Tuesday, July 27, 2004


Dreyer's Grand Ice Cream Acquires Silhouette Brands
Dreyer's Grand Ice Cream Holdings Inc. has added firepower to its low-carbohydrate arsenal by acquiring Silhouette Brands, Inc. for $65.2 million in cash.

Based in New York and founded in 1994 by Marc Wexler and Sam Pugliese, Silhouette, whose brands feature low-fat and low-carb ice cream snacks marketed under the Skinny Cow and Skinny Carb labels, said in February it was seeking to be acquired.

For Dreyer's, the acquisition marks the next chapter in the company's ice cream-buying binge, which in February found the country's top-selling ice cream parent gobbling up the U.S. rights to Haagen-Dazs, including ownership of 236 stores.

Prior to the acquisition, Dreyer's acted as the national distributor for Silhouette Brands. Following this acquisition, Dreyer's anticipates significant administrative, selling, and management synergies; reduced costs; and raw material sourcing improvements.

As one of the fastest-growing partners in Dreyer's distribution portfolio in recent years, company officials said Silhouette Brands adds significant breadth to the ice cream assortment that Dreyer's offers consumers and retailers across the country. Silhouette Brands' executives, meanwhile, praised Dreyer's as an essential partner in its growth by providing direct-store distribution for many years.

Dreyer's paid Silhouette stockholders $4.76 for each common stock share and $6.56 for each preferred stock share held. The common stock price represented a 15 percent premium over Silhouette's closing stock price of $4.15 Friday.
Source; eMedia, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


PBH Research Exposes Missed Opportunities
Fruit and vegetable offerings by quick-service, quick casual, family, and casual dining restaurants are increasing, but foodservice operators are still largely missing opportunities to appeal to their customers' interest in better health - and to ring up better sales in the process.

That's according to new "5 A Day Foodservice Opportunity Gap" research and analysis presented by the Produce for Better Health Foundation (PBH) at a special 5 A Day Foodservice Summit held late last week in Monterey, Calif.

Hosted by PBH and the Produce Marketing Association (PMA), the invitation-only summit revealed a wide gap in fruit and vegetable offerings in quick-service, quick casual, family, and casual dining restaurants, "which presents an opportunity for everyone to get what they want - customers, operators, and fruit and vegetable suppliers," PBH foodservice director Brenda Humphreys told summit attendees.

Opening the conference by offering PBH's "State of the Country" address, Humphreys noted that public health, public policy, and consumer health awareness are converging to create an environment conducive to change among foodservice operators, especially in these dining formats.

"The foodservice industry has been taking a lot of the heat for the obesity epidemic," she said, adding that healthier menu options like fruits and vegetables offer chains a way to get out of the kitchen, or at least the kitchen of public opinion. Likewise, while the foodservice sector offers significant opportunity, it has largely been untapped by fruit and vegetable suppliers, Humphreys said, adding that with almost half of every American food dollar now being spent on food prepared away from home, "the industry can't afford to overlook the market potential that exists in foodservice."
Source; PBH, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Soaring volumes drive Kuehne & Nagel results
Swiss based logistics operator Kuehne & Nagel has released its interim results for the first six months of 2004. Reflecting the positive mood of many logistics businesses, the company has put in a strong performance so far this year. Net revenues increased by 20% to CHF 4,246.9m (€2,759.9m) compared with the same period last year. Operating profit (EBITA) increased by 36.9% to CHF 181.6m (€118m).
The good results were largely due to the performance of its air and sea forwarding division. Sea freight volumes grew by 25% with container traffic to and from Asia increasing by over 40%. Even volumes on the relatively weaker transatlantic trade lanes grew strongly with traffic up 12%. Operating profits improved by 16.3% in comparison with the same period in 2003.

