GP Industry Focus

8/14/2019 GP Industry Focus

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1A perfect match? Private equity and the global pulp and paper industry

A perfect match?Private equity and the global

pulp and paper industry


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2 A perfect match? Private equity and the global pulp and paper industry

4 Introduction

7 The rise of private equity

12 The attractiveness of pulp and paper

16 Value creation and private equity

20 Private equity and pulp and paper

a perfect match?

22 Final remarks

23 Further reading and contact information

Contents


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Privateequityhasuntilrecentlybeen

consideredasanunwelcomeguestatthetableofpubliccompaniesandthemedia.

Despitethis,eversinceitsadventinthe

1970s,PEhasgrownspectacularly.

Thenumbersattesttothis:in1980,

thetotalfundsavailableforPEwasonly

USD5billion.

TotalglobalM&Adealsin2007were

USD4,5trillion,andPEshareofthatwas

astaggeringUSD900billion(source:

Thomson Financial).IntheUS,PEdeals

reachedUSD454billionanincrease

ofover44%over2006.Thisgrowthwas

achieveddespitetheeffectsofthenan-

cialcrisiswhichstartedduringthesecond

halfof2007.PEhasbecomeaglobal

forcewithanincreasingimpactonthe

worldsnancialmarketsandindustry.

ThebiggestPErmshavebecome

nancialpowerhouseswiththeabilityto

acquiresomeofthebiggestcorporations

intheworldandshapeentireindustries.

Manyofthesermsactalsoasinvestment

banksandmanagealternativeassetssuch

ashedgefundsandmezzaninenancing

inadditiontoPE.

Inadditiontothehugemegadealsgener-

atingalotofpublicity,thesecompaniesareincreasinglyalsointerestedinthe

so-calledmid-marketconsistingofsmaller

dealsbelowUSD1billioninvalue.Many

rmsarealsoownersofbasicindustry

companies,andothersarediversifying

theirportfoliointothissectoraswell.

Theglobalpulpandpaperindustry

abasic,commodityindustrywithglobal

turnoverofapproximatelyUSD500billion

hasduringthepastfewyearsattracted

increasinginvestmentsfromPErms.

Alreadymorethan25%ofUSpaperand

boardproductioncapacityisownedby

PE.Somerecenthighproleexamples

arelistedinthefollowing:

StoraEnsosNorthAmericanpaper

operationswereacquiredbyNewPage

asubsidiaryofCerberusCapital

ManagementinSeptember2007

forUSD2,5billion.

BoiseCascadesdivestmentoftheir

paperandpackagingassetsin2007

toAldabraAcquisitionasubsidiaryofMadisonDearbornPartnersfor

USD1,6billion.

ApolloManagementacquiredInter-

nationalPaperscoatedpaperbusinessforUSD1,4billionin2006.

AltorPartnersinSwedenacquired

Papyrusthemerchantingdivisionof

StoraEnsoin2008forUSD1billion.

SequanaCapitalacquiredMapthe

merchantingdivisionofM-realfor

USD520millionin2007.

NorskeSkogdivesteditsKoreanpaper

millstoMorganStanleyprivateequity

inJune2008forNOK4,2billion

(approximatelyUSD600million).

Theabovelistisnotcomprehensive

manysmallerdealshavealsotakenplace

inrecentyears.

WhileNorthAmericaisclearlyaheadof

Europeintermsofoveralltransactionsand

therolethatPErmsplayinthem,the

sametrendmighttakeplaceinEuropeand

Asia-Pacic.Untilonlyafewyearsago,

veryfewPErmshadanypulp,paperor

packagingassetsintheirportfolios.

Pulpandpaper(includingber-based

packaging)canbecharacterizedasa

troubledindustry.Thenancialresults

Introduction


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thatPEplaystodayandcouldplayinthe

future.Forthepurposesofthisreport,wediscussedtheaboveissueswithourclients

togainnewinsightsonthisverycurrent

andstrategicallyimportantissue.Based

onourndings,webelievethatbothpulp

andpaperandPErmscangreatlyben-

etfromincreasedcollaborationandin-

volvement.

