Investment: Rexam sell-off keeps up the transformation

REXAM TOOK another step towards concentrating on its packaging businesses yesterday when it sold most of its industrial division for pounds 195m.

The sale of its corrugated packaging business, to SCA, further consolidates what is a very depressed industry. However, it also further underlines the transformation that is taking place at Rexam.

"This disposal and the proposed acquisition of PLM define the new Rexam," said Rolf Bjorjesson, the group's Swedish-born chief executive.

In the past year or so Rexam has been involved in a flurry of deals as Mr Bjorjesson tries to turn the diversified manufacturer into a growing international packaging operation.

He has splashed out on acquisitions, snapping up companies in Asia, Mexico, Brazil and the US before finally making a pounds 360m bid for PLM, the Swedish company he used to run, at the end of November.

There have also been plenty of disposals, and there will be more. Rexam is in talks to sell the remainder of its industrial packaging division, and other divisions, including its printing business and a subsidiary making window frames, have been listed as non-core. Rexam has also returned pounds 260m to its shareholders by buying back ordinary and preference shares.

The whirlwind of activity has yet to have the desired effect on its share price. At yesterday's close of 161.5p, down 3p, the shares stand at half the level they were in June.

Analysts were reasonably upbeat about the latest sale. "The price looks very reasonable given the outlook for the UK corrugated sector," said David Newlands, an analyst at WestLB Panmure.

The disposal has also raised expectations that what remains of Rexam's industrial division - its bulk packaging businesses - will also fetch a decent price. That would take the proceeds of the sale of the industrial division close to pounds 250m.

Nevertheless, a handful of analysts remain sceptical. They point out that economic upheaval in Asia has hit demand for coated films and papers, Rexam's largest division, while some of the non-core operations have suffered from the downturn in the UK.

There is also some concern over Mr Bjorjesson's strategy. Analysts argue that the price on offer for the business is high, pointing out that Rexam's claim that the business will cover its cost of capital in three to four years' time is hardly encouraging.

Mr Bjorjesson dismisses the criticism. "It is a very good business and the cash flow is strong from day one," he says. He adds that worries about the group's debt load - interest cover is expected to fall to five times next year - are unnecessary now that Rexam is no longer so exposed to the ups and downs of the economic cycle.

The real question is how much of the gloom is reflected in the share price. According to WestLB Panmure, the core businesses are being undervalued by the market, but this will change as the peripheral units are sold. The broker reckons the shares are worth up to 300p, and argues that a bidder may well emerge if the valuation anomaly is not corrected.