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Business News Headlines to Jan 16 2008

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Monday Newspaper Review - Irish Business News and International Stories
Principal news stories from the Irish Times, Irish Examiner, Financial Times and New York Times.

The Irish Independent reports that Richard Branson's Virgin Group is reportedly planning a sweetened bid for Northern Rock as the British government is poised to outline financial support for a private sale.

The Virgin-led consortium is understood to be working on an improved offer to gain the support of shareholders.

It comes ahead of today's Commons statement from Chancellor Alistair Darling, which will set out plans to convert Northern Rock's £24bn of Bank of England emergency loans into bonds and sell them to international investors.

Mr Darling is also expected to give Northern Rock's suitors, Virgin and Olivant, two weeks to table plans for financing and management.

Northern Rock's shareholder base still presents a significant hurdle to any private sector sale, with the approval of the bank's investors needed to secure a takeover.

Robin Ashby, head of the Northern Rock Small Shareholders Group, warned that it was unlikely Virgin's current offer would be accepted.

Olivant's plans are widely seen as the shareholders' favourite, as it would not involve a takeover or break up of Northern Rock.

Even so, it may be too soon to declare victory beyond the staid environs of money markets. Analysts agree the pain of bad mortgage investments that started it all will burden banks and the broader economy for years to come.

In Ireland the impact has been manifest in the dire performance of the Irish banks, with the share price of both AIB and Bank of Ireland falling to levels not seen since the outbreak of the first Gulf War.

Real or imagined, investors fear that the performance of the Irish banks and other major companies on the Dublin Stock Market, are inextricably linked to the fate of the US economy rather than to anything which happen on this side of the Atlantic.

Plunging interbank lending rates in the first weeks of 2008 stand as evidence that hefty cash injections by central banks have helped money markets to resume functioning at near-normal levels.

Just a month ago these rates had been the most elevated than they had been since the stock market crash of 1987. Banks were hoarding funds to shore up capital levels depleted by soured mortgage investments, and those willing to lend charged a premium.

The US Federal Reserve, through its massive provision of liquidity has restored confidence in money market lending, said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

Yet the ongoing onslaught of news about bank losses indicates stress in the financial system is far from over.

In August, the Fed injected more temporary funds into the banking system via daily money market operations than at any time since shortly after the September 2001 attacks, but what relief that brought was short-lived. More recently, through the so-called term auction facility, or TAF, set up with other central banks in December, the US Federal Reserve has injected $70bn so far, with another $30bn to follow on January 28.

Analysts reckon the recent drop in dollar-denominated Libor below the fed funds target rate -- the US benchmark -- signals that the first chapter of credit market troubles is ending.

Libor, the London Interbank Offered Rate, is a global benchmark for lending rates among banks. Yet because a root cause of banks woes is the ailing US housing market, this could be merely the first round in a long bout where a deep economic downturn deals more blows to banks.

"You have here a recognition they (the Fed) have shoved so much money into the system that you are shoving Libor lower and next will drive the fed funds rate lower, but that will not solve the problem," said Howard Simons, a strategist with Bianco Research in Chicago.

Although most major US banks already have disclosed hefty writedowns from the mortgage mess, more waves may put the banking system under renewed stress, analysts warn. The subprime loss tally so far is already in excess of $100bn, and Federal Reserve chairman Ben Bernanke last week said the ultimate total could be several multiples of that.

Whether there are more credit losses to banks from subprime is obviously still an open question, and if there's a nasty recession around the corner, there will be another shoe to drop in terms of subprime and (mortgage) delinquencies could go up.

Those worries notwithstanding, money markets are clearly normalising, averting the most immediate threat of systemic risk.

On Friday, one-month dollar-denominated Libor traded at 3.934pc well below the 4.25pc fed funds target rate, the key overnight rate for US banks to lend to each other. The target rate is set by the Fed.

"I would say money markets are pretty much back to normal, with one-month Libor more than 25 basis points through fed funds," said Bryson.