Wehopethatbothourprivateequityand

pulpandpaperclientswillndthisreport

insightfulandhelpfulforidentifyingnew

valuecreationopportunitiesanddevelop-

ingnewstrategies.Wesincerelythankall

contributorsfortheirtimeandinsights.

havebeenpoorforsixconsecutiveyears

nowand2008doesnotlookliketheyearduringwhichtheindustrywouldturnthe

corner.Therearemanyreasonsforthis

lowdemandgrowthinNorthAmericaand

WesternEuropeinmanygrades,persistent

overcapacityespeciallyinEurope,rising

oilpricesandrawmaterialcostsandthe

weaknessoftheUSdollar.Ontheother

hand,demandinAsiaandEasternEurope

remainshealthyandtherearemanypulp

andpapercompaniesthatareproducing

healthyresultseveninthisextremely

challengingbusinessenvironment.

Theindustryremainsfragmented,with

thetenbiggestrmscontrollingonlya

25%globalcapacityshare.Formanyyears

therehavebeenspeculationsthateven-

tuallytheindustrywouldconsolidateand

thatthiswouldbethekeytoimprovedpro-

tability.Thathasnothappenedindustry

onitsownhasbeenunabletosignicant-

lyconsolidateandbalancedemandwith

supply.RiseofPEhaspromptedmany

punditstospeculatewhetherPEcouldact

asacatalystanddrivetheconsolidationthrough.

InthisErnst&Youngreportwelookatthe

impactofPEinpulp,paperandpackaging

andhowattractivethissectorcouldbeforPE.

HowdoPErmscreatevalue?

Whattypesofindustriesandcompanies

aretheyinterestedin?

ShouldPErmsbecomemoreactivein

thesectorcouldthissectorbecome

moreattractivetothem?

WhydothePErmsseemtobemore

successfulthantraditionalmanagement

andpublicownership?

Whatisthelikelyrolethesermsmight

playinindustryrestructuring?

Ernst&Younghasformanyyearsserved

boththeleadingglobalPErmsandthe

worldsbiggestpulpandpapercompanies

deliveringadviceinauditing,trans-

actions,tax,risk,IT,outsourcing,perform-

anceimprovementandnancialmanage-

ment.Wehaveaglobalnetworkofdedi-

catedprofessionalsservingbothsectors

andwetalkregularlytothetopmanage-

mentofourclientsonawiderangeof

issues.Nearlyalltheleadingcompanies

ofbothsectorsareourlong-termclients.

Weareinauniquepositiontoprovidean

objective,freshlookattherestructuring

processforpulpandpaperandtherole

Timo Uronen,

Director, Pulp and Paper


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A perfect match? Private equity and the global pulp and paper industry6

Privateequityhasbecomeamajorforceinalmosteveryindustrialand

nancialsector.


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TheimpressivegrowthofPEcanclearlybe

seeninthefollowing(Figures1and2).

PEsgrowthindealsharehascertainly

beenimpressive.AndthegrowthofPEin

pulpandpaperhasalsobeensignicant

(Figure2).

Comparedwiththehugetotaltransaction

values,themainfocusofthebiggestPE

rmshasclearlybeeninothersectors

thanpulp,paperandpackaging.Despite

signicantgrowth,consideringthehuge

sumsinvolvedinoveralltransactionvalues,

theinvestmentsinpulpandpaperarestillverysmallandrepresentonlyasmall

fractionoftotaldealvalues.

The rise of private equity

Oneofthemainreasonsbehindthe

successofPEhasbeenlowinterestrates,whichhavefacilitateduseoflever-

ageindeals.Putverysimply,thelogic

ofleveragedbuy-outsisthefollowing:if

youacquireacompanywithforinstance

80%debtand20%equityandareable

toincreasethevalueintwotothreeyears

byforinstance30%andthereafterexitthe

rmviaanIPOoratradedealthereturn

afterdebtonequityisaveryhandsome

150%.

