OI! Rexam’s balance sheet is wrecked

July 29, 2009

Like the contents of a supermarket bargain bin, the dent in the world’s biggest can-maker Rexam is much deeper than it looked at first sight. What had seemed like a clever way to avoid losing investment-grade status for its debt has turned into something much worse, and Wednesday’s rights issue is only a step away from a rescue by shareholders.

The  4-for-11 at 150p is miles from last week’s price of 321p, a shocking fall for a business which was supposed to be recession-resistant, at least. In hindsight, it’s odd that we ever thought it was, since cans of Red Bull and Pepsi are hardly essentials to consumers in a squeeze.

Suddenly, far from looking resilient, Rexam looks highly cyclical. The expensively-bought OI Plastics is shrinking fast, prompting Paul Checketts at Oriel Securities to argue that it’s still not too late to sell the shares.

Checketts had earlier calculated that losing investment grade status would cost between 8 and 12 million pounds a year in extra financing costs. The company still maintains that the issue avoids a transfer of value from shareholders to debt providers, although costs of 16 million pounds is a significant transfer from shareholders to banks and advisers instead.     

Rexam’s plight is all too familiar. It paid $1.6 billion for OI in 2007, and even after the 334 million pounds of net proceeds from the rights issue, debt is still 1.8 billion pounds. This for a business which made 150 million before tax in the last six months, with no immediate prospect of improvement.

Buying OI was supposed to transform Rexam’s plastics business, and so it has. But the shareholders who put up 270 million pounds to buy new shares at 490 pence each just two years ago to help finance it can only say: 0I! Where’s our money gone?

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