Cheaper Way to Gain Capacity, Analysts Say : More Paper Industry Mergers Seen
The consolidation of U.S. paper companies that began in 1983 will continue at least through the end of this year as firms seek a less expensive way to acquire more capacity, industry analysts say.
The industry, already operating at 95% to 100% of capacity in many areas, has been criticized for not increasing its output fast enough. Some analysts say the quick and proven way to solve the problem is to purchase assets that are already operational.
Strong demand and a cheap dollar that has opened up foreign markets provide a favorable environment for paper company expansion and the cash to implement those plans.
“Instead of building capacity individually, why not buy the capacity?” asked Tim Burns of Prescott Ball & Turben Inc.
“It is still cheaper to buy than to build new plants, even though the price you have to pay to make an acquisition now is more than what would have been paid two years ago,” said Tom Clephane, an analyst with Morgan Stanley & Co.
Clephane cites the success of Stone Container Corp. with four acquisitions in four years, none for more than $850 million. Through those acquisitions Stone has been catapulted to the top of the package product business with the capacity to make more than twice as much liner board than its nearest competitor.
The consolidation of the paper industry has been unusual in that it has been largely devoid of hostile takeovers. Instead, most of the transactions have been the result of negotiated purchases.
“About 25% of the industry’s capacity has changed hands since 1983. In the liner board business the turnover has been about 33%, and most of it has been friendly,” Clephane said.
In the 23 major paper acquisitions since 1983, only three were the result of unfriendly transactions, and those companies eventually settled for mergers with alternative parties commonly known as “white knights.”
“People have been waiting for the big, hostile shoot-outs, but they have not occurred,” Clephane said.
He expects the friendly activity to continue as companies focus more on niche building rather than general expansion.
Concern about the economy and the dollar is a vital factor affecting takeover decisions in this cyclically dependent industry. While a downturn in the economy would certainly depress earnings, a surge in economic growth and a rise in inflation would likely prompt new interest from investors seeking hard assets that appreciate in inflationary environments, such as forest land.
Richard Schneider, analyst at C. J. Lawrence, said the difficulty of predicting the economy, and therefore cash flow, may keep corporate raiders out of the business.
At this point, investors may want to wait for the economy to slow and share prices to decline further before forging into the industry, analysts said.
PAPER INDUSTRY CONSOLIDATION
About 25% of the paper industry’s capacity has changed hands since 1983, and analysts expect the consolidation trend to continue at least through the end of the year. Below are recent paper company acquisitions, based on information compiled by Morgan Stanley.
Price Date Acquirer Acquired Asset (millions) 3/88 Gaylord Container Louisiana Pacific mill $156 in Antioch, Calif. 1/88 Daishowa Paper James River mill 75 in Port Angeles, Wash. 12/87 Rock-Tenn Mead’s specialty 65 paper board division 9/87 Great Northern Nekoosa Owens-Illinois’ 1,170 forest products group 9/87 Pratt Holdings Georgia Kraft 272 mill in Macon, Ga. 4/87 Stone Container Southwest Forest 766 1/87 Simpson Paper Champion Intl. mill 90 in Pasadena, Tex. 11/86 Mid-America Packaging Gaylord Container 260 11/86 Stone Container Jacksonville Kraft 112 10/86 International Paper Hammermill Paper 1,440
Source: Reuters
