Catalyst Paper And Packaging M&A Report 2011

Paper and Packaging Sector
M&A update

Autumn 2011

2011 ending on Disposals to continue as sector
downbeat note
restructures from debt burden
Following difficult years in 2008
and 2009, the paper and packaging
industry emerged in improved
health in 2010 and the first half of
2011, buoyed by strengthening
consumption levels.
However, recent concerns about the
European sovereign debt crisis and
the wider credit environment, as
well as deteriorating growth rates “I am struck by how
in developed economies such unconsolidated the European
as Germany, once again present market is compared to its US
a number of challenges for the
industry.
equivalent. I am sure this will
not continue for much longer”
Richard Sanders, Partner
The key observations from
our research:
Many companies have been focusing Companies who have invested overseas
Restructuring not on restructuring their operations and tend to make these acquisitions to
decreasing debt levels, often through secure platforms from which to grow
yet complete the disposal of non-core businesses. and integrate their supply chains even
We do not believe this process is yet further. Large trade players have made
complete, creating deal opportunities recent acquisitions in Turkey, India and
for trade buyers, management teams other BRIC nations and we expect this
and financial investors alike. trend to gather pace.

Unlike the US market, which has been Whilst both fibre and end product prices
Compared to USA, consolidating for over a decade, the have been steadily increasing since the
industry in Europe remains relatively end of 2008, demand remains largely
European market is
fragmented - the top five US firms below pre-recession levels. Company
still unconsolidated account for 75% of the market valuations are lower and perceived as
compared to only 40% in Europe. attractive in the context of M&A.
We expect increased consolidation
as European firms seek both growth
and higher financial returns.

Paper and Packaging Sector M&A update

Figure 1: UK market structure = Tonnage expanding = Tonnage contracting

Supply Usage Recovery

Other 0.2m t (5%) Other 0.4m t (3%)
UK production of paper & board

Currently not
Tissue 0.6m t (14%) recycled 1.1m t
Tissue
Newspaper 1.0m t (9%)

Disposal
0.8m t (20%) Landfill &

3.3m t
incineration
4.03m t

Packaging Not able to be
1.4m t (36%) Newspaper recycled 2.19 m t
2.3m t (20%)

Printings & writings
1.0m t (25%)

Imported virgin pulp
1.1m t (15%)
Packaging Recycled in UK
3.5m t (30%) 3.77m t (46%)

UK paper & board recovery 8.2m t

C&I - 75%
7.48m t (65%)
Imported

Imported virgin paper
6.3m t (84%) Exported to Europe
0.6m t (14%)

Exported to
Asia Pacific
Exported for
1.3m t (30%)
recycling
Printings & writings
4.43m t (54%)
4.3m t (37%)
Municipal

Exported to China
25%

2.5m t (56%)
Imported
recovered paper
0.1m t (1%)

Re-imported to UK

Source: Catalyst Corporate Finance

Those operating Industry Trends A key priority for many companies has
been to develop a closed loop model
that both increases fibre security and
closed loop models The UK remains one of the smallest controls end customer relationships.
report consistently producers of paper and packaging Firms that have followed this strategy
products in Europe relative to have been rewarded by higher growth
higher returns consumption, importing over 65% of its figures and operating margins, as well
annual 11.5 million tonnes supply – see as stronger share price performances.
Figure 1.
Historically the industry has been highly
Mill closures increased dramatically in 2008 cyclical, which has put pressure on
and 2009 and although slowing, continue to margins and lowered returns on capital
take capacity out of the market; DS Smith (usually under 10%). Whilst mill closures
recently announced the closure of the have rationalised capacity and improved
Hollins paper mill in Lancashire. However efficiency levels supply chain discipline
it is not all one way traffic, as Spanish continues to be a priority. Operators
company SAICA will start commissioning need to react quickly to market
their new 500,000 tonne plant in Partington downturns by rationalising costs.
in December this year.
Some traditional markets continue to
Whilst decisions on production capacity are decline especially in areas where print
fundamental to the paper and packaging media is shifting online. The outlook for
industry there are also a number of other the FMCG and industrial packaging
important factors:


