2ND LD: Kumagai Gumi, Tobishima to scrap merger plan.

TOKYO, Nov. 15 Kyodo

(EDS: UPDATING FOLLOWING ANNOUNCEMENT)

Two struggling second-tier construction companies, Kumagai Gumi  Co. and Tobishima Corp., said Monday they will scrap their merger plan set for April 1, 2005.

The two companies decided to do away with the plan, announced in November 2003, because necessary costs, such as those to finance the integration of computer systems and workforce cuts, are likely to be much larger than expected.

Assessing the possible results of the merger, ''We have concluded it would be difficult to convince shareholders and employees of its effect,'' Tobishima President Yoshiharu Tomimatsu said at a press conference to announce the decision to cancel the deal.

Kumagai Gumi President Kazutoshi Torikai said, ''We cannot afford a setback, even temporarily, in (improving) earnings'' which appears likely because the integration of computer systems would require huge depreciation expenses.

The two companies have fallen into financial difficulties since the bursting of the asset-inflated economic bubble in the early 1990s. Kumagai Gumi and Tobishima received financial support worth 750 billion and 680 billion yen, respectively, largely from their main creditor banks -- Sumitomo Mitsui Banking Corp. and Mizuho Corporate Bank.

The contractors reached an accord in April last year to integrate their businesses, possibly under a holding company, in a bid to turn themselves around with help from the banks. They decided to seek a merger seven months later in view of the shrinking construction market.

They have since introduced each other's civil engineering and construction know-how while exchanging technical experts.

In fiscal 2003 ended in March, Kumagai Gumi posted a group net profit of 280.21 billion yen and a pretax profit of 2.78 billion yen on sales of 341.74 billion yen.

For the same year, Tobishima incurred 4.18 billion yen in group net loss but booked 3.50 billion yen in pretax profit with sales coming to 209.20 billion yen.

In addition to larger-than-expected merger costs, the two companies probably decided to scrap their accord because they have pulled themselves out of their financial straits with the creditor banks' support.

For the April-September first half of the current fiscal year, Kumagai Gumi and Tobishima expect to book parent-only pretax profits of 2 billion yen and 600 million yen after revising their earnings projections upward.