Rexam needs a double act

Uncertainty about top management is leaving Britain's biggest packaging group adrift
PROFIT warnings are back with a vengeance and nowhere more so than in paper, printing and packaging, one of the stock market's most cyclical sectors.

Last week, shares in Rexam, Britain's biggest packaging group, better known by its old name of Bowater, fell 37p to 335p on news that pre-tax profits for the year would be 20 per cent below 1994's pounds 231m.

The warning, the second in three months, represents a dramatic reverse in trading fortunes. In May, when the shares were above 500p, Michael Woodhouse, Rexam's chairman, told shareholders at the annual meeting that trading conditions continued "by and large" to be helpful, European printing and packaging were "for the most part" trading strongly, and North American demand was good.

Rexam is not alone in suddenly feeling the pain; the Anglo-French paper group, Arjo Wiggins Appleton, and the banknote printer, De La Rue, have also issued warnings in the past fortnight. All are suffering as customers have run down stocks, in anticipation of the peak in the commodity price cycle and in the face of falling consumer demand.

Rexam's problems, though, are compounded by a power vacuum at the top. David Lyon, the chief executive, plans to retire at 60 next June. A successor from outside was due to be in place by the end of December, but no appointment is now expected until the new year.

On top of that, Rexam is also on the look-out for a new non-executive chairman. Mr Woodhouse was appointed in 1993, but as a stop-gap only, after Norman Ireland left to rejoin and run the BTR conglomerate.

A natural successor appeared to have been lined up when Lord Sheppard, head of the Grand Metropolitan food and drinks group, joined the board two years ago, but he left in March amid speculation that such a high- profile chairman with a reputation for deal-making would unsettle an incoming chief executive.

Picking a management duo with clear ideas about strategy and direction is the natural way out of the dilemma. But the difficulty in finding such a team was highlighted last week when Brian Smith, new stopgap chairman at Cable & Wireless, said it would take at least a year to replace its top two, Lord Young and James Ross, who left the telecoms group on Tuesday after an acrimonious boardroom bust-up.

As with C&W, doubts about Rexam's strategy are likely to persist while this power vacuum remains. Analysts reckon the company is too broadly spread. Although printing and packaging still account for more than half of sales, recent expansion of the coated products business, most notably 1993's pounds 305m acquisition of the US speciality papers company SCI, has failed to reduce exposure to huge swings in stock at various stages of the paper cycle. Indeed, far from providing higher margins and greater earnings visibility, it is the mainly US-based coated products division that is suffering most from the current bout of destocking.

Analysts also continue to question how building products and engineering - accounting for almost a quarter of group sales - fit into a company whose basic business is to wrap things up.

Rexam is addressing the concerns, but only up to a point. Plans to sell the Australian engineering arm are at an advanced stage, but the group insists it is not looking for someone to take its PVC windows and MiTek metal connecting plates operations off its hands.

But perhaps the biggest criticism levelled by investors is directed at Rexam's top-down, global approach in an industry where being close to customers in niche markets is everything.

"Rexam has gone for the grand strategy," says one analyst, "but has forgotten it is in more of a people business than it imagines. Apart from mass-produced items like tin cans and aerosols, packaging is a high-service business."

Two surprise profit warnings in three months support this view of a rather monolithic management structure where information filters up only slowly through various divisional layers to the boardroom. Rexam's sheer size may also explain why it passed up several recent acquisition opportunities to add to its pharmaceutical packaging interests, one of the fastest-growing and highest-margin areas of the industry.

Such concerns are mere quibbles, though, against the unresolved management issue and uncertainty about how long de-stocking will continue. Assuming the latter ends sooner rather than later, pre-profits next year could hit BZW's top-of-the range pounds 225m, implying a pros-pective price-earnings ratio under 11. That may look attractive, but until future strategy is clarified, the shares should be given a wide berth.