Global miner Rio Tinto further improved its cash position on Monday by selling a part of its food packaging business to Bemis Co for $1.2 billion in a deal that makes Bemis by far the largest North American player in a still fragmented industry.

Rio Tinto, which only last week raised $15.2 billion in one of the world's biggest rights issues, will sell its Food Americas flexible packaging assets to U.S.-based Bemis for $1 billion cash, with the rest in equity.

Any packaging assets that Rio is getting rid of on its balance sheet is good, Olivia Ker, a research analyst at Merrill Lynch, said after the news. Monday's announcement takes Rio's expected proceeds from asset sales this year to $3.7 billion, and analysts say Rio would be encouraged to sell other noncore assets in the coming days.

The rest of the packaging business is certainly on the cards, the rest of the coal division is still on the cards, Ker added.

The deal moves Rio Tinto closer to extricating itself from near-disastrous consequences of its 2007 acquisition of Canadian aluminum and packaging company Alcan. Bought near the height of the commodities boom, Alcan left Rio Tinto with $38 billion in debt. Rio Tinto had hoped to repay some of the debt by quickly selling the packaging assets, but the global financial crisis delayed that plan as asset prices tumbled.

It also propels Bemis well ahead of rival Sealed Air Corp as the top flexible packager in North America by market share.

The transaction multiple is reasonable, with Bemis dramatically increasing its critical mass, said Ghansham Panjabi, an analyst with Robert W. Baird & Co.

But, more importantly, this will act as a lightning rod for further consolidation in the (packaging) industry.

Rio Tinto said Alcan's remaining non-aluminum assets were still on the auction block, with their book value likely to be written down ahead of their sale.

Sources told Reuters that Australian packaging group Amcor Ltd was still in talks to buy some of the remaining packaging assets from Rio, which Citigroup estimates could fetch more than $2 billion.

An Amcor spokesman declined to comment.

Rio Tinto shares closed down 7 percent in London on Monday, outpacing the British mining index <.FTNMX1770>, which was hit by a slide in metals prices. Bemis shares closed up 5 percent at $25.50 on the New York Stock Exchange.

'SOLID VALUE'

The sale of the Food Americas division is the first significant step in reducing the asset portfolio acquired with Alcan, Rio Tinto Chief Financial Officer Guy Elliott said in a statement. The transaction represents solid value given the challenging financial environment.

Rio Tinto recently opted in favor of a rights issue and a tie-up with rival BHP Billiton after aborting a deal with Chinese conglomerate Chinalco.

Analyst Michael Rawlinson at Liberum Capital in London said the price for Food Americas was decent. We believe the market has been expecting $2 billion-$3 billion for the entire Alcan packaging business, therefore we consider the price Rio has received for U.S. food packaging stand-alone looks attractive.

The assets being sold by Rio include 23 facilities, more than 90 percent of which are located in the United States, Canada and Mexico. The business posted 2008 sales of more than $1.5 billion.

Bemis Chief Executive Henry Theisen said his company has been targeting the assets for 14 months.

We thought it was really important for Bemis to stay an investment grade company, which really set the stage for what we could afford to go after, Theisen said in an interview. These assets fit -- they're very complementary to our current business, operate in an area that we're familiar with, and we targeted these assets from the beginning.

The deal, which is expected to close by the end of 2009, will generate annualized savings of $65 million for Bemis and boost its earnings per share beginning in 2010. Bemis also expects a tax benefit of around $100 million from the deal.

The synergies here are the key, JP Morgan analyst Claudia Shank Hueston said in a research note, who said the price was at the high end of her expectations. At just over 4 percent of sales, the $65 million target is higher than what we have seen in many other flexible packaging transactions, but given the significant business overlap, at first blush, the target does not sound wholly unreasonable.

Barclays Capital and Greenhill advised Bemis on the deal.

($1=$1.26 Australian)

(Additional reporting by Eric Onstad in London and Euan Rocha in Toronto; editing by Peter Galloway, Tim Dobbyn, Gary Hill)

Merrill Lynch