income was stable in the first six months, but its net profit will rise as forecast.

CIC's 1996 first-half net profit totalled 533 million francs, while its net banking income totalled 8.56 billion francs.

GAN, currently 80% state owned, is expected to be privatised in the next few weeks. In 1996, the company lost 5.7 billion francs. On July 30, the European Union commission approved a bail-out plan that will cost French taxpayers at least 20 billion francs.

[12] Thorn to appeal against US court ruling

Thorn said its decision to appeal follows a ruling by the Superior Court of New Jersey Sept. 12 granting damages to plaintiffs in a class action lawsuit alleging consumer fraud.

'Thorn believes it has strong grounds for appeal, which it intends to vigorously pursue, and is confident that the New Jersey Superior Court's ruling won't prevail,' it said.

The class action suit alleged that rental purchase agreements from Thorn's Rent-A-Centers are credit sales and don't comply with the requirements of the New Jersey Retail Installment Sales Act and the New Jersey Consumer Fraud Act.

Thorn said it estimates potential damages from the lawsuit will total about $120 million before legal fees.

In the ruling Sept. 12, the court agreed with the plaintiff's formula for calculating damages as 40% of all rental payments made by class members on their rent-to-own contracts, plus all reinstatement fees arising under those contracts.

Thorn noted that under the New Jersey Consumer Fraud Act, all damages are automatically tripled.

A decision from the appellate division is expected within six to 12 months of the appeal being lodged.

[13] Enel will be privatised next year, Italian official says

Parliament has already set up the legislation for the creation of a regulatory authority to oversee the electricity sector, but the government must still put in place an industrial plan for the market, which is currently dominated by Enel.

Bersani said the government would restructure Enel, which has a virtual monopoly over production, transmission and distribution of electricity in Italy.

'In the course of 1998 this (restructuring) must take place, together with the launch of the privatisation programme,' Bersani said. 'I think this (timetable) is credible,' he added.

Various Italian governments over the past five years have pledged to sell off the state's 100% holding in Enel, but have failed to reach an agreement over how the company should be sold.

Bersani wants Enel to be privatised in one block and has turned down demands from some quarters to break it into its separate units to help boost competition in the sector. The government argues that a split-up would take years to effect.

[14] French budget deficit narrows to $43 billion

The government of former Prime Minister Alain Juppe set a budget deficit target for 1997 of 284.8 billion francs compared with 1996's 295.4 billion francs gap. The 1996 deficit figure exceeded government goals for a deficit of 288 billion francs.

General budget receipts at the end of July stood at 760.9 billion francs, up 22.7 billion francs, or 3.1%, from a year ago.

General budget expenditures at the end of July were up 4.9 billion francs, or 0.5% at 950.8 billion francs. The Finance Ministry added that special Treasury accounts charges were up 4 billion francs at 69.9 billion francs from 65.9 billion francs at the same time a year ago.

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