However,successobviouslydependson

theavailabilityandcostofcapital,the

dealitselfandtheabilitytoactuallyin-

creasethevalueofthetarget.Rewards

PEhasbecomeamajorforceto

bereckonedwithinalmostevery

industryandnancialsector.

Thesermswhetheracting

aloneorinconcertwithother

similarrmshavebeenableto

puttogethermegadealsthathave

hadanimpactonentireindustries.

FIGURE 1: Global M & A transactions and PE share

(Source:Zephyr)

Valueofglobalprivate

equityhousedeals

2003 2004 2005 2006 2007

500

1.000

1.500

2.000

2.500

3.000

3.500

0

Valueoftotaldeals

USDBillion

FIGURE 2: Global pulp and paper M & A transactions and PE share

(Source:Zephyr)

2003 2004 2005 2006 20070

15.000

10.000

5.000

20.000

25.000

30.000

USDMillion

Valueofglobalprivate

equityhousedeals

Valueoftotalglobaldeals


8/24

butalsotherisksarehuge.Despitethe

impressivegrowth,thesermshavealsosometimesfailed,resultinginhugelosses.

Successisdenitelynotguaranteedand

riskmanagementisanessentialmanage-

menttoolfortheserms.

MostPErmsownaportfolioofverydi-

verseassets.Theirportfoliooftenincludes

assetsintechnology&telecommunica-

tions,realestate,healthcare,consumer

products,media,retailandbasicindus-

tries.Somealsohaveassetsinthepulp,

paperandpackagingindustry.Thefocus

oftheselectedrmsareshowninTable1

thevalueofassetsundertheownership

ofthesermsrangesbetweenUSD2050

billion(seepage10).

AnumberofthebiggestPErmsalso

specializeindistressedindustries,where

therisksarehigherbuttherewards

canbegreater.Forinstance,Blackstone

Groupspeciesasoneofitsfocusareas

out-of-favor,under-appreciatedindus-

tries.Someotherverybigrmshave

thesamephilosophy.

Theverysuccessofthesermshasre-

sultedinincreasingpublicscrutiny.Ina

numberofmorepublicizedrecentcases,

therehavebeenpublicoutcriesagainst

specicdealsandaccusationsofpreda-

torybehaviorbysomePErms.PErms

havebeenaccusedofshort-termism,

strippingrespectablepubliccompaniesofassetsandsellingthecompanyafterhav-

ingloadedthebalancesheetwithdebt.

Perhapsduetothisimage,mostPErms

prefertooperatebehindthescenesand

avoidunnecessarypublicityafterall,the

verynamePEimpliesprivacy.

Thisimageiscertainlynotthereality

today:researchshowsthatinmanycases

PEownersgeneratemorevalueandleave

thecompanyinbettershapethanpublic

companies.

Asfarasshort-termismisconcerned,

averageexittimetodayisbetweenveto

sevenyears.Oneindicationofthevalue

creationandsoundmanagementbyPE

rmsisthefactthatmanystate-owned

pensionandendowmentfundsareincreas-

inglyinvestinginPEthesearegenerally

notknownforrecklessorunethicalin-

vestments.Despitethis,mostcorporate

managersviewPEverynegativelyapoll

carriedoutinGermanyin2004indicated

thatmorethan50%ofthe3,500execu-

tivesinterviewedconsideredPEasOut

ofthequestion!

(Source:TheEconomist).

ManySovereignWealthFundssuchas

ChinaInvestmentCorporation,AbuDhabi

InvestmentAuthorityandTheGovernment



9/24

A perfect match? Private equity and the global pulp and paper industry 9

Tech-nology

Tele-

communi-cations

Realestate

Consumerproducts

Financialservices

Retail

Media

and enter-tainment

Health-care

Industry

and manu-facturing

Pulp,

paper andpackaging

ApaxPartners

Apollo

BainCapital

Bridgepoint

CerberusCapitalManagement

CinvenGroup

CVCCapitalPartners

Fortress

GoldmanSachs

Hellman&Friedman

KKR

Macquarie

MadisonDearbornPartners

OneEquityPartners

Permira

TexasPacicGroup

TheBlackstoneGroup

TheCarlyleGroup

3i

TritonPacic

WarburgPincusCapital

TABLE 1: Selected PE rms and their sector focus (Source:companyreportsandwebsites,July2008)


10/24



11/24


ResearchshowsthatinmanycasesPEownersgeneratemore

valueandleavethecompaniesinbettershapethanwhenevidencedbycomparablepubliccompanybenchmarks.