The results were also buoyed by the integration of Pracht Spedition in Germany. The acquisition was a key driver of revenues in the company’s Road & Rail unit, with particularly strong demand for international and intermodal services. Meanwhile its Contract Logistics division doubled its operating profits to CHF20.2m (€13m) on a 5% increase of turnover to CHF581.1m (€377.6m). The unit has experienced problems over the past few years especially in the US, but a re-structuring combined with strong warehouse utilization in Europe has brought about a turnaround in fortunes.
Write; LuisB, july 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Bigger billboard turnover boost for Stroer Polska
Stroer Polska, one of the leading companies on the domestic outdoor advertising market, has published results for the first six months of the year with revenues of zł. 45 million and a near 20% increase in turnover compared to the same period last year.
"The growth is due to the introduction of a new hoarding campaign. At the beginning of the year we launched a two-week system replacing the previous monthly campaigns. This led to an increase in supply of billboards and cut display costs for customers," said company president Janusz Malinowski. The price of a two-week campaign is cheaper by around 30% than a monthly campaign. According to company forecasts Stroer Polska will post profits of zł.3 million on revenues of zł.100 million this year. In 2005 the company plans to invest around zł.10 million on further development of its services.
Write; by A.K., July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Regulatory Agency Approves Petrobras Appraisal, Drilling Plans
Brazil's hydrocarbons regulator ANP has approved plans by federal energy company Petrobras to appraise and drill 27 areas for commercial feasibility, O Globo news service quoted the company's exploration and production director Guilherme Estrella as saying.

The approval was given after Brazil's federal audit court cleared Petrobras's plans. The company has asked for permission to study and drill the fields in the next two to three years to study their commercial feasibility.
The authorization includes the Mexilhão field, in the Santos basin, where 419 billion cubic meters of natural gas reserves have been found, the Golfinho field in the Espírito Santo basin where the company has found signs of light crude and the Baleia Franca field in the Campos basin, the news service reported.
The development of the Espírito Santo basin includes a US$500mn investment plan to build gas pipelines to shore and a liquefaction plant. The basin is seen to reach production of 100,000 barrels of oil a day (b/d), from the current 40,000b/d, and 1.1 million cubic meters of gas a day, Estrella told O Globo.

Petrobras should speed up production plans for most profitable fields, including light crude production, which should help the country be self-sufficient in oil by 2005, bringing forward self-sufficiency target from 2006, O Globo reported.

Petrobras currently produces 1.6mb/d in Brazil, accounting for about 80% of the country's oil needs.
Estrella declined to say how much would be invested in the development program but said the company invested US$500mn in the initial exploratory activities.

Mature fields
Separately, the development of Petrobras's mature fields by small and medium size companies will depend on talks between those companies and Petrobras, ANP board member Newton Monteiro told local press.
Petrobras has operation licenses for 40 mature fields that have low levels of productivity.
Monteiro, who was sworn in last week for a second four-year term as ANP board member, said small and medium size companies would have to seek partnerships with Petrobras to develop the fields.
It is part of ANP's policy to use the cheaper development of mature fields in Brazil as an incentive for the creation of small and medium sized oil and gas companies and development of local technology.
The 913 blocks that ANP plans to auction on August 17-19 in the sixth round of oil and gas exploration licenses include several mature fields.
Write; by LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Korea, Japan and China agree on IT cooperation
The governments of Korea, Japan and China have agreed to start an international working group to share their advancements in information technology, extending a movement among Asian countries to jointly develop solutions to compete against dominant multinational high-tech firms such as Microsoft Corp.

The three countries announced the launch of the East Asia ICT (CJK) Summit in Tokyo on July 26, with all countries agreeing to exchange information on markets, technology trends and standardization activities while encouraging business partnerships and strategic alliances in both the public and private sectors.
The working group will run through December 2009 and include officials from governments, research institutes and private companies. The agreement resulted from a meeting of information and communication technology ministers from each country.

Korea, China and Japan had been cooperating in expanding broadband Internet coverage and developing new IT industry growth engines over the past few years. The East Asian region has put itself in a position to become the trendsetter in the global IT industry.
The three countries have agreed to set up an advanced framework to cooperate on mobile communication, next generation Internet and open-source solutions among other sectors. We believe private companies to benefit greatly from this agreement.

Under the agreement, the three countries will continue recent efforts to develop open-source software, setting up the tentatively named "Northeast Asia open-source software promotion forum," comprised of working-level officials from industries, research institutes and other related organizations to promote open-source applications.

In other issues, the three countries decided to cooperate in developing third-generation mobile telephony and other wireless solutions, encouraging joint efforts in research and development of communication technologies and their standardization.

The working group will jointly develop solutions for the next-generation Internet, most notably Internet protocol version 6, and radio frequency identification technology. The sides will cooperate in the development and promotion of IPv6 application services, while leading the experiments in setting up an interoperable regional network for RFID.
Write; by LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Digital camera boom drives new Web sites
Photo-sharing now a rich revenue source
Can't get anyone to peruse the 50 family photos from your new digital camera? Internet companies would love to see them.

