International
Friday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Feb 24, 2006, 07:23

According to the latest filed accounts for the Irish subsidiary, which is the parent firm of a number of aircraft leasing firms, there are two Irish directors at the firm - Colm Barrington, an aviation executive and former GPA manager, and John Lynch, an aeronautical engineer.

There are three other directors at Babcock & Brown Ireland Ltd.

Notes to the accounts, filed at the Companies Office, show that wages and salaries came to $1.5m in 2004, including pension costs of $26,343.

The company reported an operating income of $138.5m in the year ended December 2004, a 94pc increase on the previous year.

Mr Barrington heads up the Irish operation which has a registered address in Dun Laoghaire, Co Dublin.

He is also a director at the Dublin Airport Authority and a non-executive director of IFG. Meanwhile, volumes in Eircom shares were strong yesterday suggesting that Babcock & Brown was building up its holding in the former State-owned telecom.

This company confirmed yesterday it has increased its stake in Eircom to nearly 20pc, bringing it closer to that of the Employee Share Ownership Trust which owns 22pc of Eircom.

Shares in Eircom finished the day down 1c at €2.20.

Eircom said earlier that it had received an approach which may or may not lead to an offer.

The approach came just two months after a failed takeover attempt by Swisscom, Switzerland's biggest telco.

The Irish Independent reports that the healthcare insurance market will double in value over the next five years from €1bn to €2bn, the head of the latest entrant to the market Vivas Healthcare has said.

Speaking to the monthly lunch meeting of the Leinster Society of Chartered Accountants, Vivas Healthcare chief executive Oliver Tatton also said that if the market is to attract new entrants then the regulatory framework, including the issue of risk equalisation, has to be addressed by Government.

Mr Tatton blamed the poor regulation of the sector for the refusal of major UK health insurers to enter the market here.

He said that other insurers should not have to pay over money to build up the reserves of the VHI, which he said was being allowed to carry on its business despite being insolvent.

Growing

"Policy and regulation have failed, and the Government is failing the consumer," he said.

Mr Tatton said that a mixture of demographics, including the growing population and inward migration and increased spending on healthcare meant that the value of the health insurance market will double in size over the next five years.

Vivas, which is partly owned by Dermot Desmond and AIB, has built up a 2pc share of the health insurance market in just over a year, and has ambitious plans to expand its business.

The Irish Times reports that telecoms regulator ComReg would have no power to veto a takeover of Eircom by the Australian investment fund Babcock & Brown Capital, even though such a deal might increase the Irish telco's debt to more than €3 billion.

Babcock & Brown is proposing a leveraged buy-out of the former State company for some €2.4 billion.

While advisers to the two sides will not conduct formal meetings until next week, informed observers believe that a transaction would easily have the potential to increase Eircom's debt by more than €1 billion from the current level of about €2 billion.

The Irish company is likely to examine in the coming weeks whether this would impede its ability to make capital expenditure of some €400 million this year and next as it integrates the Meteor mobile business and strives to grow its broadband business.

Crucial to this examination will be scrutiny of the financing arrangement that the Australian fund proposes to put in place. Market sources believe this will inevitably involve a big component of debt, a factor that could compromise Eircom's capacity to invest in telecoms infrastructure.

While ComReg is likely to examine any proposed transaction from the perspective of whether it would enhance competition in the market, it could not veto a deal per se.

The regulator can examine whether the new entity offered universal access to basic services and transparent pricing but it would be unable to stop a transaction if, as expected by the market, Eircom's network was formally split from its retail division.

Industry analysts believe that Babcock & Brown would be likely after such a split to take a dividend from the network business and increase its debt. Babcock & Brown is predicting an annual return in excess of 15 per cent from a takeover, possibly compromising its ability to invest in the network.

There was no comment yesterday on the preliminary approach from either Babcock & Brown or Eircom. The telco's shares finished one cent weaker at €2.20 on the Dublin market yesterday in much thinner trading than on the previous day.

Traders in Dublin believe Babcock & Brown has increased its stake in Eircom above 18 per cent and is likely to continue buying the telco's stock in the coming weeks towards the 29.9 per cent threshold that would trigger a mandatory bid.

In addition, traders said the market had taken the view that a bid would ultimately be priced in the region of €2.30 per Eircom share, some 12 cent lower than the mooted offer late last year from Swisscom. While advisers to Babcock & Brown are believed to have made an informal approach to advisers to the Employee Share Ownership Trust, which controls 22 per cent of the telco, a formal engagement is not expected for some time.