PensionFundofNorwayhaveinvestedin

PE.Therehasalsobeenadownsidetothis

whilethefundinghascertainlybeenwel-

come,recentlytherehavebeencallsfor

moretransparencyanddisclosure,as

wellascautionsagainstundueinuence

byforeigngovernments.Theinterestof

SovereignWealthFundsandpensionfunds

veryclearlyhighlightstheattractiveness

ofPErmsandtheirabilitytogenerate

higherreturnsforinvestmentthanwhatisavailableinthepublicmarkets.

PErmsareaffectedbythegeneraleco-

nomicconditions.Thesubprimecrisisand

thecreditcrunchthatstartedinlate2007

hasimpactedalsothePEsector,andfund-

inghasbecomemuchmoredifcult.Now-

adaysPErmsneedtouseasmuchas

3040%oftheirownequitytonancea

majordealafewyearsagothegure

wascloserto20%.Useofleverageis

thereforemuchmoredifcult.Several

high-proledealswerecancelledin2007

andthersthalfof2008asaresultof

theuncertaintyofthenancialmarkets

similarly,theturbulenceofthestock

marketsalsoaffectedmanyplannedexits.

Despitethis,manyPErmscompleted

impressivenewfundingduring2007

atotalofUSD282billionintheUSalone

(a25%increaseto2006).Thiscapitalis

nowavailableforinvestmentsinachanged

environment.Asaresult,thebiggestPE

rmshavenowincreasinglychangedtheir

focusfromhugemega-dealstotheless-

riskymid-market(denedasdealsbelow

USD1billion).Thismaybeoneofthe

reasonsfortherecentinterestinthepulp,paperandpackagingcompanies.

Despitethenewchallenges,suchasthe

creditcrunch,theuncertainstockmarket

andtheincreasedmediaandpolitical

attention,seniorexecutivesofthebiggest

PErmsremaincondentaboutthefuture

(Source:Ernst&Youngsponsoredprivate

equityLeadershipNetwork,November

2007).Thesermshaveasuperbtrack

recordofgeneratinghighreturnsand

theywillundoubtedlycontinuetoexcelin

ndinginnovativewaystodeploycapital

effectivelyandcreatevalueintheirport-

folioofcompanies.


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Thenancialresultsandstockmarketper-

formanceofmanycompaniesleavesmuchtobedesired.However,somecompanies

suchasInternationalPaper,Kimberly-

Clark,SCA,Anglo-American(Mondi),

NineDragons,Mayr-MelnhofandHolmen

aregeneratinghealthyresultseveninthe

currentchallengingbusinessenvironment.

Inadditiontoownership,pulp,paperand

ber-basedpackagingisafragmentedand

heterogenousbusinessalsointheproduct

dimension.Productareasliketissue,pulp,

newsprint,ofcepapers,coatedwoodfree,

coatedmechanical,containerboardand

paperboardarealldifferentbusinesses

withdifferingbusinesslogic,coststruc-

ture,end-usesanddistribution.Mostbig

pulpandpapercompaniesalsohavesiza-

blesawmillingandbuildingproductsoper-

ations.Theseproductsareusedthrough-

outtheworldineveryday-lifebybillionsof

The attractiveness of pulp and paper

people.Growthandprotabilityprospects

varybyproductgroupandregion:NorthAmericaandWesternEuropearemature,

whereasCentralEasternEuropeandAsia

havestronggrowth.