As digital cameras continue their sales boom, Web sites have found an increasingly attractive business helping consumers share their photos with friends and family.

This month, two online photo-sharing services were bought within a 24-hour period. The technology publisher CNET Networks will pay $70 million for a longtime market leader, Webshots, and Google paid an undisclosed amount for a relative newcomer, Picasa.

The announcements came on the heels of a series of improvements from Yahoo Photos that have helped it leapfrog Webshots as the Internet leader in photo sharing.

Why all the activity? Analysts said a resurgence in the online advertising market had helped, along with a seemingly insatiable consumer appetite for digital photography.

"The digital camera adoption rate continues to defy expectations," said Chris Chute, an analyst with the research and consulting firm IDC, who predicted that digital camera sales would reach 25 million this year. Including the 27 million camera phones that are expected to sell this year, at least one-third of American households will be able to take digital photos by year's end.

Chute said that 28 percent of digital-camera owners shared their pictures over the Internet and that cellphones and devices connected to home networks, for instance, would facilitate photo sharing.

Some online photo sites have had a surge in visitors in the past year, according to comScore Media Metrix, an Internet measurement firm, while others have leveled off. Yahoo and Webshots have had marginal declines in visitors, while Kodak's Ofoto.com, District Photo's Snapfish.com and Shutterfly.com attracted 25 percent to 30 percent more visitors. What is more, the value of those visitors has increased as the demand for online advertising has intensified.

Executives said those audience sizes were enticing enough for marketers to open their checkbooks. Narendra Rocherolle, co-chief executive of Webshots, said one reason Webshots chose CNET over other suitors was that it could help the company reach more well-known advertisers, because it already had long-term relationships with advertisers like Canon and Sony.

Webshots said it was profitable and expected to generate $12 million to $13 million in revenue this year, half from advertising and the remainder from selling premium online services and photo prints. CNET said it expected overall revenue for Webshots to grow by at least one-third next year.

Webshots, like several other photo-sharing sites, lets consumers upload their digital photos to a Web page on the site, free of charge. From there, users create albums, then e-mail invitations for others to look.

Webshots has faced increasing competition from Yahoo, which has in recent months added a number of features to enable users to share their photos more easily and decreased the number of places where advertisements appear.

Late last year, Yahoo began a service that allows users to view their photos on wireless phones. "So instead of Dad pulling out his wallet for pictures, you can do it all electronically," Jeff Stoddard, director of Yahoo Photos, said.

Even so, the smaller competitors have some advantages. Ofoto.com and Sony's Imagestation.com, for instance, have considerable muscle behind them, while Snapfish.com can rely on marketing support from District Photo, one of the biggest mail-order film processors.

Ofoto, Snapfish and Shutterfly.com have for years helped customers convert conventional photos into digital images they could e-mail to others. Now they, too, enable digital camera users to swap photos, or print them professionally for less than 20 cents an image.

Raj Kapoor, president of Snapfish, said the company had recently allowed camera phone users to e-mail images directly to their albums on the Snapfish site. This week the company will vastly expand the merchandise people can order decorated with their photos. The new items include dog leashes, baby bibs and neckties.

In this competitive market, Google's purchase of Picasa is particularly intriguing. Unlike most other services, Picasa is a peer-to-peer sharing application. Users open a window similar to that of instant messaging applications to swap photos.

Google declined to comment on its acquisition, citing the required "quiet period" for companies that are about to sell shares to the public.
Source; The New York Times, July 04
Write; by Bob Tedeschi

