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Merger/Acquisition in Forestry, Paper and Packaging

Merger and acquisition activity in the forestry, paper and packaging industries hit bottom between mid-2009 and mid-2010. According to PricewaterhouseCoopers' (PwC) report on global deal making in these industries, the floor of the downturn “straddled” 2009 and 2010. In 2009, 369 deals with a total value of $18.7 billion closed. In 2010, 385 deals were struck, more than any year since PwC started tracking industry consolidation in 2003. Those deals were smaller in general, however, totaling just $12.7 billion. The average deal value in 2010 was down 29 percent to $68.2 million.

Activity in late 2010 and early 2011 indicates that merger and acquisition momentum is increasing. The report identifies the drivers of this momentum as “consolidation, security of fibre supply, geographical diversification into new growth markets, reposition of product and operational portfolios and a continuing flow of institutional money into timberlands.”

In fact, deals in 2011 are expected to eclipse those seen in 2009 and 2010. The RockTenn/Smurfit-Stone consolidation (see RockTenn story in last month’s issue), will total more than all the deals transacted in North America in 2009 and 2010; the $5 billion acquisition requires approval from shareholders and regulators before it is complete.

Russia’s Ilim Timber recently purchased Tolleson Lumber for an undisclosed amount in an effort to diversity its holdings. One report suggests that Tolleson is worth $55-60 million. Tolleson operates two sawmills in Perry and Preston, Ga. This purchase is part of Ilim’s global initiative to enter new markets; last year, it purchased two European mills. Ilim has indicated that they will continue to add to their US assets by purchasing other mills through Tolleson.

March has been a busy month for companies across the globe merging or taking stakes in other companies. International Paper just announced that they would take a 53.5 percent stake in India’s Andhra Pradesh Paper Mills for $257 million in cash and a $62 million non-compete payment. They will also undertake a mandatory public tender offer for an additional 21.5 percent for $104 million.

Japan’s Oji Paper acquired a 23 percent stake in a S. Pack & Print, a Thai carton and corrugated boxboard. This deal is part of an effort by Japanese companies to expand their presence in Southeast Asia. In 2009, Nippon Paper started this trend with the purchase of Paper Australia. They followed this acquisition with the purchase of minority stakes in Lee & Man in Hong Kong and Taiwan’s Yuen Foong Yu Paper in 2010. Oji Paper also purchased the Malaysian company, GS Paper & Packaging, in 2010.

In part because of active Japanese investment, 25 percent of all deals (by value) occurred in Asia Pacific in 2010, up from 2009’s 19 percent. Tying Asia Pacific, 25 percent of all deals globally occurred in North America, up from 5 percent in 2009. The value of deals that occurred in Central and Latin America fell from 67 percent in 2009 to 11 percent in 2010. Most deals in 2010—36 percent—occurred in Europe, however, a huge jump from 9 percent in 2009.

The amount of activity located in Europe may be an indication that companies there are ready to follow the lead of North American companies that have been able to stabilize markets by consolidating and rationalizing capacity. UPM-Kymmene is a prime example of this. UPM-Kymmene purchased its distressed Nordic rival, Myllykoski for $1.1 billion at the end of 2010. PwC identifies this as the beginning of a trend.

Integrated pulp and paper companies have fared better than non-integrated ones during the recession. According to PwC, “The former have come out of the downturn with strong balance sheets, benefiting at the upstream end from higher commodity prices. But the non-integrateds have suffered a squeeze from raw material price increases [see story on fiber prices in the previous issue] and that squeeze is set to continue. This imbalance will create a further dynamic for rationalization of the industry and M&A activity.”

Read the full report from PricewaterhouseCoopers.