Inadditiontodemandandsupply,thebig-

gestreasonsfortheunsatisfactoryprots

formostcompaniesaretheexternalfac-

tors.TheUSDisextraordinarilyweakand

thepriceofoilhasreachedyetanother

peak.Thesearebothperhapsthemost

volatileeconomicfactorspossiblethe

USdollarhasweakened60%inrelation

toeuroandothermajorcurrencies(such

asCAD,SEKandGBP)injustafewyears.

Ifandwhenthesefactorschangeandthe

industryhasrestructuredandreduced

costs,thesurvivingplayersshouldbe

inaverygoodpositiontomakemoney.

Thequestionis,ofcourse,howlongwill

thistake?

Atrstglance,thepulpand

paperindustrydoesnotseem

likealucrativeinvestmenttarget.

Table2showstheprotability

andmarketcapitalizationof

someofthebiggestpulpand

papercompanies.

Company Turnover 2007(USD million)

EBIT 2007(% of sales)*

EBIT 1-2/2008(% of sales)*

Market Cap 31/12/2007(USD million)

InternationalPaper 21.890 7,6 5,8 13.859

KimberlyClark 18.266 14,3 13,5 29.123

MeadWestvaco 6.906 4,5 4,7 5.759

M-Real 6.536 -2,7 3,5 1.569

NorskeSkog 4.994 2,2 2,2 1.573

Sappi 5.304 7,2 6,6 3.475

SCA 16.864 9,6 8,5 12.629

StoraEnso 19.687 1,8 3,5 11.924

UPM 14.773 4,8 7,3 10.428

Weyerhaeuser** 16.308 2,5 -15,2 15.098

TABLE 2: Key gures of selected pulp and paper companies (Source:annualreports)

*Includingnon-recurringitems.**Includingrealestate.


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PulpandpapermatchestheinvestmentcriteriaofmanyPE

rmsrelativelywell.


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15/24


Wehaveanalyzedthecriteriathatthe

biggestPErmsseemtousewhenselect-

ingabusinesstheyareinterestedin.This

isbasedonpubliclyavailableinformation

anddiscussionswithleadingPErmsand

thecomparisonwiththepulpandpaperindustryisshowninTable3.

Theattractivenessvariesbygrade,market

andcompanyandobviouslyeachPErm

hasitsown,differentiatedinvestment

strategy.Butitwouldseem,thatoverall

thepulpandpaperindustrymatchesthe

investmentcriteriaofPErelativelywell.

Whenthebusinessenvironmenteventuallyimprovesandtheindustryhasrestructured,theremainingcompaniesshouldbeabletoproducegoodnancialresults.

Private equity criteria Fit with pulp and paper

Historicalprotability Good

Currentprotabil ity Poor

MarketgrowthNorthAmericaandWesternEurope:Low

CentralandEasternEuropeandAsia:High

Potentialforconsolidation High

Potentialforcostreduction Medium

Needforinvestments Medium

Ownershipstructure Mostarepubliccompanies

Enterprisevalues Low

Exitopportunities Tradedeals,IPO

Disposableassets Forestassets,realestate,powerplants

TABLE 3: PE investment criteria and t with pulp and paper

(Source:EYanalysis)


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Value creation and private equity

TheaverageenterprisevaluesofPE

rmscomparedwithpubliccompany

equivalentsareshowningure3.Thestudyalsoshowed,thatwhenPErms

exitedthebusinessviaforinstancean

IPO,thebusinesshadbetterprospects

andwasbetter-offthanatthetimeof

theacquisition.

Thereareseveralreasonsbehindtheim-

pressivegrowthofPE.Oneobviousreason

istheskillinndingtherighttargetsand

righttimingofbothentryandexit.The

othermainreasonsforthedifferencecom-

paredwithpubliccompaniesisfasterprot

growthandcostreductions.ThesourcesofEBITDAgrowtharedepictedinFigure4.

MostoftheEBITDAgrowthcamefromor-

ganicgrowthinvestments,newproducts,

newmarketsetc.Ourndingsdonotsup-

portthepublicimageofPEasashortterm

ownerwithfocusonlyoncostsandstripping-

offthebestassetsofthecompany.While

costreductionsandrestructuringare

important,theyaccountedforonly34%

ofthetotalEBITDAgrowthin2007.The

averageemploymentwasatthesameor

higherlevelatexitthanatentry.Thismaycomeasasurprisetomanyindustryexec-

utives.