The Irish Times reports that UK-based Serica Energy is hoping to begin a $30 million exploration drilling programme at its gas prospects in the Slyne Basin off the west coast of Ireland.

"We hope to drill it this year," Serica's chief executive Paul Ellis told The Irish Times. "It's a question of getting rigs and sorting out a few other technical issues. [Because of the difficult Atlantic weather] we can only drill there in the summer."

Serica secured rights to the Slyne blocks in the last licensing round in 2006. It is situated about 50km from the Corrib field, which has been the subject of much controversy between Shell and locals in Co Mayo.

Serica is considering drilling two wells over a 60-day period during the summer.

Mr Ellis said the company would probably bring in rigs from the North Sea. With oil hovering around the $100 a barrel mark, rigs are in high demand among exploration companies, pushing up their cost.

As a result, Mr Ellis said the company would probably incur costs of about $500,000 a day for its Irish drilling programme.

"We are taking a risk, which is what you do as exploration companies," he said. "These are wildcat exploration wells but they are potentially large, which is why we like them."

Mr Ellis said 3D seismic data suggests that its gas prospect could be as large as the Corrib field, which has reserves of about a trillion cubic feet of gas.

Serica has indicated that it could seek a "farm-in" partner for the project.

Serica was formed in 2000. It listed in Canada four years later and on the Alternative Investment Market in London in 2005.

It recently raised $52 million to fund exploration activities and secured a $100 million debt facility from JP Morgan and Bank of Scotland. It is also considering drilling in Vietnam.

Serica is due to begin production at its Kambuna gas field in offshore Indonesia in late 2008. This would be its first production of oil or gas. It has a 65 per cent interest in the Kambuna field and has signed a deal to sell the majority of gas there to the Indonesian state electricity company.

The Irish Times also reports that Payzone's board of directors will meet at the company's head office in Sandyford, Dublin, tomorrow but will not discuss the legal proceedings under way between the company and its chief executive John Nagle and chief financial officer John Williamson.

It is understood Mr Nagle will present the board with an update of Payzone's operational performance since the merger of Irish electronic payments group Alphyra and UK ATM operator Cardpoint six weeks ago.

The Irishman is expected to inform the board that Cardpoint failed to perform to expectations between October and December - the first quarter of its financial year. Cardpoint's earnings are believed to have been more than 20 per cent behind expectations.

Alphyra, however, has performed in line with expectations. In addition, the company secured a lucrative contract this month to handle payments for the operation of barrier-free tolling on the M50 motorway in Dublin.

Mr Nagle is also expected to address the issue of a meeting with the company's lenders, which include AIB, Rabobank and Abbey.

Payzone has debts of €300 million, and the banks collectively are believed to be seeking a meeting with Mr Williamson for an update on recent events.

Mr Nagle is believed to have spent much of the weekend at Payzone's head office in Dublin preparing for the board meeting.

This will be the first scheduled meeting of the company's board since it was created on December 5th, and will bring together Mr Nagle and Payzone chairman Bob Thian, who sought to take charge of "executive responsibilities" at Payzone last week.

Payzone dismissed the two executives last Tuesday night. The pair secured a High Court injunction against their dismissal the following day.

On Thursday trading in Payzone's shares was suspended on the Alternative Investment Market (AIM) in London pending the outcome of the legal action.

Separately, Mr Nagle, who founded Alphyra and owns 10.5 per cent of Payzone, is this week expected to canvass support for his position from the company's shareholders.

Sixty per cent of shareholders are reported to support the decision to remove Mr Nagle and Mr Williamson from their posts, including private equity group Balderton Capital, which owns 40.5 per cent of the business.

Balderton had supported the management buyout of Alphyra in 2003 and has one representative on the board, Mark Evans a former Goldman Sachs executive. Relations between Balderton and Mr Nagle have been strained in recent times.

The High Court action between the two sides was adjourned on Friday evening and is expected to resume this week.

Mr Nagle claims the chairman Mr Thian is pursuing "a personal agenda" to deflect attention from the underperformance of Cardpoint and to "transfer blame" to himself and Mr Williamson.

