RMC will merge German businesses

SHARES in RMC, the building materials group, jumped 34p to 675p yesterday as the company said it expected to make substantial tax savings by merging its eastern and western German businesses, writes Heather Connon.

The merger will mean that the heavy capital investment programme in eastern Germany can be offset against tax on profits generated in the west - which will benefit both cash flow and earnings per share.

The group has had operations in the east since 1990, shortly after the Berlin Wall came down, but they have been kept separate from the other German operations in an associate company. The merger of the businesses will bring more benefits from the German government's programme of encouraging investment in the east by allowing accelerated tax allowances on capital expenditure.

RMC has already spent DM700m ( pounds 280m) in the east and is planning a further DM500m of investment in the next two years. Although the DM250m cost of acquiring the Rudersdorf cement works near Berlin will not qualify for the tax incentives, Derek Jenkins, finance director, believes that most other expenditure will. The tax allowances can be up to 100 per cent.

Mr Jenkins added that the earnings benefits depend on the amount of deferred tax provision the company establishes. Some analysts estimate it could increase earnings by 2p to about 36.2p in the current year. It will, however, add to debt by bringing pounds 150m on to the balance sheet. That would have increased gearing from the 31 per cent level at the end of 1992 to 45 per cent.

Profits from the eastern German business are not disclosed, but it accounted for most of the pounds 7.4m increase in associates' profits in the 1992 results.