sectors can be seen as more robust develop consumer led economies.
with good opportunities across a wide This has had a stark impact on the BRICs demand has
number of end markets. Firms are paper and packaging sector in the UK:
clearly repositioning in these areas.
increased recycled
The BRIC nations have driven demand paper prices
The paper and packaging industry has for packaging and consequently the
always been highly geared – in some prices of recycled paper. Recycling
cases debt / equity ratios have capacity in these markets is limited with
exceeded 200%. Releasing capital 50% of their requirement being supplied
through non core disposals has been by the US and the UK. The price of raw
a preferred route to accelerate the materials associated with the industry
deleveraging process. has risen over the last five years. Old
corrugated containers (OCC) in
Whilst raw material fibre prices may particular having recovered from a
soften in the near future, we expect slump in 2009 recently reached a
them to continue to rise over the long record level. (see Figure 2).
term due to global competition for
recovered paper. Effective hedging Accelerated growth in middle class
will be central to managing cost and disposable incomes in the BRIC
maintaining fibre security. economies has led to strong structural
growth in FMCG packaging and other
consumer related sectors. A growing
Emerging proportion of investment is being
channelled into these markets by
Market Impact European and American companies.

Demand in the sector from emerging Chinese producers have made plans to
markets has traditionally been linked increase their capacity aggressively in Chinese ambitions
to the expansion in exports of the next three years. Their stated aim
is to become the world’s largest
will alter
manufactured products
packaging producers by the end of 2012, global market
These countries and especially China took which will further intensify competition
the opportunity during the last cycle to also and will alter the global market dynamic.

Figure 2: Recovered paper prices

Source: Letsrecycle.com


Valuations Current Valuations Raw materials costs are highly influential
on profitability and an inability to pass
on higher input costs to customers has
subdued presently The packaging sector has suffered been a threat to valuations. The ability
from lower valuations than a number to hedge supply, manage supplier
of other comparable sectors. However,
relationships and long term contract
improved operating performances,
positions will have a pronounced effect
deleveraging of balance sheets and
on sector outlook.
better GDP growth prospects drove
valuation growth higher than the rest
of the market in Q1 2011.

Since then, valuations have declined and
again are expected to remain subdued for
the short term:

Volume growth in the paper and
packaging sector is highly correlated to
GDP growth and we have seen a sharp
decline in US and European growth stats
in Q2 with reduced forecasts for the rest
of 2011. Consumer spending remains
weaker as confidence remains low.

Figure 3: Paper & packaging composite share price index

Source: Capital IQ
Catalyst 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 Activity SCA’s packaging business in Asia.
Successful debt reduction programmes Many trade buyers
have left many larger players with capacity
The paper and packaging industry has for acquisitions and M&A remains core to
have ample capacity
always enjoyed a relatively active M&A most firm’s growth strategies. We have for acquisitions
market, and continues to be a source some key observations on what buyers
of speculation in the press with regards are looking for:
to the consolidation plans of the
larger players. Proof of trading and profit resilience
during 2008/09 with a focus on strategy
Mondi and Stora Enso are currently more and decision making during the period.
focused on non-core disposals, the latter
keen to exit magazine paper and Focus on viability of forward profitability
concentrate on consumer goods demonstrated through stable client
packaging. US giant International Paper has relationships, contractual agreements,
launched a £2 billion hostile takeover this differentiated service offerings and
summer for Temple-Inland, third largest exposure to emerging markets.
corrugate packaging producer in North
America. International Paper has also been An economic model that utilizes the
active in building scale internationally with ‘closed loop’ approach of controlling Supply chain
acquisitions in India and the purchase of the supply chain. Buyers are looking
to integrate their supply chains, from
integration key focus
securing the raw material at source
through to paper manufacturing and
then through converting and
corrugating processes. This ultimately
encourages clients to feed their used
packaging back into the system.