Payzone argued in court last week that the two executives no longer had the confidence of other board members.

Mr Thian has said that morale at Cardpoint was low and that 25 per cent of the company's ATMs were inoperable over Christmas.

The Irish Examiner reports that les than 30 minutes of Irish was spoken in the European Parliament in the first full year as an official language — working out at a little less than €13,000 a minute.

Despite pressure to have Gaeilge recognised as an official language, records show six of our 13 MEPs have never used Irish in parliamentary debates since January 1, 2007.

The Government has been warned that use of the language is being undermined and EU officials will carry out a review in four years’ time to see if its official status should continue.

The cost of implementing the language across all EU institutions is estimated to be in the region of €3.5 million.

The cost of interpretation in the parliament alone was €360,000 last year, meaning each minute of debate translated at a cost of almost €13,000.

There are four interpreters working in the parliament. Two man a booth at a time, and there are two shifts a day for the 10 days the parliament sits each month. These interpreters cost €30,000 a month, which is paid by the EU with contributions from individual member states.

A parliament spokesperson said two interpreters are needed at a time in case there is an “overflow”, or two MEPs speaking Irish in succession.

Records show that an overflow is unlikely, with an average of 30 seconds of Irish spoken for each day the parliament sits.

Six MEPs have never used Irish, including Mary Lou McDonald (Sinn Féin), Gay Mitchell, Mairéad McGuinness, Avril Doyle (all Fine Gael), Eoin Ryan (Fianna Fáil) and Independent Kathy Sinnott.

Colm Burke (FG) spoke one Irish sentence at the start of one of his speeches.

This means none of the current Fine Gael MEPs, with the exception of Jim Higgins, have spoken more than one sentence of Irish in the parliament. This is despite Enda Kenny jointly tabled the Dáil motion to request that Irish would be made an official language.

Fianna Fáil MEPs are the most frequent users of Irish.

Seán Ó Neachtain accounts for more than a third of Irish spoken in the European Parliament, while Brian Crowley was the second highest user of the language among Irish MEPs.

Sinn Féin’s Bairbre de Brún was also a regular user of the language in parliament.

As well as the interpreting service, there are three full- time translators for the parliament, at €243,000 per year to translate texts.

In December, Foreign Affairs Minister Dermot Ahern, urged his colleagues to make use of the interpreting service in meetings.

The Financial Times reports that Gordon Brown, the UK prime minister, is to deflect criticism that his government is subsidising a knock-down sale of mortgage-lender Northern Rock by proposing that the taxpayer gets a slice of any windfall profits made by a private buyer.

Mr Brown has been criticised for offering a sweetener – in the form of a government bond issue – to help Sir Richard Branson’s Virgin Group or another bidder buy the ailing bank.

Vincent Cable, the Liberal Democrat treasury spokesman, said Mr Brown suffered from a “pathological inability to admit failure” and risked wasting billions of pounds to avoid the embarrassment of nationalising the bank.

To minimise the political risk of allowing a private buyer to make huge profits on the back of government support, Mr Brown will insist the UK taxpayer gets some of the spoils from a recovery in Northern Rock’s fortunes.

One official close to the negotiations told the Financial Times: “The government is assuming some of the risk so it would not be unreasonable for it to get some of the upside.”

It is unclear what that upside would be and it will be up to the bidders to structure it in their proposals. Options being examined include the government receiving warrants or an equity stake of 5-10 per cent.

Mr Brown is travelling with Sir Richard and other British businessmen in China and India, prompting accusations he has set up a sweetheart deal to help the Virgin boss buy Northern Rock. One headline described the deal as a “Chinese takeaway”.

Alistair Darling, the UK chancellor of the exchequer, will on Monday give details of the financial package being proposed by the government to allow a sale, probably to one of the three current bidders: Virgin, Olivant, the private equity group, and Northern Rock itself.

