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Devro plc Disposes of Cellulose Business

Devro plc ("Devro") today announces that it has conditionally agreed to sell its Cellulose business to Teepak, LLC, a newly formed entity established by Lake Pacific Partners, LLC, a Chicago-based private equity fund, and the management of the Cellulose business. The gross consideration is US$7.15 million (£5.0 million) subject to a working capital adjustment and is payable in cash on completion.

As part of the transaction, the purchaser will take on the responsibility for certain liabilities relating to the Cellulose business employees amounting to US$40.8 million (£28.3 million) at 30 June 2001. In view of its size in relation to the group, the disposal is conditional, inter alia, upon shareholder approval and a circular in this regard will be sent to shareholders in due course.

Background to and reasons for the disposal of the Cellulose business Devro established its Cellulose business through the acquisition of Teepak International Inc. in January 1996. Following the acquisition, the Cellulose business demonstrated solid profit growth. However, in the latter part of 1998, the economic difficulties experienced in several markets around the world, and in particular in Russia, resulted in a sharp decline in global demand for cellulose casing products. This led to significant global over-capacity in cellulose and aggressive price discounting by most producers. This in turn led to a substantial and continuing decline in the profitability of the Cellulose business. Difficult market conditions have persisted and, despite significant business restructuring initiatives, the decline in the cellulose profitability has continued, which ultimately resulted in an underlying operating loss in 2000.

The market conditions for cellulose products are unlikely to improve in the short-term and the Board believes that a disposal of the Cellulose business, which will permit a greater concentration of resources for the development of the collagen casings business, offers the best opportunity of maximizing shareholder value.

Commenting on the disposal, Pat Barrett, Chairman of Devro, said: "The disposal of the cellulose business gives the management of Devro the opportunity to rededicate themselves to their successful global collagen business. They will refocus all of their attention and investment on enhancing the technical and manufacturing advantages of collagen and reinforcing the strong position which collagen occupies within the casings industry."

"We have a superb global presence in the collagen business with well invested facilities in North America, the United Kingdom, Central Europe, and Australia. Our operations utilise three distinct manufacturing processes, each with their own unique relevance to certain markets and applications."

"Our operating cash flow following the successful disposal of the cellulose business will be dedicated towards enhancing the added value properties of our collagen products and also towards the reduction of debt."

"Since my appointment to the Board of Devro, I have developed great confidence that the team of dedicated employees at every level in our business, who achieved such excellent results over most of the past decade, have the ability, the motivation, and the determination to maintain the highest quality performance standards in each of the key areas of our business. The restoration of good and improving financial performance leading to good shareholder returns will be the key indicator of our success".

Information on the Cellulose business Manufactures cellulose and fibrous casings for use in the processed meat industry. The Cellulose business' casings can be used for a wide array of applications including wieners, frankfurters, sausages, deli meats, hams and other specialised applications. The Cellulose business operates cellulose and fibrous manufacturing facilities and converting centres in the US and Europe.

The principal manufacturing facilities are located in Danville, Illinois and Lommel, Belgium. The products are marketed through sales staff with offices in Chicago, Miami, Toronto, Zurich, Lommel and Moscow. Turnover of the Cellulose business during the twelve months ended 31 December 2000 totalled £107.1 million. The Cellulose business employs approximately 1,300 primarily in the US and Europe.

The net assets attributable to the Cellulose business at 30 June 2001 amounted to £17.7 million. A loss of £2.6 million, before interest and tax, was attributable to the Cellulose business for the year ended 31 December 2000.

The world market for collagen casings The world market for collagen casings has demonstrated a pattern of modest but steady growth over many years. While the collagen market has also experienced some pressures in the recent past, the Board of Devro considers that the underlying fundamentals driving the business remain sound, with the changeover by sausage manufacturers from gut casings to collagen continuing to be a key feature of the market. This conversion process is based on the ability to produce collagen casings to a wide range of precise specifications and offering manufacturers significant productivity benefits, particularly on modern, high-speed production and processing lines.

Collagen casings are an integral and important part of Devro's customers' products, contributing to their appearance and performance at every stage of filling, cooking or curing through to their final appearance on the consumers' plate. This, therefore, means that through continued investment in the development of the group's collagen markets and technologies, Devro has the opportunity to provide products offering real added value to its customers' businesses.

Conditions of the disposal Completion of the disposal is subject to a number of customary conditions including the passing of a resolution of the Company at an Extraordinary General Meeting.

Effects of the disposal The Directors estimate that, excluding any working capital adjustment, net proceeds after taking account of expenses will total £1 million. This will result in the group making an exceptional loss on disposal of approximately £55 million. This loss comprises a reduction of net assets of approximately £20 million and a charge to the profit and loss account of approximately £35 million for the goodwill relating to the Cellulose business, which was written off to reserves on acquisition. There is no effect on group reserves from the goodwill write-off because of a corresponding credit to reserves.

Current trading and prospects The two issues of BSE and Foot and Mouth Disease had a considerable adverse effect on market conditions in the early part of the year, resulting in a much reduced first quarter trading performance. Trading conditions began to improve slightly during the second quarter and with this more positive trend continuing into the third quarter the Directors believe that the second half profit performance will reflect these improving market conditions.

Interim results Financial results for the 6 months ended 30 June 2001 will be released on 6 September 2001.

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