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The Market
Leading shares in London ended the week sharply lower, unsettled by a 2.82 per cent fall in Vodafone AirTouch and profit taking in the heavily weighted banking and oil sectors. With Wall Street putting a distinctly lacklustre performance, the FTSE 100 ended the week 68.5 points lower at 6482.3 points. Market turnover remained healthy, topping 1.63 billion by 4.45 pm on Friday.
The banking sector, which accounts for around 18 per cent of London's market value, exerted the greatest downward pressure on the FTSE. The FTSE 350 banking index retreated around 1.37 per cent as investors fretted about the future direction of interest rates following this week's hawkish set of minutes from the last Bank of England's Monetary Policy Committee meeting. Among the worse hit were Lloyds TSB, sliding 28 pence to 827 points, Barclays down 58 pence at 1842 pence and Halifax, off 8.5 pence at 680.5 pence.
Vodafone AirTouch
Vodafone AirTouch, the mobile telecommunications group, announced that the group is well positioned to take advantage of the major opportunities that will undoubtedly arise as it moves into the next century. The group's chief executive argued that Vodafone AirTouch is making outstanding progress and has huge opportunities ahead.
In fact, to enhance its position as the world-leading provider of mobile communication services Vodafone announced a take-over offer for German engineering and telecomunications group Mannesmann. The offer values Mannesmann at EUR124 billion. The transaction is expected to generate proportionate after tax cash flow synergies of at least £500 million in 2003 and £600 million in 2004, Vodafone AirTouch said in a statement.
In its half year results Vodafone reported that its contract customer base declined by 55,000 in the period to 3,675,000, primarily due to problems at two independent service providers and customers switching to Pay As You Talk (PAYT). However, the contract customer base continues to be profitably managed for the 12 months to 30 September 1999. Programmes to reduce churn and restore growth on the contract base are also being implemented. The number of PAYT and contract customers using SMS has continued to increase, as has the average number of messages sent by each customer.
Vodafone also intends to bid for a third generation mobile phone service licence (Universal Mobile Telecommunications Service (UMTS)) in the Government's forthcoming spectrum auction. As part of this process, the company has reached an agreement with the DTI on a change to its licence to enable national roaming by a new entrant Vodafone Interactive.
In the USA and the rest of the world, improvements in the distribution of cellular services are continuing. In the US, with the opening of new retail shops Vodafone reduced its reliance on independent retailers to support customer growth. Customers connected through wholly owned retail operations are less expensive to connect and, at the present time, churn is at a significantly lower rate.
Vodafone is considering an Initial Public Offering in the first half of 2000 of Vodafone Pacific, which comprises its Australian and New Zealand businesses together with the Group's 49 per cent shareholding in Vodafone Fiji. Vodafone New Zealand is expected to pass through break-even in the second half of the financial year.
The group is pursuing new opportunities for delivering third generation ("3G") wireless services in Japan through a partnership with Japan Telecom and British Telecommunications. The Globalstar telecommunications system is based on a constellation of 48 low-earth orbit satellites which, through dual mode handsets, will provide Globalstar service when customers are outside terrestrial network coverage. There are currently 44 satellites in orbit, with the final four satellites to be launched by the end of 1999. Globalstar plans to launch full commercial service during the first half of 2000.
Vodafone's recent merger with AirTouch is expected to generate after tax net cash flow savings of approximately £200 million per year by the year ending 31 March 2002. Good progress has been made towards this target in the three months since closure of the merger and a number of initiatives are being implemented.
Vodafone's interim results showed that cash generated from operating activities increased by £453 million to £966 million due to the growth in the group's operations and the inclusion of the operating cash flows of the former AirTouch businesses following the merger. The principal cash outflows during the period related to cash consideration for the purchase of subsidiary undertakings of £3,493 million, primarily in relation to the AirTouch merger, equity investments in Italy and Japan totalling £452m, capital expenditure of £644m and net interest and other finance charges of £116m, including dividends paid to minority interests of £22m. As a result of these cash flows, and acquired net debt of £1,684 million, net debt at 30 September 1999 had increased by £5,187 million compared to 31 March 1999. The group has incurred costs of approximately £5.1 million in the current period in relation to Year 2000 compliance and is satisfied that the total future amount will not be material to the future profitability or liquidity of the group.