Ernst&Youngrecentlystudied

thevaluecreationofPE(see

report:HowdoPEinvestorscreate

value?Aglobalstudyof2007

exits).ThehighgrowthofPE

suggests,thatthesecompanies

areabletogeneratehighervalue

thanpubliccompanies.

FIGURE 4: Sources of PE EBITDA growth in Europe in 2007

(Source:EYreport:Howdoprivateequityinvestorscreatevalue?Aglobalstudyof2007exits)

1%

13%

34%

52%

Organicrevenuegrowth

Acquisitions

Other

Costreduction/restructuring

FIGURE 3: Growth in business value driven by PE

(Source:EYresearch:Howdoprivateequityinvestorscreatevalue?Aglobalstudyof2007exits)

PEout-performance

TOTAL=24% EV growthTOTAL=23% EV growth

2006 2007

Increase of

2007 vs 2006

1%

Publiccompany

benchmark

10% 12%

13% 12%


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18/24


Very careful and selective buying

Privateequityrmsbuybusinesses

onlyaftercarefulandmeticulousre-

search.Sectorfocusandexpertise

isalsoimportant70%ofUSdeals

intheEYstudybenettedfromsec-

torfocus.Thisoftenmeanshiring

industryprofessionalstobothana-

lyzethebusinessandthenpossibly

torunit.Three-quartersofthedeals

intheUSresultedfromproactive

dealstrategies.Exhaustiveevalua-

tionandduediligenceprocessesareastandardcomponentofthedeal.

Afterthedeal,PErmsalsotake

greatpainstomanagethetransition

andintegrationprocessesverythor-

oughly.Inshort,theyareverywell-

prepared,theyhavedeeppockets

andtheymanageallthestepsinthe

M&Aprocessveryprofessionally.

Delivery of the business plan

PErmsarestrongandactiveown-

ersofthermstheyacquire.They

investthetimeandthecommit-

menttolookaftertheirinvestment

usuallythismeansimplementing

rapidchanges.Newbusinessplans,

oftennewmanagementandincen-

tivesareputinplaceandexecution

ofthebusinessplansismonitored

closelywithstrongboard-level

leadership.AccordingtotheEY

study,74%ofthecasesstudiedintheUSincludedmanagement

changes;inEuropethecorrespond-

inggurewas68%.

The success of PE rms can be attributed to four cornerstones

(Source:EYreport:Howdoprivateequityinvestorscreatevalue

Aglobalstudyof2007exits)


19/24


Highly motivated management

PErmsaredemandingowners.

Theyselectthebestpossibleteam

toexecutethebusinessplans,and

whilethetargetsareusuallyvery

challenging,theincentivesarealso

veryattractive.Successishand-

somelyrewarded,andthewinning

managementteamisoftengranted

equityinthebusiness,typicallybe-

tween5%and10%.

Successful and well-executed exit

PErmsmakemoneyfromtheir

acquisitionsatexit.Successful

timingandplanningarecritical,

andexitconsiderationsaretaken

intoaccountattargetselection

level.TheexitsareusuallyIPOs,

buttradedealsorsellingtoanother

PErmarealsopossibilities.

Averageexittimeisbetweenve

andsevenyears.

Itisclear,thatPErmsareonaverage

performingbetterthantheirpubliccoun-

terparts.Someoftheacquiredbusiness-

esmaybecarve-outsfrombigconglom-

erates,thatmightnothavereceivedthe

managementattentionandinvestments

needed.Whentakingarmprivate,many

administrationandcorporategovernance

costssuchasSOX404areremoved.De-

cisionmakingisfasterandmorestraight-

forwardandmanynon-coreassetssuchas

realestate,landorproductionunitscanbe

divested.Capitalisreadilyavailablefor-

nancinggrowththroughacquisitions,in-vestmentsorexpansionintonewmarkets.

