Catalyst Paper And Packaging M&A Report 2011

Following difficult years in 2008and 2009, the paper and packagingindustry emerged in improvedhealth in 2010 and the first half of2011, buoyed by strengtheningconsumption levels.

However, recent concerns about theEuropean sovereign debt crisis andthe wider credit environment, aswell as deteriorating growth ratesin developed economies suchas Germany, once again presenta number of challenges for theindustry.

The key observations fromour research:

Many companies have been focusingon restructuring their operations anddecreasing debt levels, often throughthe disposal of non-core businesses.We do not believe this process is yetcomplete, creating deal opportunitiesfor trade buyers, management teamsand financial investors alike.

Unlike the US market, which has beenconsolidating for over a decade, theindustry in Europe remains relativelyfragmented - the top five US firmsaccount for 75% of the marketcompared to only 40% in Europe.We expect increased consolidationas European firms seek both growthand higher financial returns.

Companies who have invested overseastend to make these acquisitions tosecure platforms from which to growand integrate their supply chains evenfurther. Large trade players have maderecent acquisitions in Turkey, India andother BRIC nations and we expect thistrend to gather pace.

Whilst both fibre and end product priceshave been steadily increasing since theend of 2008, demand remains largelybelow pre-recession levels. Companyvaluations are lower and perceived asattractive in the context of M&A.

2011 ending ondownbeat note

Restructuring notyet complete

Compared to USA,European market isstill unconsolidated

Paper and Packaging SectorM&A update

Autumn 2011

Disposals to continue as sectorrestructures from debt burden

“I am struck by howunconsolidated the Europeanmarket is compared to its USequivalent. I am sure this willnot continue for much longer”Richard Sanders, Partner

Industry TrendsThe UK remains one of the smallestproducers of paper and packagingproducts in Europe relative toconsumption, importing over 65% of itsannual 11.5 million tonnes supply – seeFigure 1.

Mill closures increased dramatically in 2008and 2009 and although slowing, continue totake capacity out of the market; DS Smithrecently announced the closure of theHollins paper mill in Lancashire. Howeverit is not all one way traffic, as Spanishcompany SAICA will start commissioningtheir new 500,000 tonne plant in Partingtonin December this year.

Whilst decisions on production capacity arefundamental to the paper and packagingindustry there are also a number of otherimportant factors:

A key priority for many companies hasbeen to develop a closed loop modelthat both increases fibre security andcontrols end customer relationships.Firms that have followed this strategyhave been rewarded by higher growthfigures and operating margins, as wellas stronger share price performances.

Historically the industry has been highlycyclical, which has put pressure onmargins and lowered returns on capital(usually under 10%). Whilst mill closureshave rationalised capacity and improvedefficiency levels supply chain disciplinecontinues to be a priority. Operatorsneed to react quickly to marketdownturns by rationalising costs.

Some traditional markets continue todecline especially in areas where printmedia is shifting online. The outlook forthe FMCG and industrial packaging

Paper and Packaging Sector M&A update

Figure 1: UK market structure

Those operatingclosed loop modelsreport consistently

higher returns

Source: Catalyst Corporate Finance

= Tonnage contracting= Tonnage expanding

RecoveryUsageSupply

Newspaper0.8m t (20%)

Printings & writings1.0m t (25%)

Packaging1.4m t (36%)

Tissue 0.6m t (14%)

Other 0.2m t (5%)

Imported virgin paper6.3m t (84%)

Imported virgin pulp1.1m t (15%)

Importedrecovered paper

0.1m t (1%)

UK

prod

uctio

nof

pape

r&bo

ard

4.03

mt

Impo

rted

7.48

mt(

65%

)

UK

pape

r&bo

ard

reco

very

8.2m

t

Dis

posa

l3.

3mt

C&

I-75

%M

unic

ipal

25%

Printings & writings4.3m t (37%)

Packaging3.5m t (30%)

Newspaper2.3m t (20%)

Tissue1.0m t (9%)

Other 0.4m t (3%)

Exported forrecycling

4.43m t (54%)

Recycled in UK3.77m t (46%)

Not able to berecycled 2.19 m t

Currently notrecycled 1.1m t

Landfill &incineration

Exported to China2.5m t (56%)

Exported toAsia Pacific1.3m t (30%)

Exported to Europe0.6m t (14%)

Re-imported to UK


Figure 2: Recovered paper prices

sectors can be seen as more robustwith good opportunities across a widenumber of end markets. Firms areclearly repositioning in these areas.

