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BPB shares plummet on probe

Investment: Building materials industry under investigation by European Union
SHARES IN BPB, the buildings material company, plummeted by 18 per cent to 215p yesterday after the company said that it was being investigated by the European Union over alleged breaches in European anti-competition laws, and that trading conditions were becoming increasingly difficult.

In a statement, BPB confirmed that "officials from the commission of the European communities had visited various BPB offices on Wednesday as part of a pan-European investigation into alleged infringements of Article 85 of the Treaty of Rome within the European plasterboard business".

BPB is the dominant player in the European plasterboard market, with more than 50 per cent of market share. Its two main competitors, Lafarge and Knauf, share 45 per cent, with the remaining 5 per cent controlled by small regional players.

The investigation, coming only six weeks after BPB announced the acquisition of the Scandinavian company Gyproc, has inevitably led to speculation that the main focus of the investigation will be allegations concerning anti-competitive practices in the Scandinavian market.

Another suggestion is that tight pricing in the German market had given rise to the investigation. Over the past two years plasterboard prices have fallen by up to 20 per cent in Germany, partly due to decreased demand from East Germany, as well as alleged price-cutting by Polish-based Norgips.

Analysts said that the EU announcement was the main impetus behind the sharp fall in the share price. Half-year pre-tax profit before exceptionals rose by 1 per cent to pounds 90m, and dividend per share increased by 5 per cent, both of which were in line with expectations.

Commenting on the outlook for the next six months, chief executive Jean- Pierre Cuny said that "with uncertainties continuing to surround the impact of a possible global economic slowdown, trading conditions in the second half will be challenging; the overall trend of trading now suggesting slower growth for the remainder of the year."

The prolonged strength of sterling, Mr Cuny said, had cost the company up to pounds 3m in pretax profit, which after a pounds 20m loss due to the disposal of the Radcliffe papermill, saw profits drop 23 per cent to pounds 69m.

Analysts think that it is too early to ascertain what the long-term effect of the investigation will be on the industry, particularly as the EU has not yet commented on the reasons behind the inquiry.

Mike Betts, of Goldman Sachs, said the EU investigation would cast a shadow over the industry for quite some time. Commenting on the EU investigation into the cement industry between 1991 and 1994, Mr Betts said "it took three years between the launch and conclusion of the investigation, and there is a risk that this investigation will impinge upon BPB share price performance for the foreseeable future".

The announcement of the imminent buy-back of up to 10 per cent of the company's shares was greeted with enthusiasm, with most analysts agreeing that it will greatly improve the strength of BPB's balance sheet - a criticism frequently levelled at the company.

According to Mr Betts, "a buy back of 10 per cent, given that the share price is so weak, will add 7 per cent to earnings and raise the debt to equity ratio to 50 per cent".

One analyst said that the weak trading conditions had more than been compensated for by today's fall in share price, but that the share "was definitely not one for the faint-hearted". While speculation still surrounds the exact nature of the EU investigation, he said that there was little prospect of a bounce in share prices in the immediate future.