Mr Darling will make it clear that the government – with £25bn in loans to Northern Rock and up to £30bn in guarantees – would decide who buys the bank, not its board or shareholders. Although he will stress that “all options” including temporary nationalisation are possible outcomes, the bond issue raises the likelihood of a sale because it removes the need for bidders to raise billions of pounds in capital upfront to repay a large chunk of the government loan.

Under the scheme, drawn up by Goldman Sachs, the loans will be turned into gilts – probably five-year bonds – guaranteed by the government.

They would be released into the market in tranches over a period of months.

Northern Rock’s new owners would pay the annual coupon on the bonds and pay the Treasury for guaranteeing them, to satisfy state aid regulators in Brussels. Government officials say the bond vehicle would be backed by enough of Northern Rock’s assets – both in terms of quality and quantity – to provide a “buffer zone” in case a property crash meant the government guarantee was called into practice.

The bond issue would leave Northern Rock on the government’s books for years to come and needs European Commission clearance.

The government expects bidders to present business plans by February 4.

The FT also reports that Europe’s plans to cut greenhouse gas emissions, due to be unveiled as part of a radical green agenda this week, risk working against the environment and could destroy the competitive position of European industry, according to the region’s leading industrialists.

The warning comes in a letter to Gunter Verheugen, European Union commissioner for enterprise and industry, from Jeroen van der Veer, chief executive of Royal Dutch Shell and chairman of the energy and ­climate change working group of the European Roundtable of Industrialists. ERT is a group of about 50 of Europe’s biggest industrial companies representing sales of about €1,600bn ($2,300bn, £1,200bn).

The letter warns against the EU’s plans to introduce an auction system for carbon certificates to replace the current free allocation of permits on a country-by-country basis.

The ERT says the plan could both encourage undesirable protectionist measures, such as import taxes on goods from countries without similar schemes, and severely damage the competitiveness of European industry by imposing costs that cannot be passed on to consumers. This, in turn, could threaten investment in carbon capture and other environmental initiatives.

Mr Van der Veer said that while the ERT supported a carbon trading scheme, industrialists believed Brussels was moving too quickly. Draft versions of the proposed scheme also revealed a fundamental flaw.

“We are concerned that we might have a system that if you look at Europe in isolation could work, but the reality is that Europe is not isolated. We may destroy capacity here and import those goods from somewhere else and those imports might be even worse [in terms of carbon emissions].” The ERT was in favour of a more gradual shift to an auction system, he said.

The ERT’s concerns are shared by politicians and the wider business community as Brussels prepares to unveil on Tuesday the most extensive overhaul yet of the EU’s green agenda. Member states will on Wednesday receive binding targets on renewable energy usage, along with details on cutting greenhouse gas emissions and boosting biofuels.

Independent studies have shown that European industry could be severely penalised by the proposal to auction the majority of carbon certificates.

The Breugel Institute, a Brussels-based think-tank, warned in a report last year of a “real risk that business will resort to regulatory arbitrage, which will entail a shift in where emissions take place but no reduction in global emissions”.

Europe’s relatively high exposure to carbon-intensive industries would put its goods at a disadvantage to those produced in the US and China, which do not price carbon, the institute said.

Brussels has said that it will review the trading system in 2011, but many fear this pledge only creates uncertainty.

Mr Van der Veer warned that companies would be reluctant to invest in environmental initiatives, such as carbon capture, as a result. The likelihood of highly volatile carbon permit prices would further deter such investment, he said. “It is very difficult for a company to invest in energy conservation if the prices go up and down like a yo-yo. We need to invent a system with a certain amount of predictability on CO2 prices. That will be a bigger incentive to invest in energy ­conservation.”

The New York Times reports that ever since John Riccitiello took over last year as chief executive of Electronic Arts, the video game industry bellwether, he has promised to revitalize the company with new games and new ways of reaching consumers. Now, that may be happening.

In a major departure from its traditional business model, E.A. plans to announce Monday that it is developing a new installment in its hit Battlefield series that will be distributed on the Internet as a free download. Rather than being sold at retail, the game is meant to generate revenue through advertising and small in-game transactions that allow players to spend a few dollars on new outfits, weapons and other virtual gear.