The paper and packaging industry hasalways been highly geared – in somecases debt / equity ratios haveexceeded 200%. Releasing capitalthrough non core disposals has beena preferred route to accelerate thedeleveraging process.

Whilst raw material fibre prices maysoften in the near future, we expectthem to continue to rise over the longterm due to global competition forrecovered paper. Effective hedgingwill be central to managing cost andmaintaining fibre security.

EmergingMarket ImpactDemand in the sector from emergingmarkets has traditionally been linkedto the expansion in exports ofmanufactured products

These countries and especially China tookthe opportunity during the last cycle to also

develop consumer led economies.This has had a stark impact on thepaper and packaging sector in the UK:

The BRIC nations have driven demandfor packaging and consequently theprices of recycled paper. Recyclingcapacity in these markets is limited with50% of their requirement being suppliedby the US and the UK. The price of rawmaterials associated with the industryhas risen over the last five years. Oldcorrugated containers (OCC) inparticular having recovered from aslump in 2009 recently reached arecord level. (see Figure 2).

Accelerated growth in middle classdisposable incomes in the BRICeconomies has led to strong structuralgrowth in FMCG packaging and otherconsumer related sectors. A growingproportion of investment is beingchannelled into these markets byEuropean and American companies.

Chinese producers have made plans toincrease their capacity aggressively inthe next three years. Their stated aimis to become the world’s largestpackaging producers by the end of 2012,which will further intensify competitionand will alter the global market dynamic.

Source: Letsrecycle.com

BRICs demand hasincreased recycled

paper prices

Chinese ambitionswill alter

global market

Current ValuationsThe packaging sector has sufferedfrom lower valuations than a numberof other comparable sectors. However,improved operating performances,deleveraging of balance sheets andbetter GDP growth prospects drovevaluation growth higher than the restof the market in Q1 2011.

Since then, valuations have declined andagain are expected to remain subdued forthe short term:

Volume growth in the paper andpackaging sector is highly correlated toGDP growth and we have seen a sharpdecline in US and European growth statsin Q2 with reduced forecasts for the restof 2011. Consumer spending remainsweaker as confidence remains low.

Raw materials costs are highly influentialon profitability and an inability to passon higher input costs to customers hasbeen a threat to valuations. The abilityto hedge supply, manage supplierrelationships and long term contractpositions will have a pronounced effecton sector outlook.


Figure 3: Paper & packaging composite share price index

Valuationssubdued presently

Source: Capital IQCatalyst Packaging Composite: International Paper, Kimberley-Clark, SCA, Stora Enso, DS Smith, Smurfit Kappa, Holmen, UPM, Rexam, Mondi, Sappi


Figure 4: Comparison of average EV/EBITDA multiples

Trade Buyer ActivityThe paper and packaging industry hasalways enjoyed a relatively active M&Amarket, and continues to be a sourceof speculation in the press with regardsto the consolidation plans of thelarger players.

Mondi and Stora Enso are currently morefocused on non-core disposals, the latterkeen to exit magazine paper andconcentrate on consumer goodspackaging. US giant International Paper haslaunched a £2 billion hostile takeover thissummer for Temple-Inland, third largestcorrugate packaging producer in NorthAmerica. International Paper has also beenactive in building scale internationally withacquisitions in India and the purchase of

SCA’s packaging business in Asia.Successful debt reduction programmeshave left many larger players with capacityfor acquisitions and M&A remains core tomost firm’s growth strategies. We havesome key observations on what buyersare looking for:

Proof of trading and profit resilienceduring 2008/09 with a focus on strategyand decision making during the period.

Focus on viability of forward profitabilitydemonstrated through stable clientrelationships, contractual agreements,differentiated service offerings andexposure to emerging markets.

An economic model that utilizes the‘closed loop’ approach of controllingthe supply chain. Buyers are lookingto integrate their supply chains, fromsecuring the raw material at sourcethrough to paper manufacturing andthen through converting andcorrugating processes. This ultimatelyencourages clients to feed their usedpackaging back into the system.

Due to the industry’s cyclical naturebuyers will often base value on a threeyear average profit level (two historicand one budget).