Babcock & Brown's parent posted better than expected results on Wednesday in Sydney and said the pipeline for transactions was strong. Net profit in 2005 grew 251.6 million Australian dollars (€155.93 million) from A$96.8 million.

Managing director Phil Green said it was "certainly" possible that the fund would make a full bid for Eircom. Asked whether a hostile bid was likely if Eircom did not want to do business, he declined to comment. "I'm not ruling it in, or ruling it out."

The Irish Times also reports that Government spending will increase this year at its fastest rate since 2001 and two percentage points faster than planned at Budget time.

The revised estimates for public services and public capital programme, published yesterday, put total gross voted spending for 2006 at a level of €50.6 billion - an increase of €5.7 billion on last year. Year-on-year, spending will increase by 13 per cent, according to the estimates. This is the fastest rate of increase since 2001 when spending rose by 16 per cent. Fine Gael yesterday condemned the estimates as evidence of a "boom and bust" approach to the nation's finances.

Finance Minister Brian Cowen attributed the increase over Budget targets to extra spending on second-level schools and dormant accounts. "The revised estimates volume provides for additional spending of €65 million funded from the dormant accounts fund. An additional allocation of €25 million has been made available for capital investment in second-level schools."

Spending is set to increase strongly across all headings. The vote groups of environment and transport will experience rises of 13 per cent, related largely to capital expenditure. Spending under the remit of the Departments of Social & Family Affairs and Health & Children are due to rise by 12 per cent and 11 per cent, respectively.

Fine Gael Deputy Leader and Finance spokesperson Richard Bruton TD said that Government plans would lead to a funding gap emerging in its future financial position. "The Government plans to increase taxation by just under 6 per cent. There is clearly a significant funding gap between the trends in spending and in taxation. The last time we saw this gap emerge was in 2001 and 2002 in the run-up to the last general election," Mr Bruton said.

He attributed the Government's spending plans to a breach in public sector recruitment targets "Despite the Government's commitment to reduce public service numbers by 5,000 in the 2002-2005 period, the Government has actually increased numbers by almost 22,000. A further increase in public service numbers of 8,800 is planned for 2006," he said.

Mr Cowen also addressed the controversy surrounding a €56.4 million carry-over of capital spending by the Health Services Executive earlier this year. In January it emerged that the HSE may have used money it underspent on its capital budget to fund overspending on day-to-day spending.

"The definitive positions in relation to capital spending in 2005 in the Health Services Executive (HSE) will not be known until end March when the appropriation accounts are finalised," Mr Cowen said yesterday. He added that legislation was still pending to give effect to reimbursement of charges for long-stay care in former health board funded institutions.

Total gross voted spending is a measures the bulk of Government expenditure under the direct control of the Dail.

The Financial Times reports that German business confidence rose to its highest level in more than 14 years this month, underpinning hopes that Europe’s largest economy could grow at its fastest rate since the unification boom.

The sharp rise in the Ifo index of German business sentiment and news that consumer confidence hit its highest level for five years is likely to convince the European Central Bank that it is justified in raising interest rates, as early as next week.

Hopes of economic recovery were boosted yesterday by an unexpectedly steep rise in the Ifo German business sentiment index and news that consumer confidence hit is highest level for five years.with German companies more optimistic about the country’s economic outlook than at any time since reunification.

David Brown, chief economist at Bear Stearns, said the ECB now had the evidence to defend a quarter-point rate rise to 2.5 per cent. “It is not just economic spring returning to the German recovery, it looks like full blown summer,” he said.

German consumer sentiment, meanwhile, extended its rally with consumer expectations for March hitting an 11-month high. The Nuremberg-based GfK’s forward-looking consumer sentiment gauge rose to 4.8 from a February reading of 4.6.

After data last week showing the German economy stagnated in the final quarter of 2005, analysts took yesterday’s figures as proof that German growth might finally be spurred by domestic consumption, and not just exports. “In addition to exports, domestic demand appears to be gaining momentum,” said Hans-Werner Sinn, head of the Munich Ifo Institute.

The picture in Germany was supported by forecasts that the eurozone Purchasing Managers’ Index for manufacturing was likely to expand in February at its fastest pace in 19 months. The German government hinted yesterday it could raise its growth forecast from 1.4 per cent towards the 2 per cent level projected by many banks in April.

Eurozone monetary policymakers, who meet next week, recently downplayed Germany’s lacklustre fourth-quarter numbers, signalling there was little reason to revise their eurozone growth forecast of 1.9 per cent this year after 1.4 per cent in 2005.

Separately, Peer Steinbrück, Germany’s finance minister, told the Financial Times that his country needed to shift resources from welfare spending to innovation and not rely on savings to tackle crushing fiscal problems.