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


USA: Benetton Shuts Second Prime-Location Store
Clothing retailer Benetton has closed its store at 666 Third Avenue, 42nd Street - the second high-profile location abandoned by the company in recent months as it focuses on the more upmarket Sisley brand.
Benetton shut its 555 Broadway outlet in SoHo in the spring.
The company, which has about 5000 franchised stores, reported a 13 per cent year-on-year profit decrease for the first half of 2004.
Write; LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Lidl sets sights on Aldi
Lidl is poised to overtake arch-rival Aldi to become the leading hard discounter in Europe by 2012 as it pushes into 7 new territories, according to food think-tank IGD. Both the German chains have been expanding in France especially and Western Europe, while Lidl is planning an assault on Central and Eastern Europe. The markets Lidl is targeting include Denmark, Hungary, Estonia, Latvia, Lithuania, Croatia and Slovenia, where Aldi has no presence. Both retailers also want to expand in Switzerland and Norway, but Aldi is focused on growth in Canada and New Zealand, which could allow Lidl to push ahead in Europe. At present, Aldi is almost double the size of Lidl in Germany. Aldi has a German market share of 9.4% and 4,050 stores, while Lidl has 4.9% and 2,522 shops. Excluding Germany, Lidl already generates greater European sales than Aldi - E9bn sales, compared with E8bn - and looks likely to beat Aldi to the Continent's number one slot.
Write; LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Shiseido narrows first-quarter net loss
Japanese beauty group Shiseido reduced its net loss to Y6.61bn/$60.2m for the first quarter ended June 30, 2004, compared with Y8.42bn/$76.7m in the same period last year. The company attributed the reduction in net loss to lower income taxes. Net sales, however, increased 1.7% during the quarter to reach Y144.2m/$1.3m. Sales at Shiseido's core cosmetics activity were up 2.1% to Y115.6m/$1.1m, offsetting a 3.1% decline in toiletries sales which reached Y13.3m/$121,120.
By region, the group recorded a 0.5% dip in sales in its home country, its largest market, to Y103.8m/$945,673. Overseas sales fared better increasing 7.7% to Y40.4m/$368,238 with European sales climbing 12.7% to Y19.7m/$178,956.
Write; by LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Tesco selling Dillons, partnering with eDiets
Leading UK supermarket operator Tesco is understood to be in talks to sell its Dillons newsagent chain in a deal worth £20m (US$36.8m).
The Dillons chain includes 180 stores selling newspapers, tobacco and grocery items. The mooted buyer is private convenience store chain TM Retail.
Tesco acquired Dillons in autumn 2002 as part of its £357m acquisition of the T&S Stores neighbourhood store group, and has never seen it as core to its business.
TM Retail is already one of the country’s biggest newsagent operators, owning the Martin’s and Forbuoys chains.
In a related story, Tesco is reported to have signed a licensing deal with eDiets.com, the US Internet diet service. Tesco has paid £2m to acquire the UK and Ireland rights to eDiets.com’s technology.
Tesco is reported to be planning to expand the service to enable dieters to order products recommended in their personalised meal plan to their door.
Write; LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -



Unilever washes investment woes away
Though foreign investors are still reluctant to invest in Indonesia or to expand their existing businesses in the country, publicly listed PT Unilever Indonesia, a subsidiary of the Anglo-Dutch global consumer-products giant Unilever Plc, last week announced plans to increase its investment.

Indonesia's "most admired company in 2003" in the toiletries and cosmetics category said it would invest another Rp4.5 trillion (US$500 million) in the country over the next 10 years.

The company claims that almost 99% of Indonesian households use at least one of its brands of soap, detergent, shampoo, cosmetics, toothpaste and food and beverage products, which include margarine, milk, ketchup and ice cream.

Indonesians get Unilever's highest-quality Lux soap at the lowest price in the world because, according to Unilever Indonesia's former president, Nihal Vijaya Devadas Kaviratne, the raw material is available in the country and the labor is productive and low-cost.

With household names such as Pepsodent, Sunsilk, Rinso, Surf, Lux and Lifebuoy, and the best-selling tea, Sariwangi, Unilever has cashed in on most, if not all, of several positive business factors in the world's fourth-biggest nation.

Net profits increased fivefold in the three years leading up to 2003, and sales are now more than before the 1997 Asian financial crisis.

Audited net profit surged by 33% last year on higher sales and amid strong consumer purchasing power. The company booked sales of Rp8.12 trillion against Rp7.01 trillion in 2002. Meanwhile, profit rose last year to Rp1.29 trillion ($151 million), or Rp170 per share, from Rp978 billion, or Rp128 per share, in 2002.

Dividend payments were Rp1.53 trillion ($162 million), or Rp200 per share, equivalent to 118% of Unilever's net profits for 2003. Unilever made the gesture to celebrate the company's 70th anniversary this year, but shareholders may have cause to be happy for some time to come as the company's strengths continue to grow.

Unilever takes off amid crisis
Though the company has operated in Indonesia for seven decades, it was not until the 1997 regional financial crisis that it really got into top gear.

