Potential Profit in Paper Lures the Money Men
If “plastics” was the profitable word when Dustin Hoffman played “The Graduate” in 1967, is today’s word “paper”? Some sophisticated business people obviously think so. The smart money has been messing around in the paper industry for several years now and shows no signs of letting up.
Just this week International Paper, the industry giant, agreed to pay $1.1 billion to acquire Hammermill Paper, taking the prize away from investor Paul A. Bilzerian of Sacramento, who can console himself and his backers with a $60-million trading profit.
Three weeks ago, it was a collaboration of Jefferson Smurfit Co.--of Dublin, Ireland, and Alton, Ill.--and the Morgan Stanley investment firm buying Container Corp. of America from Mobil (which got the packaging company as a side benefit when it bought Montgomery Ward in 1974). Michael Smurfit, the chairman of the Irish firm, has built his American subsidiary up to $1 billion in sales mostly by purchasing the castoffs of others--including some of the leavings of another international money man, Britain’s Sir James Goldsmith, the acquirer last year of San Francisco’s Crown Zellerbach.
Big, Basic Industry
What’s going on? The stock market is being used as a vehicle to reduce the number of competitors in an industry where no one is making a very good profit. This won’t happen simply or quickly. The process--which business people call “consolidation”--will continue into the 1990s, with some paper companies growing bigger and others going out of existence.
The paper business may be big--roughly $60 billion in revenue overall. And it may be basic--bringing us all of those necessities we take for granted, from cardboard boxes to computer printouts. But it is also an industry where the companies produce too much and then compete by slashing prices.
Paper mills are expensive to build--$550 million for a facility to turn wood into pulp--and once built, their owners dislike idling them in hopes of balancing supply and demand for their products. The frequent result: glutted markets, unstable product prices and a lot of paper mills unable to earn an adequate return on the investment that built them.
This is where the entrepreneurial eye comes in, seeing opportunity in the inevitable consolidation that will separate the survivors from the casualties in paper. It sees the business improving through the specialization that will lead one company to concentrate in one product, such as corrugated cardboard, while another concentrates on newsprint.
Chance to Seize the Future
Furthermore, paper is now an industry that a newcomer can enter at a bargain price, because plants earning an inadequate return sell below their stated asset value--as Mobil sold Container Corp.
With plants purchased at a discount in an industry where the economics are forcing the number of competitors to shrink, the newcomer has the opportunity to seize the future.
That is what entrepreneurs Brenton Halsey and Robert Williams did in building James River Corp. of Virginia into a paper powerhouse that will have more than $4 billion in revenue this year following its purchase of Crown Zellerbach assets from Goldsmith.
That is also what Roger Stone did. In the last 10 years, he has steadily purchased plants of older companies and built Chicago’s Stone Container Corp. from a $250-million (sales) company into the $2-billion (sales) leading producer of corrugated cardboard and heavy industrial-grade paper.
The Jimmy Goldsmiths of this world, the money men, have acted as the catalysts in this process: purchasing assets for resale and booking profit in the middle. Big profit. Goldsmith is said to have bought Crown Zellerbach’s timberlands at an average of $85 an acre, a bargain in land with or without the trees.
It all seems so logical. So is it working? Are the mergers doing the job of retiring unneeded capacity? Are profits rising?
Well, no, not yet. Profitability in the industry remains low; product prices are none too stable. And the reason, the market’s Catch-22, is the debt that the survivors have used to buy up the plants of the casualties. Rather than being shut down, those plants continue to run to pay interest and principal on that debt. Says leading paper analyst Sherman Chao of the Salomon Bros. investment firm: “There is no guarantee that prices will get better soon in this industry.”
What Chao means is that the process of consolidation in paper will continue for some time. Meanwhile, users of paper--which includes virtually all of U.S. business--get the benefit of lower prices.
Today, those lower prices result from ruinous competition. Ultimately, when the weeding out process is completed, low prices should result from the efficiencies of a healthier industry.