In a harsh rebuttal of economists in the Bundesbank, central bank and elsewhere, Mr Steinbrück said: “We can’t save our way out of our budget problems. That’s a hopeless prospect. There will only be progress if there is also movement on the economy, in the labour market and regarding our social security system.”

Mr Steinbrück, a Social Democratic party ally of Gerhard Schröder, the former chancellor, intends to make a clean break with the Schröder-era, heralding closer co-operation with partners in Europe and a broader reform role for the finance ministry.

The FT also reports that Nestlé chief executive Peter Brabeck on Thursday said the food and beverage company may buy ice-cream, bottled water, petfood or nutrition businesses as it seeks to fill gaps in its operations.

Nestlé stressed it was focused on organic growth as it reported a 21 per cent rise in annual profits to SFr7.99bn ($6.1bn). Strong sales in the company's Americas and emerging markets divisions contributed to organic sales growth of 6.2 per cent in 2005 on total sales of SFr91bn. However, Mr Brabeck said Nestlé would use acquisitions as a "strategic weapon".

Nestlé's strong debt rating enabled it to make large acquisitions, he told the FT in an interview. "Even if we made an SFr8bn acquisition it would not put our AAA debt rating into jeopardy," he said. Nestlé reduced its net debt, most of which is held in US dollars, to SFr9.6bn in 2005 from SFr10.2bn a year earlier.

Mr Brabeck said gaps in Nestlé's operations included ice-cream in Eastern Europe and South and Latin America; bottled water in Asia; the "treat" niche in petfoods; and clinical nutrition. Mr Brabeck dismissed speculation Nestlé would intervene if a takeover bid was launched for French food company Danone.

"Nestlé is not a white knight for any company," he said, adding it did not need Dutch food company Numico either.

Nestlé, like other consumer companies, is struggling to get sales growth in Europe. It reported organic growth of 2 per cent for the region on sales of SFr27.6bn and said growth expectations were "modest". However, it said it had increased sales through hard discounters such as Aldi and Lidl by 20 per cent to more than SFr1bn.

"We have established a specific business model for hard discounters," Mr Brabeck said, adding that the company was developing products to be sold only through discounters.

¦Numico, Europe's biggest baby milk maker, dismissed merger speculation as it forecast 2006 sales would rise 11-13 per cent and said it would hold operating margins steady at about 19 per cent in order to invest in new babyfood and nutritional products, writes Ian Bickerton in Amsterdam.

The New York Times reports that America's largest companies expect the federal government to pay them about $4 billion over the next four years to help keep their retiree health plans alive at a time when such benefits are increasingly on the chopping block, according to a new study by Credit Suisse First Boston.

The money is due to start flowing to employers this month as part of Medicare's new prescription drug benefit. When Congress authorized the Medicare drug benefit, it also agreed to start subsidizing the drug component of employers' retiree health plans, to keep them from shifting their retirees into the government program.

The goal is to save the government money, even after the subsidies, while giving the retirees a better deal than they might get if they were pushed into Medicare.

Among the nation's 500 largest companies, 331 offer retiree health plans.

With the program just starting its first year, it is not yet clear whether the subsidy will achieve its goals. For one thing, there are about 36 million people 65 and older in this country who are eligible for Medicare, but only about 7 million retirees currently covered by employer-sponsored health plans. Still, the Credit Suisse study, published on Wednesday, shows that the subsidy is popular with big employers — even those that do not fit the stereotype of companies in waning industries unable to cope with health care inflation and armies of baby-boomer retirees.

The money, to be sure, will flow to some financially weaker companies staggering under the weight of their health plans, like General Motors, which is expected to receive $1.1 billion over the next four years in drug subsidies for their retired workers.

But there are also thriving businesses like the utility company Exelon, which seem able to afford their plans on their own but will nonetheless receive the federal payouts.

There are companies, too, like BellSouth, that have been setting aside money for retiree health care for years and have billions on hand.

And some that have no reserves for those outlays, like Delta Air Lines, will also receive subsidies.

The government is not drawing distinctions because the subsidy is meant only to help employers stay in the retiree health care business, not to direct public funds to the neediest employers.

Mark Hamelburg, director of employer policy and operations at the Centers for Medicare and Medicaid Services, the agency that runs Medicare, said, "The whole purpose was to incentivize employers to keep providing the good level of coverage that they have had." So far, employers covering 6.4 million retirees have enrolled for the subsidy, he said.