Due to the industry’s cyclical nature
buyers will often base value on a three
year average profit level (two historic
and one budget).


Figure 5: Recent paper and packaging M&A activity
Deal Value
Date Bidder Target Target Product line (£’m)

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

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

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

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

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

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

Jan-11 Rosmar Packaging Corp Manufacturer of packaging and folding
Sun Capital Partners (US) n/d
(Can) cartons

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

Dec-10 Nampak Paper Holdings Manufacturers of diversified packaging
Maximus Holding (Lux) 65.0
(UK/SA) products in paper, plastic, metal and glass

Papeles y Cartones de Corrugated board plant
Dec-10 Producers of corrugated board 29.0
Europa SA (Esp) belonging to SCA (Swe)

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

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

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

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

Producer of corrugated Board and
Apr-10 Duropack (Aust) Belisce (Cro) 51.0
packaging
Manufacturer of packaging for the FMCG
Feb-10 Entrepreneur Venture (Fra) Unicarton (Fra) n/d
and luxury goods

Dec-09 Provider of paperboard and corrugated
Dura-Fibre (US) Rock Tenn (US) n/d
packaging
Rigesa, Celulose, Papel e Manufacturer of corrugated packaging
Dec-09 Grupo Orsa (Bra) 18.0
Embalagens (Bra) products
Specialized Packaging Provider and manufacturer of paperboard
Jul-09 PaperWorks Industries (US) n/d
Group (US) packaging

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



Private Equity The disposal to a trade buyer in DS
Smith marked the end of a controversial Private equity interest
Investment period of ownership that began with an
initially hostile bid for the French
in sector focussed
Private equity (PE) investors have
company. on buyside
historically proved a useful guide in Sun Capital, Chamonix Private Equity
terms of gauging where in the cycle and Platinum Equity have all been
an industry is placed. active in making acquisitions in the
packaging sector.
Deal activity in the last 18 months has been
weighted in favour of the buy side with PE In addition private equity has proved a
firms seeing the opportunity to make willing buyer of non-core assets with
acquisitions. Valuations have remained Better Capital recently acquiring the
modest leading to a consistent deal flow. UK operations of Spicers, the office
products business recently divested
The Carlyle Group’s sale of Otor in
by DS Smith for £40 million.
July 2010 proved to be the major
transaction on the sell side.

Prospects for M&A Consolidation
Looking at the deals that have been to continue
completed in 2010 and the first half
of 2011 we see positive trends which
support our view of consolidation in
the mid-market.

Recent industry success has been focused
on the divesting of non core assets and
investing in growth areas.

In the short term economic headwinds
are presenting challenges however
drivers for growth remain. Large
consumer goods companies are Recent economic uncertainties have
applying pressure on the packaging seen paper and packaging companies Focus on east
focusing internally on financial
sector to use more sustainable
performance. However the industry
will increase
materials and amongst other things,
reduce their reliance on plastics. drive toward scale and international
footprint will encourage the sector to
Market leading FMCG specialists such be more outward looking. The BRIC
as Unilever and Nestle have publically economies and specifically Eastern
committed to reducing the weight of its Europe are likely to prove key areas,
packaging by a third by 2020. The with recycling still in its infancy, there
constant drive to more lightweight is scope for significant growth.
packaging is stimulating investment in
the sector. We see further consolidation
as the industry attempts to keep pace
with demand through M&A.

Award winning international corporate finance advice
Catalyst’s focus is on advising management teams,
private shareholders and corporates on:
Buying businesses (MBOs/MBIs/BIMBOs)
Selling businesses
Searching for businesses to acquire,
both in the UK and overseas
Investment opportunities for
private equity firms
Maximising shareholder value
This is all we do and all we want to do. ʻMid Market Adviser of the Yearʼ 2011

International experience
Through our international partnership, which we chair, we provide:
Access to overseas buyers International M&A Research
Local knowledge of M&A culture Identifying targets overseas
and tactics and executing acquisitions

www.catalystcf.co.uk

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Catalyst Paper And Packaging M&A Report 2011

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