Forest, Paper and Packaging Industry Deal Values Fall by a Quarter

15 April 2009 - According to a new report by PricewaterhouseCoopers (PwC), total deal value in the forest, paper and packaging (FPP) sector fell 23% to US$21.3bn in 2008, down from US$27.6bn in 2007. The report, entitled Forest, Paper and Packaging Deals 2008, says that continuing financial market uncertainty, economic slowdown and a collapse in worldwide demand is plunging the sector towards a record M&A low in 2009.

Total deal value in the first half of 2008 surpassed that of 2007 which itself had been a high point in recent years. Buoyed by International Paper’s US$6bn purchase of businesses from Weyerhaeuser, first half total deal value across the sector in 2008 was US$16bn. However, second half total value fell to just US$5.3bn. The fall in overall FPP deal value takes M&A back to the underlying level seen in 2005 and, if it continues, puts it on course to rival or surpass lows last seen in 2003.

2003
2004
2005
2006
2007
2008
Total deal value
(US$bn)
11.4
18.5 (+63%)
21.0 *
(+13%)
25.7 (+23%)
27.6 (+7%)
21.3
(-23%)
Total deal numbers
224
254 (+13%)
295 *
(+16%)
280 (-5%)
370 (+32%)
349
(-6%)
Average value ( based on deals where value is reported)
(US$ million)
90.0
132.3 (+47%)
128.0 *
(-3%)
169.4 (+32%)
134.6
(-21%)
111.0
(-18%)
* 2005 data excludes exceptional US$22bn acquisition of Georgia-Pacific (GP) by Koch Industries in the US

Clive Suckling, global forest, paper and packaging leader, PricewaterhouseCoopers, said:
“Many companies in the forest, paper and packaging industries are facing unprecedented tough market conditions. As 2009 unfolds, many companies in the sector find themselves on a knife-edge and the industry looks set to undergo an intense round of painful distress-led transformation and likely to emerge in two or three years time looking very different from today.”

As in previous years, pulp & paper production delivered by far the largest average deal size and, in turn, the largest total deal value. With US$11.9bn worth of deals, pulp & paper production accounted for 56% of total FPP deal value. Average pulp & paper production deal value was down 19% to US$233 million from an average of US$288 million recorded in 2007 and total deal value was down 10%.

Behind pulp & paper production, deals in converting (including distribution, such as packaging and tissue product producers, paper converters, paper merchants), comprised the second largest segment of deal value, with a total US$3.8bn of deal value or 18% of all FPP deal value. Converting’s total deal value was 35% down on 2007 levels and average deal value was down from US$82m million to US$61 million. Even bigger was the fall in the total value of forestland and forestry deals which fell 45% on 2007 levels to US$3.5bn in 2008. Average forestland and forestry deal size fell 16% from US$188 million to US$159 million.

Wood products was the sector where total deal value was most resilient, edging down just 1% or US$21 million to US$2.1bn in 2008. The 3% rise in wood product deal volume continues a trend of significant increases in deal activity in recent years. Deal numbers in this sector are running at twice the level of two and three years ago, albeit with smaller deal sizes and without any corresponding rise in total value. Wood products accounted for 34% of all deals in the sector in 2008 but, with an average deal size of just US$38 million, only 10% of total deal value.

Pure private equity (PE) players featured in three of the top ten deals and the PE influence on deal-making in the sector remained very strong in 2008. Excluding forestland and forestry where real estate investment trusts (REITs) and timber investment management organisations (TIMOs) play a dominant role, PE played a part in 18% of all deals, accounting for 24% of deal value. REITs, TIMOs and PE together were involved in 19% of all FPP deals and 34% of total FPP deal value in 2008. Private equity will continue to play a major role in the sector with PE players seeking to capitalise on distress situations. PE is also likely to play an increasing role in the consolidation of the sector in the growth markets. In China, for example, there has been increasing involvement of PE players and this looks set to gain momentum although, hitherto, mismatches in valuation have restricted deal activity.

Clive Suckling, global forest, paper and packaging leader, PricewaterhouseCoopers, concluded:
“In summary the deal-making environment is beset with many and varied challenges and opportunities. Ultimately, deal-making is driven by relatively few factors, the most important of which are the existence of benefit and/or need and the availability of the required finance. With the industry on course towards significant restructuring, the first of these exists in abundance. It is the second which will determine the level and pace of activity in the period ahead.”

The global top ten – FPP deals 2008
Month announced Deal value
US$m
Target Target nationality Acquirer Acquirer nationality
1 Mar 2008 6,000 Weyerhaeuser Co (containerboard, packaging and recycling business ) United States International Paper Co United States
2 Feb 2008 1,710 iStar Financial Inc (portfolio of forestland & related assets ) United States Hancock Timber Resource Group United States
3 Sep 08 1,096 M-real Oyj
(graphic paper business)
Finland Sappi Ltd South Africa
4 Mar 08 974 Papyrus AB Sweden Altor Equity Partners Sweden
5 Jan 08 851 Southern Container Corp United States RockTenn Co United States
6 Aug 08 783 Plum Creek Timber Co Inc (Timberlands ) United States Campbell Group LLC United States
7 Jun 08 621 Norske Skog Korea Co Ltd South Korea Morgan Stanley Private Equity Asia;
Shinhan Private Equity Inc
South Korea
8 May 08 493 Weyerhaeuser Co (Australian timber manufacturing and distribution operations) Australia Rank Group Investments Ltd New Zealand
9 Apr 08 485 MeadWestvaco Corp (North Charles Kraft Division and related assets) United States Kapstone Paper & Packaging Corp United States
10 Jun 08 390 Ainsworth Lumber Co Ltd Canada Creditors;
Tricap Partners Ltd;
HBK Master Fund LP;
Barclays Bank plc
Canada

ENDS

Notes to editor:
Forest, paper and packaging deals is based on published transactions from the Dealogic ‘M&A Global’ database, January 2009. Deals are included on an announced basis, adjusted to include only accepted offers. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the target company or assets. The analysis relates to the forestry, paper and paper based packaging sector and therefore excludes related sectors such as printing and plastic, glass and metal packaging. The sector and subsectors analysed include: forestland/forestry (e.g. standing timber, nurseries, harvesting and logging operators), wood products (e.g. sawn timber, wood-based building materials), pulp & paper (e.g. pulp, primary paper producers) and converting (incl distribution) (e.g. packaging and tissue product producers, paper converters, paper merchants).

Copies of the FPP deals review are available to download at www.pwc.com/fpp The report is the latest edition of a range of deals publications from PwC, covering sectors including mining, aerospace & defence, metals, renewable energy, power and oil and gas. Together the mix of deals reports provides a comprehensive analysis of M&A activity across industries worldwide.


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