Perhapsthebiggestbenetistheability

ofthenewownerstotakeafresh,objec-

tivelookatthebusinesspastmistakesor

structuresdonotencumberthenewown-

ersandmanagement.Anewstrategyand

businessstructureisthuseasiertoformu-

lateandimplement.


20/24


Ernst&Younghasapproached

theleadingPErmstodiscuss

theattractivenessofthepulp,

paperandpackagingindustries.

Theclearmajorityofthetop20

rmsrespondedthatthissector

isnotintheirnear-termfocus.

However,somebigPErmsalreadyhave

substantialassetsinthesectorexamplesareMadisonDearbornPartners,Cerberus

andApolloManagement.Theresultof

ourqueryisveryinterestingforthein-

dustryitselfandthePErmsthatalready

haveassetsinthesector.Fortheindustry

thismeansthatrestructuringeffortsmust

becontinuedandPErmswillnotactas

acatalystforconsolidation.Atthesame

time,thePErmsthathaveenteredthe

sectorcanenjoyarelativelygreenpasture

thereislimitedcompetitionfromother

PErmsforthebestdeals.

Whileglobalconsolidationthroughin-

creasedPEinvolvementisnotrealistic,re-

gionallyandwithinspecicgradessuch

ascoatedwoodfreeortissueinEuropeor

paperboardinAsiathesituationisdiffer-

ent.Thereareopportunitiesfortakinga

dominantpositionregionallyinaparticular

gradeandthiscouldbringaboutregional

consolidationandimprovedprotabili-

Private equity and pulp and paper a perfect match?

ty.SomePErmsareatthemomentvery

activelystudyingtheseopportunities.

Wefeelthereisaverygoodmatchbetween

somePErmsandpulpandpaper.Pulp

andpaperindustryneedsrestructuring,

newideasandbetterdemandandsupply

management.Somecompaniesarecur-

rentlyunabletocloseordivestoldcapac-

ityduetotheresultingwrite-downs,while

othersmayneedcapitalinordertoexpand

intheemergingmarkets.Intheon-going

restructuringprocess,manycompanies

needtodivestnon-coreassetsatrade

dealisoftennotpossibleduetocompeti-

tionauthorities,whereasaPEdealcould

be.ManyofthepastM&Adealsofthein-

dustryhavebeenunsuccessful.Partnering

withawell-knownPErmcanward-offun-

welcomebidsbycompetitorsorotherPE

rms.PEcanbeasolutionandapartner

inalloftheabove.

Withinaspecicproductgroupandre-

gion,consolidationandsubsequentcureof

Added value for private equity Added value for pulp and paper

Potentialforconsolidationinspecicgradesandregions Restructuringthroughdisposalsandcarve-outs

Undervaluedassets CapitalforexpansioneginBRIC-markets

Interestinmid-marketandbasicindustries M&Aandnancialexpertise

DisposableassetsNewbusinessconceptsandmanagement

experiencefromotherindustries

Potentialforcostreductions Reducedadministrativeandgovernancecosts

Gradualimprovementofthebusinessenvironment Fastdecisionmaking

TABLE 4: Added value for PE and pulp and paper (Source: EY analysis)


21/24


theindustrysillnessesarepossible.Manycompaniessharepriceshaveduring2008

declinedandtheyhavedisposableas-

sets.ThemarketismatureinNorthAmer-

icaandWesternEuropetobesure.But

manyoftheproductsandend-usesofthe

industryareproductsusedbybillionsof

peopleineverydaylifetheyarenotgoing

tobesubstitutedinmanyyears,ifever.

Thecurrentcreditcrunchandnancial

turbulencehavemadehugemega-deals

moredifcultandtherecentlybuilt-up

fundsarelookingforinvestmentopportu-nities.Regionalandfocusedinvestments

inthepulpandpapersectormeetmanyof

theinvestmentcriteriaofanumberofPE

rms.Asummaryofthematchbetween

therequirementsofbothsectorsisshown

intable4.