To get the new subsidy, a company must offer retirees a prescription drug benefit that is at least as valuable as the minimum benefits now available under Medicare. Even though General Motors, 3M, Unocal, International Flavors and Fragrances and Avaya are among businesses that have limited or cut back their retiree health plans in recent years, the study showed, all still offer benefits generous enough to qualify for the subsidy.

At the same time, the study found a few large companies that were expanding their retiree health plans, not cutting them. General Electric, for example, in 2003 increased its total obligations of this sort by about $2.5 billion, as part of a new labor agreement. The Medicare subsidy will offset some $583 million of that increase.

And BellSouth's commitments to retiree health care increased $3.3 billion in 2004, after auditors for the company required changes in the way it was accounting for the benefits. The Medicare subsidy will offset $1.1 billion of that.

The Credit Suisse analysts who conducted the study, David Zion and Bill Carcache, prepared it to show investors how successful, or not, companies had been in shifting the cost of their retiree health plans onto other payers.

Companies that fear they have promised more benefits than they can deliver "are actively trying to pass the buck," the analysts wrote. This means trying to shift costs "to anyone who will bear them: their retirees, active workers, the U.S. taxpayer, etc.."

"If they succeed," the analysts added, "it's a giant transfer of risk from corporate America to the work force, and retirees."

Instead of increasing corporate profits in a given year, the subsidies are supposed to free up cash that the company would otherwise have to spend on health care. Mr. Zion and Mr. Carcache said this effect would show up on corporate cash-flow statements. In the future, though, after the Financial Accounting Standards Board completes its current project on pension accounting, retiree medical plan activity might make its way onto corporate balance sheets.

The company with by far the biggest retiree health plan is G.M. — a plan so large that the $77 billion obligation constitutes 18 percent of the combined retiree health obligations of the nation's 500 largest companies. G.M. projects that it will make cash outlays of about $18 billion for retiree health care over the next four years.

Those projections were made before it negotiated a package of concessions with the United Auto Workers union in October, but a G.M. spokesman, Jerry Dubrowski, said newer projections were not available. He said the cutbacks were still being challenged in court by retirees, who argue that the union has no legal authority to negotiate for them, only for active workers. If the concessions are upheld, Mr. Dubrowski said, the retirees will still get a better deal under G.M.'s health plan than if they were pushed into Medicare.

"This is an important first step in reforming the whole health care system," he added.

But the company that will get the biggest boost from Medicare on a percentage basis is not G.M., but Genuine Parts, a distributor of auto replacement parts and office products that has rising sales and profits, and a much smaller health plan. The subsidy, estimated at $6 million over the next four years, will reduce its overall health care obligations to retirees by 62 percent, the study found.

The Credit Suisse analysts found that the big companies, over the life of their retiree health plans, expected to receive about $25 billion from the federal subsidy arrangement.

But Mr. Hamelburg of the federal Centers for Medicare and Medicaid Services said that companies' estimates did not capture the entire outlay expected because they did not include the substantial subsidies that would go to state and local governments that run retiree health plans. The government expects to pay all employers, private and public, about $14 billion over the next four years.

The NYT also reports that the Dubai company at the center of a political furor over its plans to take over some terminal operations at six American ports said Thursday night that it planned to close the deal next week, but that it would "not exercise control" over its new operations in the United States while the Bush administration tried to calm opposition in Congress.

The statement may provide a little time and political breathing room for President Bush, who has appeared stunned at the opposition from Republicans and Democrats alike over the deal involving one of the country's few close Arab allies. But it was not clear how long the company was willing to suspend control over its new American properties, or whether its offer would assuage the members of Congress, governors and mayors who have vowed to block the deal.

In a statement, the company, Dubai Ports World, said that its $6.85 billion purchase of the Peninsular & Oriental Steam Navigation Company of Britain spanned 30 terminals in 18 countries.

"The reaction in the United States has occurred in no other country in the world," said Ted Bilkey, the chief operating officer for Dubai Ports, which is controlled by the government of the United Arab Emirates. "We need to understand the concerns of the people in the U.S. who are worried about this transaction and make sure that they are addressed to the benefit of all parties. Security is everyone's business."

The action came after the Bush administration and leading members of Congress, including Senator John W. Warner, Republican of Virginia and the chairman of the Senate Armed Services Committee, quietly told the company that more time was needed to derail Congressional action to block the deal.

Earlier in the day, administration officials and Senate Democrats clashed in a public hearing on Capitol Hill about whether allowing Dubai Ports to assume management of terminals at American ports would represent any kind of national security risk.

In an effort to calm Congress, the administration released a confidential letter sent on Jan. 6 in which the company committed itself to continuing its participation in a range of American-led initiatives to close gaping security holes in ports around the world. This included an agreement with the Department of Energy a year ago to use new equipment in Dubai's own seaports intended to sniff out radioactive shipments.