Many trade buyershave ample capacity

for acquisitions

Supply chainintegration key focus



Date Bidder Target Target Product lineDeal Value (£’m)

Sept-11 SAICA (Esp) Stirling Fibre (UK) Independent waste paper recycler n/d

Jul-11 Sonoco (UK) Robinson Paperboard Packaging (UK) Paper bottom Technology n/d

Jul-11 SAICA (Esp) Cutts Recycling (UK) Recycled waste paper supplier n/d

Jun-11 SCA (Swe) Komili Temizlik Urunleri Pazarlama (Tur) Manufacturer of personal care products 30.0

Aprl-11 International Paper (US) Andra Pradesh Paper Mills(Ind) Operate paper mills in India 223.0

Jan-11 Chamonix Private Equity(UK) Linpac assets (UK) Various non core packaging assets 203.0

Jan-11 Sun Capital Partners (US) Rosmar Packaging Corp (Can)

Manufacturer of packaging and foldingcartons n/d

Dec-10 UPM-Kymmene (Fin) Myllykoski (Fin) Pulp and paper producer 756.0

Dec-10 Nampak Paper Holdings(UK/SA) Maximus Holding (Lux) Manufacturers of diversified packaging

products in paper, plastic, metal and glass 65.0

Dec-10 Papeles y Cartones deEuropa SA (Esp)

Corrugated board plantbelonging to SCA (Swe) Producers of corrugated board 29.0

Oct-10 SAICA (Esp) Future Recycling (UK) Recycled Waste paper supplier n/d

Jul-10 DS Smith Plc (UK) Otor (Fra) Manufacturers of corrugated paper andpackaging materials 203.0

Apr-10 International Paper (US) SCA (Swe) Asian based packaging business 129.0

Apr-10 Smurfit Kappa (Ire) Mondi (UK Corrugated) Corrugated operations and paperpackaging products 38.0

Apr-10 Duropack (Aust) Belisce (Cro) Producer of corrugated Board andpackaging 51.0

Feb-10 Entrepreneur Venture (Fra) Unicarton (Fra) Manufacturer of packaging for the FMCG and luxury goods n/d

Dec-09 Dura-Fibre (US) Rock Tenn (US) Provider of paperboard and corrugatedpackaging n/d

Dec-09 Rigesa, Celulose, Papel eEmbalagens (Bra) Grupo Orsa (Bra) Manufacturer of corrugated packaging

products 18.0

Jul-09 PaperWorks Industries (US) Specialized PackagingGroup (US)

Provider and manufacturer of paperboard packaging n/d

Feb-09 VPK Packaging (Bel) Mondi Packaging (Fra) Manufacturer of corrugated paper andpackaging materials 18.0

Figure 5: Recent paper and packaging M&A activity


Private EquityInvestmentPrivate equity (PE) investors havehistorically proved a useful guide interms of gauging where in the cyclean industry is placed.

Deal activity in the last 18 months has beenweighted in favour of the buy side with PEfirms seeing the opportunity to makeacquisitions. Valuations have remainedmodest leading to a consistent deal flow.

The Carlyle Group’s sale of Otor inJuly 2010 proved to be the majortransaction on the sell side.

The disposal to a trade buyer in DSSmith marked the end of a controversialperiod of ownership that began with aninitially hostile bid for the Frenchcompany.

Sun Capital, Chamonix Private Equityand Platinum Equity have all beenactive in making acquisitions in thepackaging sector.

In addition private equity has proved awilling buyer of non-core assets withBetter Capital recently acquiring theUK operations of Spicers, the officeproducts business recently divestedby DS Smith for £40 million.

Prospects for M&ALooking at the deals that have beencompleted in 2010 and the first halfof 2011 we see positive trends whichsupport our view of consolidation inthe mid-market.

Recent industry success has been focusedon the divesting of non core assets andinvesting in growth areas.

In the short term economic headwindsare presenting challenges howeverdrivers for growth remain. Largeconsumer goods companies areapplying pressure on the packagingsector to use more sustainablematerials and amongst other things,reduce their reliance on plastics.

Market leading FMCG specialists suchas Unilever and Nestle have publicallycommitted to reducing the weight of itspackaging by a third by 2020. Theconstant drive to more lightweightpackaging is stimulating investment inthe sector. We see further consolidationas the industry attempts to keep pacewith demand through M&A.

Recent economic uncertainties haveseen paper and packaging companiesfocusing internally on financialperformance. However the industrydrive toward scale and internationalfootprint will encourage the sector tobe more outward looking. The BRICeconomies and specifically EasternEurope are likely to prove key areas,with recycling still in its infancy, thereis scope for significant growth.


Private equity interestin sector focussed

on buyside

Consolidationto continue

Focus on eastwill increase

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Catalyst Paper And Packaging M&A Report 2011

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