At a conference in Munich, the company intends to announce that the new game, Battlefield Heroes, will be released for PC this summer. More broadly, E.A. hopes the game can help point the way for Western game publishers looking to diversify beyond appealing to hard-core players with games that can cost $60 or more.

E.A.’s most recent experiment with free online games began two years ago in South Korea, the world’s most fervent gaming culture. In 2006, the company introduced a free version of its FIFA soccer game there, and Gerhard Florin, E.A.’s executive vice president for publishing in the Americas and Europe, said it has signed up more than five million Korean users and generates more than $1 million in monthly in-game sales.

Players can pay not only for decorative items like shoes and jerseys but also for boosts in their players’ speed, agility and accuracy. Mr. Florin said that while most users do not buy anything, a sizable minority ends up spending $15 to $20 a month.

With Battlefield Heroes, E.A. hopes to bring that basic system of “microtransactions” to Western players, along with increased advertising. Mr. Florin said the licensing agreements around the soccer game prevent E.A. from inserting in-game advertisements from companies that are not already sponsors of FIFA, the international soccer federation. By contrast, E.A. already owns the Battlefield franchise and will be free to insert whatever advertising it wants.

The game industry is booming worldwide, largely on the strength of two trends: a demographic expansion of the gaming population beyond the traditional young male audience and the rising popularity of online play.

Electronic Arts, once the industry leviathan, has not taken full advantage of those shifts. Meanwhile, one of E.A.’s main competitors, Activision, is riding high on the strength of the mass-market Guitar Hero series and has agreed to merge with Vivendi’s games division, which makes the world’s most popular online game, World of Warcraft.

With Battlefield Heroes, E.A. is trying to capitalize on both trends at once. Not only will Heroes be distributed online, but also it is meant to provide a simpler, more accessible entertainment experience than the relatively complex earlier Battlefield games. The combat-oriented series has sold about 10 million copies since the 2002 debut of the franchise’s first game, Battlefield 1942.

“The existing Battlefield games are fairly deep; you have to be pretty good or you’ll die pretty quick,” Mr. Florin said Friday in a telephone interview from Geneva. “Now we’ve toned down the difficulty, shortened each game session to 10 or 15 minutes and made the visual style more cartoony.”

Strategically, Mr. Florin said the game was a step toward figuring out how to generate multiple revenue streams from a single intellectual property, a maneuver Hollywood has mastered.

“I’ve always envied the movie industry when they put a film out in the cinema, then they go to retail with a different business model and then to pay television and then free TV,” he said. “They have the same content reaching different audiences with different models, and we could never figure out a way to do that. Now with higher broadband penetration, we can use the technology to reach a broader audience.”

Not to mention the fact that popular games distributed online can be more profitable than games sold at retail, a prime driver of the Activision-Vivendi deal. Across China and South Korea, where online games dominate the market, game companies are generating profits far beyond their Western counterparts’ returns.

“The Activision-Vivendi deal changes the landscape for how investors will look at game companies, and that puts pressure on everyone else,” Ben Schachter, an Internet and game company analyst at UBS Securities, said Friday.

“Before it was a battle for a few operating margin points here and there,” Mr. Schachter said, “but when you look at the Asian companies like Shanda or something like World of Warcraft, you talking about a 40 percent operating margin business, which is just in a different league from the U.S. companies. So the U.S. publishers like E.A. have to be looking at those models with envious eyes, and those companies will have to experiment.”

Mr. Florin declined to name names but did say that if Battlefield Heroes is a success, E.A. would soon look to create free downloadable versions of some its other marquee games as well.

Perhaps the prime candidate would be the company’s flagship Madden series, for which sales have slowed. Traditional versions of Madden are extremely complicated, but a simplified downloadable version would be expected to appeal to millions of more casual players.

