Paper and Packaging SectorM&A updateAutumn 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 UKSource: 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:
Paper and Packaging Sector M&A update 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 growingEmerging proportion of investment is being channelled into these markets byMarket Impact European and American companies.Demand in the sector from emerging Chinese producers have made plans tomarkets has traditionally been linked increase their capacity aggressively in Chinese ambitionsto the expansion in exports of the next three years. Their stated aim is to become the world’s largest will altermanufactured products packaging producers by the end of 2012, global marketThese countries and especially China took which will further intensify competitionthe opportunity during the last cycle to also and will alter the global market dynamic. Figure 2: Recovered paper pricesSource: Letsrecycle.com
Paper and Packaging Sector M&A update 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 indexSource: Capital IQCatalyst Packaging Composite: International Paper, Kimberley-Clark, SCA, Stora Enso, DS Smith, Smurfit Kappa, Holmen, UPM, Rexam, Mondi, Sappi
Paper and Packaging Sector M&A update Figure 4: Comparison of average EV/EBITDA multiplesSource: Catalyst Corporate FinanceTrade Buyer Activity SCA’s packaging business in Asia. Successful debt reduction programmes Many trade buyers have left many larger players with capacityThe paper and packaging industry has for acquisitions and M&A remains core to have ample capacityalways enjoyed a relatively active M&A most firm’s growth strategies. We have for acquisitionsmarket, and continues to be a source some key observations on what buyersof 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 strategyMondi and Stora Enso are currently more and decision making during the period.focused on non-core disposals, the latterkeen to exit magazine paper and Focus on viability of forward profitabilityconcentrate on consumer goods demonstrated through stable clientpackaging. US giant International Paper has relationships, contractual agreements,launched a £2 billion hostile takeover this differentiated service offerings andsummer for Temple-Inland, third largest exposure to emerging markets.corrugate packaging producer in NorthAmerica. International Paper has also been An economic model that utilizes theactive in building scale internationally with ‘closed loop’ approach of controlling Supply chainacquisitions 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).
Paper and Packaging Sector M&A update 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 materialsSource: Catalyst Corporate Finance
Paper and Packaging Sector M&A updatePrivate Equity The disposal to a trade buyer in DS Smith marked the end of a controversial Private equity interestInvestment period of ownership that began with an initially hostile bid for the French in sector focussedPrivate equity (PE) investors have company. on buysidehistorically proved a useful guide in Sun Capital, Chamonix Private Equityterms of gauging where in the cycle and Platinum Equity have all beenan industry is placed. active in making acquisitions in the packaging sector.Deal activity in the last 18 months has beenweighted in favour of the buy side with PE In addition private equity has proved afirms seeing the opportunity to make willing buyer of non-core assets withacquisitions. Valuations have remained Better Capital recently acquiring themodest 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 ConsolidationLooking at the deals that have been to continuecompleted 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 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.
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