Unilever and other multinationals quickly wired into the liberal investment regime in Indonesia in the wake of a change in the law in January 1999 that removed the 49% limit on foreign shareholding in Indonesian companies. A ban on foreign investment in the distribution business was also removed, making it easier for foreign companies to manufacture and distribute their own consumer goods. The protracted weakness of the rupiah in the years following the crisis and the consequent bargain brands for personal and household-care products also aided the company's expansion.

The company has made six acquisitions and joint ventures since 1999, including five local ones, the first of which was Yuhan. This deal gave Unilever the rights to the best-selling Moltos fabric conditioner and Superpell, a popular floor cleaner. Unilever then paid $120 million for Kecap Bango, the country's top-selling soy sauce. A portfolio of more than 65 brands was slashed in half to enable the company to focus on its strongest brands.

Private consumption has driven economic growth in Indonesia since the crisis, accounting for about 60% of the growth recorded. This, coupled with strong levels of household savings, a low-interest-rate environment and a predominantly young population, has helped lift the company's sales to new highs.

Though labor issues remain a problem in Indonesia, cheaper wage levels have been an added incentive for Unilever Indonesia to increase exports, particularly to other countries in the region.

Lower tariffs due to the ASEAN (Association of Southeast Asian Nations) Free Trade Agreement are another positive factor. AFTA prompted the corporate decision to make Indonesia the regional sourcing center for a number of Unilever's products. Tea factories in Australia and Singapore were closed down and relocated to Indonesia, as were Lux and Lifebuoy soap factories previously located in Malaysia.

The AFTA agreement allows most products manufactured in one of the 10 ASEAN member states to be shipped to any other state at a 5% duty or less.

In addition to these factors, Unilever's expansion was also encouraged by the availability of raw material locally. The special taste of Kecap Bango, for example, derives from black soybeans, which grow only in Indonesia. To ensure continuity of supply, the company has struck deals with some 800 farmers who grow about 200 tons of black soybeans every year for Unilever.

Indonesia is also one of the world's major producers of palm oil, a primary raw material for many of the company's products. Industries under the Unilever group need about 1.7 million tons of crude palm oil (CPO) every year, equivalent to 5% of the world's CPO production, which is about 22 million tons.

Globally, about 56% of Unilever's business is in food, while some 44% is in household and personal care products. In Indonesia, the household and personal-care business is growing at about 14-15%, but this rate is dwarfed by its food business. Food currently accounts for about 18% of the company's total business in Indonesia, but Unilever expects this to increase to about 25% by 2010.

A prime export position
Exports account for nearly 6% of turnover, though this is expected to increase to about 15%, approximately $150 million, within the next three to five years.

Products for export include toothpaste, which is manufactured in Indonesia and supplied to the Philippines and other countries in the region. In addition, all the tea and soap for the Asia-Pacific region are now supplied from Indonesia. Tea is also exported to Japan and Australia. Ice cream made in Indonesia is also a large export item and margarine will follow soon. Economies of scale make production costs very competitive, compared with players with a small market share and ensuing high costs.

Even the poor can afford at least some of their basic needs, with the widely available single-use packs of Rinso detergent and Sunsilk shampoo priced at Rp500 (5.5 cents).

With more than 20,000 distributors and at least 2 million retailers, there is little chance of major hiccups in getting the goods to the customers.

Of course, it's not all plain sailing for businesses in Indonesia. Labor-intensive factories have shut down because of competition from China. Sony decided more than a year ago that it was not worth the hassles and risks and left the country. Many other businesses chose to relocate their factories out of the country at the same time that Unilever was doing the opposite and relocating several factories from elsewhere in the region to Indonesia.

But Unilever is a classic example of how savvy companies that have long-running exposure to a country and understand the risks are prepared to invest further and also to reach out to other committed multinationals. A 50-50 joint venture with Kimberly-Clark, for instance, now produces Huggies diapers and Kotex feminine napkins in Indonesia.

In the Asia-Pacific region, stretching from Australia to India, and to China and Japan, Unilever's Indonesia business is bigger than that in Japan or Australia, and second in size only to India's.

