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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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3A perfect match? Private equity and the global pulp and paper industry
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4 A perfect match? Private equity and the global pulp and paper industry
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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5A perfect match? Private equity and the global pulp and paper industry
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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7A perfect match? Private equity and the global pulp and paper industry
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
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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
8 A perfect match? Private equity and the global pulp and paper industry
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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)
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10 A perfect match? Private equity and the global pulp and paper industry
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11A perfect match? Private equity and the global pulp and paper industry
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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12 A perfect match? Private equity and the global pulp and paper industry
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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13A perfect match? Private equity and the global pulp and paper industry
PulpandpapermatchestheinvestmentcriteriaofmanyPE
rmsrelativelywell.
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14 A perfect match? Private equity and the global pulp and paper industry
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15A perfect match? Private equity and the global pulp and paper industry
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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16 A perfect match? Private equity and the global pulp and paper industry
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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17A perfect match? Private equity and the global pulp and paper industry
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18 A perfect match? Private equity and the global pulp and paper industry
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)
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19A perfect match? Private equity and the global pulp and paper industry
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.
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20 A perfect match? Private equity and the global pulp and paper industry
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)
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21A perfect match? Private equity and the global pulp and paper industry
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.
8/14/2019 GP Industry Focus
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.
8/14/2019 GP Industry Focus
23/24
23A perfect match? Private equity and the global pulp and paper industry
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
8/14/2019 GP Industry Focus
24/24
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