Among the ports in the United States where the company hopes to take over terminals, only one, in Newark, is similarly equipped with nuclear detectors. On Thursday afternoon, hours before the company's announcement, the Port Authority of New York and New Jersey, which owns the Newark container port, said it would terminate the lease of P &O Ports, the current manager of the terminal, in an effort to stop what it termed an illegal transfer to the Dubai company.

White House officials had said that because the deal was formally approved by the Committee on Foreign Investment in the United States in mid-January, the administration had no legal channel to reopen its review of the acquisition, a step being pressed by Congress, unless it determines that the company misled the federal government.

But with members of Congress threatening to enact legislation to block the deal, the White House strongly signaled that it would welcome an agreement by Dubai Ports to delay final closing of the deal, which is scheduled next week.

In its statement Thursday night, the company said, "It is not only unreasonable but also impractical to suggest that the closing of this entire global transaction should be delayed."

So instead, the company's lawyers came up with a plan under which Dubai Ports would essentially become a silent partner, owning the management contracts for the six facilities but recusing itself from managing them.

"DP world will segregate P & O's U.S. operations while it engages in further consultation with the Bush administration and, as appropriate, Congressional leadership," the statement said.

The company appeared to be facing the political reality that unless it blinked, its entire deal could be scuttled.

The White House, while defending the deal, had sent some less-than-subtle hints. Karl Rove, the deputy White House chief of staff and President Bush's chief political adviser, said in an interview with Fox News that while the acquisition by Dubai Ports World would pass its final regulatory hurdles next week, "there's no requirement that it close, you know, immediately after that."

Mr. Rove added: "Our interest is in making certain the members of Congress have full information about it, and that, we're convinced, will give them a level of comfort with this."

A senior White House official said, however, that Mr. Bush was still firm that he would veto any effort by Congress to overturn the deal.

"He's completely adamant about this," another aide to Mr. Bush said. If a Dubai company is treated as less trustworthy than a British one, the aide said, "he thinks that the signal in the Mideast would be disastrous."

Critics of the deal said earlier in the day that a delay was insufficient.

"A simple 30-day cooling off period without the full 45-day review that should have been done from the beginning is not adequate," said Senator Charles E. Schumer, Democrat of New York. "If the president were to voluntarily institute the review and delay the contract, that would obviate the need for our legislation, but a simple cooling off period will not allay our concerns."

Senator Warner said at the public hearing that the White House needed to "recognize the very strong sentiment in Congress" for requiring further review of the acquisition. Mr. Warner said he hoped the political uproar would "work itself out" without Congress intervening.

His statement appeared to be aimed at persuading the White House and Dubai Ports World to accept political reality and submit the deal to further examination.

Mr. Warner convened the hearing at which a group of administration officials conceded little ground in a nearly three-hour briefing on the details of the deal. The group, led by the deputy Treasury secretary, Robert M. Kimmitt, said that the administration's interagency review of the transaction had taken three months, and that the Dubai company had been willing to address concerns raised by the Department of Homeland Security.

In the Jan. 6 letter to the department, the company agreed to operate the terminals "to the extent possible with the current U.S. management structure" and to maintain existing security policies. But most of its assurances centered on compliance with existing United States law.

Democratic lawmakers asserted that acquisition fell under a provision of the law requiring a far more extensive, 45-day government review of transactions that have potential national security implications or involve, as this transaction does, a state-owned company.

"Is there not one agency in this government that believes this takeover could affect the national security of the United States?" asked Senator Carl Levin of Michigan, the senior Democrat on the Armed Services Committee.

But Mr. Kimmitt said "all of those concerns were addressed" in the administration's initial, three-month examination of the deal. When the interagency panel charged with reviewing foreign acquisitions met in mid-January — its only formal meeting on the Dubai Ports World acquisition — no agency raised further national concerns, Mr. Kimmitt said. That made an additional 45-day review unnecessary, he said.

Democrats disagreed, and even Mr. Warner conceded that the language of the statute could be read to require the additional investigation. Senator Hillary Rodham Clinton, Democrat of New York, said that the administration's review "appears to be cursory at best" and that "port security is too important to be treated this cavalierly."

When Congress returns from recess next week, House and Senate lawmakers from both parties are expected to introduce legislation to require further examination of the acquisition's national's security implications, an idea that the Republicans leadership in both chambers have supported.

Mr. Schumer and Representative Peter T. King, Republican of New York, have said they will propose companion bills to block the Dubai Ports World acquisition until after the 45-day review is completed.