Unilever's strong position in the Indonesian market and economies of scale explain its full-blooded commitment to go forward and also why it may be around for another seven decades to come.
Write; by LuisB, July 04

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


Abbey opens its doors
Spain’s biggest bank is buying a British household name, in Europe’s largest-ever cross-border merger between high-street banks. The deal changes the continent’s financial landscape, but it is unlikely to spur rivals to do the same

It was widely expected, but no less eye-catching for that. On Monday July 26th, Abbey National, a British building society turned listed bank, said its board had accepted a takeover offer from Spain’s biggest bank, Santander Central Hispano (SCH). The shares-and-cash deal was valued at around £8.5 billion ($15.6 billion) when it was announced. If completed, it would be Europe’s largest retail-banking merger across borders.

Many a pundit had predicted that the European Union’s “single market” project and the introduction of the euro would lead to a flood of cross-border mergers in financial services. But, by and large, banks have shied away from such deal - which is why some of those pundits are talking of this week’s Anglo-Spanish union as a long-awaited milestone. There are several reasons for this reluctance. First, national markets still differ in lots of ways when it comes to financial regulation and taxation; as a result, a financial product that is popular in one country may be a non-starter in a neighbouring one. Added to this is continuing regulatory resistance to foreign takeovers: in some European countries - France being the most notable example - banking is considered a “strategic” industry that should be kept out of foreign hands.

Not so in Britain, but approval is not the same as success. Santander is paying a premium for Abbey. This is only worth paying if costs can be cut and profitability boosted. Domestic bank mergers have been popular in both Europe and America because of the scope they offer to close branches and crunch together back offices. By contrast, cross-border mergers are usually more about extending empires than cutting costs - and, since many an attempt at expansion into new markets has come a cropper, stockmarkets tend to frown on such deals. In this case, Santander is stressing cost-cutting as much as revenue-building, with annual savings of €500m ($606m) mooted, much of that coming from replacing Abbey’s out-of-date computer systems.

For the Spanish bank, the deal marks the end of a long search for a partner that would give it bulk in another European market. Santander’s driving force is Emilio Botin, its chairman, who inherited a small regional bank, Banco Santander, and turned it into the largest in Spain and the biggest foreign bank in Latin America, through a series a bold acquisitions. In 1999, Mr Botin brought together Banco Santander and Banco Central Hispano, a smaller bank. Since then, he has made no secret of wanting to get the group into the global top ten.

Britain was always the focus of his search for a new partner. The reason was, in a word, efficiency. The best Spanish banks make very nice profits - on the day the Abbey takeover was announced, Santander unveiled first-half net profits of €1.91 billion - and they want partners that are in the same league. British banks fit the bill: like their Spanish counterparts, they have been able to merge with each other, jettison overlapping bits of their networks, and so on. As a result, their return on equity tends to be above that of banks in countries like France, Germany and Italy, where obstacles to restructuring have held profits back.

However, Abbey is hardly the pick of the bunch. Having been a steady earner in retail banking and mortgages for years, it started to lose its way in the late 1990s - so much so, in fact, that it made pre-tax losses of £947m in 2002 and £686m last year. Dabbling in junk bonds proved particularly disastrous. Abbey’s life-insurance division has also been a worry, but the recent announcement that it would not have to stump up more capital under new regulatory rules was seen as removing the last obstacle to a bid. Abbey is halfway through a three-year turnaround programme designed to return it to its profitable ways of old.

Abbey’s rocky recent history may reduce the chances of a counter-bid emerging. Moreover, tightly run American banks are likely to balk at the premium payable, while most continental European banks simply can’t afford it. One or two of Abbey’s domestic rivals would like to bid, but they know they would face imposing regulatory hurdles. In 2001, Lloyds TSB was forced by the Competition Commission to withdraw a bid for Abbey.

The Abbey/Santander tie-up is not yet a done deal. Though it has been welcomed by Abbey’s board, the bank’s mostly British shareholders must vote on it, and many of them are less than thrilled at the prospect of their shares being turned into Spanish paper, with the currency risk that goes with it. However, they may still vote for the merger and dump their shares at an opportune moment soon after it is completed.

If the deal does go ahead, it would create a new giant in Europe, but it probably wouldn’t herald a wave of copycat cross-border mergers. As long as the continent’s financial-services markets retain their national quirks, banks will worry about straying from home turf. Santander’s rivals will want to wait and see how it fares as it grapples with its bulky British bride. After all, bank mergers have an unhappy history, whether domestic or cross-border: more often than not, the cost savings and revenue gains achieved (as opposed to promised) fall far short of the premium paid by the acquirer. Is it different this time? If history is a guide, probably not.
Source; The Economist, July 04