Latin America props up deal activity in global forest, paper and packaging sectors

London, 9 APR 2010 -- Given the difficult economic environment and restricted credit markets, total deal value in the forest, paper and packaging (FPP) sectors held up remarkably well last year due to blockbuster transactions in Latin America, according to a new report by PricewaterhouseCoopers (PwC).

Overall deal volume remained fairly stable in 2009, with 369 deals slightly topping the 350 seen in 2008. Deal value dropped to US$18.7bn in 2009 from 2008’s US$21.3bn. Private equity activity was also down, accounting for only 11% of deal values, compared to an average of 27% over the previous five years.

PwC’s ‘Branching Out 2009 Annual Review’, which studies mergers and acquisitions (M&A) in the FPP sectors showed that continued tight credit conditions and low valuations cast an overall damper on FPP transaction activity, particularly in North America, where deal values dipped to around US$1bn and the focus shifted to restructuring high debt levels with a total face value reaching US$17.5bn.

Already-modest deal values in Asia-Pacific were slightly down in 2009, although deal volume stayed solid, largely due to interest in timberlands. The notable bright spot globally was Latin America, where pent-up demand and a quicker recovery helped spur an unprecedented level of deal activity, accounting for around two-thirds of global deal value, up from 5% in 2008. Two of the regions’ biggest players, Votorantim Celulose e Papel (VCP) and Aracruz, merged in a deal value at close to US$8bn to form Fibria, the world’s largest pulp company by some margin.

Clive Suckling, global forest, paper and packaging leader at PricewaterhouseCoopers, commented:

“Many CEOs have been concentrating on short-term survival at the expense of longer-term strategies such as mergers and acquisitions; only once genuine confidence about the future returns can we expect to see a return of larger value deals. Deal activity should therefore start to resume momentum when any combination of improved market fundamentals, strengthened balance sheets, stronger credit markets makes those target assets look not just good value but also financeable again.”

The report also finds that in North America and Europe, the rationalisation of capacity, general cost cutting and deleveraging of balance sheets have still to run their course. The major consolidation needed in Europe especially to address shrinking demand is likely to remain as elusive as ever in the near term. Distress, selective acquisitions to enhance market positions and disposals to exit non-core businesses are the factors likely to drive a continuing flow of smaller value deals in the immediate future.

Looking further ahead, PwC believes there are a few dominant themes that will drive deal activity as the decade unfolds.

• Most market structures within FPP remain fragmented and consolidation will continue to provide the opportunity to enhance returns. The financial imperative to consolidate remains greatest where end-markets are mature and consolidation would enable capacity and the cost base to be managed more effectively in the face of static or declining demand. European paper remains a prime example.
  
• Product specialisation has driven and will continue to drive transactions as companies seek to focus on or strengthen their chosen core businesses, through deals that bridge gaps in their core offerings or that expand or maintain market share.
  
• The acquisition of fibre resources seems set to gain further momentum driven by either the returns and/or the security in prospect from controlling a sustainable and renewable resource. Specific drivers will range from the attractiveness of timberland assets to financial investors, and with the potential plus factors of carbon and even entire ecosystem value sometime in the future to companies securing the resources needed to generate returns downstream from wood and paper products as well as energy and the bioproducts of the future.  Similar considerations apply to waste fibre which is increasingly seen as a valuable resource and not as waste.
  

Clive Suckling, global forest, paper and packaging leader at PricewaterhouseCoopers, concluded:

“Looking ahead, the immediate prospects for any significant recovery in deal value look limited. The fundamental drivers for deals remain and if anything have probably strengthened over the past two years, so a return of confidence could release some pent up demand – the uncertainty is over timing. In the meantime we expect that distress and selective “voluntary” transactions will drive a continuing flow of small value deals.”

Notes to Editors:

1. Copies of Branching Out can be downloaded from www.pwc.com/fpp.
   
   
2. Forest, paper and packaging deals is based on published transactions from the Dealogic ‘M&A Global’ database, January 2010. In a few cases, notably in the forestland sector, we have supplemented Dealogics' data with additional publically announced deals. 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 (including distribution) (e.g. packaging and tissue product producers, paper converters, paper merchants).
   
   
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