BOC
BOC, the industrial gas supplier, reported a 20 per cent increase in pre-tax profits to £363 million for the year to 30 September . The programme to reduce costs by £120 million a year and to develop a new organisation for BOC, known internally as Renew, has progressed well. Savings of £50 million were achieved in 1999 as planned. By the time of the pre-conditional bid by Air Liquide of France and US-based Air Products in July all aspects of the programme were being implemented and some had been completed. Most of these individual projects have continued; only those with a strong global component have been held in abeyance.
The group has been reorganised along lines of business and into business units. New, more efficient, organisations have been set up for the support functions of information management, finance, human resources and safety. Programmes have also been implemented to increase sales, to improve operational efficiency and thereby to improve margins.
The turnover of BOC's gases business in Europe was lower in 1999 as a result of business disposals and operating profit was down 13 per cent. The carbide business, based on production at Odda in Norway, was sold at the end of September 1998 and gases operations in Benelux and Germany were sold in January 1999.
In the UK, difficult trading conditions in key customer industries, such as steel and chemicals, led to lower demand for some pipeline and liquefied gases during the first half of 1999 and put pressure on prices. Helped by demand from the food industry, sales were on an improving trend in the fourth quarter but still below the level of a year ago. At the same time, industrial and special products turnover increased largely as a result of equipment sales through new outlets. Sales of gases to the electronics industry were adversely affected by customers' plant closures in the UK.
During 1999 a new plant to serve British Steel began production at Port Talbot in south Wales. Another major new plant is under construction at Grangemouth in Scotland to satisfy a long-term contract to supply BP Amoco's refining and petrochemical complex.
In north America, turnover growth in bulk gases was due mainly to increased volumes from new sales contracts. Much of this business was satisfied by smaller-scale on-site plant. After a difficult start to the year, demand from steel industry customers in the US began to recover later in the year. Sales to food industry customers remained buoyant in 1999, reflecting competitive application technology leading to business gains. As in the UK, sales to the electronics industry were affected by some customers' plant closures.
During 1999, BOC Gases opened a new electronic gases facility at Medford, Oregon. Economic conditions were less favourable in all BOC's Latin American markets during 1999 but a combination of new business, improved productivity and price increases to offset local inflation led to improved operating profit from the region as a whole. In Mexico, work on the air separation units, power plant and pipeline facility to supply nitrogen under long-term contract to the Pemex oil company is on schedule with more than 80 per cent of construction completed.
Plants to supply Anaconda Nickel at Murrin Murrin and Western Mining Corporation's copper smelters at Olympic Dam came on stream in 1999 and plants to supply Port Kembla Copper and BHP's steel works at Port Kembla are nearing completion. Construction of a major plant to supply a range of industrial gases and utilities to the BP refinery near Brisbane in Queensland is in progress. The economic climate for BOC's industrial and special products business in Australia was unfavourable with flat conditions in manufacturing and construction. Despite a decline in sales volumes of compressed gases and price increases below inflation, there was an overall increase in turnover. This reflected growth of welding and safety equipment sales following acquisitions of selected distributors.
Japan suffered from severely depressed economic conditions in 1999, particularly in the first part of the year and in the steel and electronics industries. This led to lower sales volumes and prices for industrial gases. Progress in India was held back by a weak economy, particularly in the steel sector. Substantial increases in productivity achieved during 1999 failed to prevent a disappointing result.
The benefits of the BOC's demanding restructuring exercise, aimed at cutting costs went down well with investors. In addition, if the BOC deal goes through the regulatory hurdle, there should be further potential upside for investors.
Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.
James DeBono can be contacted by e-mail: JamesDeBono@CompuServe.com
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