PErmshavehundredsofcompanies

acrossdiverseindustriesundertheir

managementthiscouldprovideahuge

poolofnewbusinessconceptsandman-

agementexperiencefromotherindustries.

PErmsareserialbuyersandsellersofbusi-nessesin2006theycompletedaltogether

3000buyoutdeals.Oneoftheircorecompe-

tencesisM&Aandnancialmanagement,and

pulpandpapercompaniescouldbenetfrom

theirknowhow.Underprivateownership,

costsassociatedwithpubliccompanieswould

bereducedanddifcultdecision-makingre-

garding,forinstancecapacityclosures,would

bemorestraightforward.Therearepossibili-

tiesforoperationalcooperationespeciallyin

thecaseofcarve-outdeals.

ItwouldbeanoverstatementtosaythatPEandpulpandpaperisaperfectmatch.The

industryremainsintroubleinNorthAmerica

andEuropethisisabig,capitalintensive

andcyclicalbusinesswithlowmarketgrowth

exceptinAsiaandCentralEasternEurope.

ManyPErmshaveseveralotherveryinter-

estinginvestmentalternatives.Butforsome

PErmscurrentlyalsoinvestinginbasic

industriesthroughmid-marketdealsandin

certainproductsandregionsitcouldbevery

attractive.


22/24

A perfect match? Private equity and the global pulp and paper industry22

MostofthebigPErmsdonotconsider

thepulpandpapersectorattractiveandtheirinvestmentfocusiselsewhere.This

means,thatanymajorindustryrestructur-

ingandconsolidationonaglobalscaleis

notlikelyatleastnotthroughPE.There-

fore,weareunlikelytoseeanymajor

megadealsortakeoversfundedbyPEin

thenearfuture.However,someofthebig-

gestPErmsalreadyhaveassetsinthe

sectorandtheyhaveindicatedtheirinter-

esttoexpandinpulpandpaperinaddition

tomanymid-marketrmstheycanenjoy

arelativelygreenpasture.

Regionallyandwithinspecicgrades

therearesignicantopportunities.Many

rmshavealsobuilt-upmajorfundsre-

cently,andthiscapitalneedstobeef-

cientlydeployed.Inmanyways,pulp,pa-

perandber-basedpackagingmeetsthe

investmentcriteriausedbytheserms.

Thebusinessenvironmentwilleventually

changepreferablysoonerthanlater.

Whileitreallycantbecalledaperfect

match,ourndingssuggest,thatthereisacaseforincreasedcollaborationand

interactionbetweenPEandpulpandpa-

per.Theindustryprovidesopportunities

forvaluecreationandconsolidationwithin

specicregionsandgrades,whilePEpro-

videscapital,afreshlookatthebusiness,

newmanagementideasandrestructuring

possibilities.Webelieve,thatthetrendof

increasingPEinvestmentinpulpandpa-

perthathasbeenseeninNorthAmerica

willalsobeseeninotherregions.This

willinouropinioncreatenewvaluecre-ationopportunitiesandbetterprotabil-

ityforboththeindustryandtheprivate

investors.

Final remarks

Duringrecentyears,privateequity

hasrisentotheforefrontofthe

nancialmarketsoftheworld.

Contrarytopopularbelief,these

rmsusuallyleavethebusiness

theyhaveacquiredbetter-offprof-

itability,ahold-periodofveto

sevenyears,maintainedorhigher

employmentlevels,investments

innewproductsandmarketsand

comparisonswithpubliccompa-

niesalltestifytothat.


23/24


Ernst & Young has produced the following

thought leadership reports, that are relevantto both PE and pulp and paper:

Private equity 2007 year in review

How do private equity investors create value? 2007

The best of both worlds

Why every consumer products company should have

a private equity strategy(2008)

Mining is now the time for private equity? (2007)

At the crossroads global pulp and paper industry report

(2007)

The art of turnaround management

The challenges of change in the paper industry (2007)

Further reading and contact information

For further information, please contact:

TimoUronen

Director,PulpandPaper


24/24

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