The NYT also reports that the top editor of The Los Angeles Times has been forced out for resisting newsroom budget cuts, executives at the paper said Sunday, marking the fourth time in less than three years that the highest-ranking editor or the publisher has left for that reason.

The removal of the editor, James E. O’Shea, by the publisher, David D. Hiller, mirrors the odd spectacle of a little more than a year ago, when the previous publisher, Jeffrey M. Johnson, was fired for refusing to eliminate newsroom jobs as directed by the paper’s owner, the Tribune Company. In each case, a longtime Tribune executive was expected to rein in costs at the paper, but instead sided with the newsroom and lost his job for it.

The departure of Mr. O’Shea appears to contradict statements by Samuel Zell, the Chicago real estate magnate who took over the company last month and is now its chairman and chief executive. Mr. Zell has criticized the previous regime of the financially troubled company for trying to improve the bottom line by cutting costs, and he has said that the path to profit lies in finding new revenue, not paring costs.

Calls to Mr. O’Shea, Mr. Hiller and a spokeswoman for Mr. Zell were not returned. A Tribune spokesman referred inquiries to Nancy Sullivan, a spokeswoman for The Times, who said, “I don’t have any comment for you.”

Officials at The Times said Mr. Hiller had ordered a $4 million cut in the newsroom budget. Some said he specifically sought to cut expenses related to covering the presidential campaign, a time when such expenses usually spike. Some editors and reporters said that Mr. Hiller told them in a meeting in November that he wanted to reduce staff somewhat by the end of 2008.

The shake-up came as a surprise to newsroom employees at The Times, several of whom said late last week that they had not heard about a clash between the editor and the publisher and did not have any indication that Mr. O’Shea’s job was threatened.

People at The Times said they did not know whether Mr. Hiller was acting on orders from company headquarters or on his own initiative; Mr. Zell has said he would allow each of the Tribune properties greater autonomy.

The Times had a newsroom staff of more than 1,100 people at the start of this decade, but the number has declined to below 900, officials say. Its weekday circulation has dropped to about 800,000, from 1.1 million.

Tribune, whose flagship is The Chicago Tribune, bought the Times Mirror Company in 2000, acquiring its crown jewel, The Los Angeles Times, one of the nation’s largest newspapers and long regarded as one of the best. The $8 billion price was widely seen as inflated, particularly after recession struck the following year and newspaper ad revenues began a long decline.

The relationship between the Los Angeles and Chicago offices has been troubled for much of the time since then. Chicago has demanded cost savings and higher profit — officials at The Times say the paper still makes a healthy profit, despite its troubles — and the view in Los Angeles has been that the new owners are slowly killing an asset they neither value nor understand.

Tribune first brought in two well-regarded editors from outside, John S. Carroll and Dean P. Baquet, to run The Times. But after rounds of job cuts and demands for more, Mr. Carroll quit in 2005, and Mr. Baquet rose to the top spot.

In late 2006, Mr. Johnson, the publisher, was fired along with Mr. Baquet for refusing to carry out more cuts. Mr. Baquet then rejoined The New York Times, which he had left in 2000 for the Los Angeles paper, as the Washington bureau chief and an assistant managing editor.

With Mr. Baquet gone, Mr. O’Shea, the managing editor of The Chicago Tribune, went to Los Angeles to run the newsroom.

Adding to the turmoil of the last few years has been the departure of two editors of The Times’ editorial page, Michael Kinsley and Andres Martinez, after short tenures.

It was not clear Sunday whether Mr. O’Shea’s successor would come from within The Times, or when his departure took place.

Tribune, one of the nation’s largest media companies, also owns Newsday, The Baltimore Sun and other newspapers, as well as two dozen television stations, the Chicago Cubs baseball team and other properties.

But as newspapers endure tough times, Tribune’s papers have suffered even more than the industry as a whole. Through the first three quarters of last year, its profit was 53 percent below the same period a year earlier.

Newspapers generally have been cutting staff in recent years, especially those in California, which have been hit hard by the downturn in real estate and, in turn, real estate advertising.

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