Merger Wave Accelerates in Paper Sector

A rapid consolidation in the global paper and lumber industry, reflected in two takeovers announced on Thursday, is being driven as much by the low share prices of paper companies as by the hunt for new markets and raw material sources, analysts said.

Europe’s second-biggest paper and board maker, UPM-Kymmene, said it was buying Champion International for more than $6 billion to form the world’s largest paper producer, while Purchase, N.Y.-based International Paper Co., which has been the industry leader, said it was buying New York-based Shorewood Packaging Corp.

Shorewood’s acceptance of an offer of $600 million, or $21 a share, from International Paper capped a three-month hostile takeover attempt by Chesapeake Corp. Richmond, Va.-based Chesapeake, which had offered $500 million, said it would let its offer expire today.

The merger announcements follow news last week that Canada’s Abitibi-Consolidated Inc. struck an agreement to buy rival newsprint maker Donohue Inc. of Canada for $4 billion. In October, Weyerhaeuser Co., based in Federal Way, Wash., announced its merger with Canadian forest products producer MacMillan Bloedel Ltd. And last month, Finnish-Swedish forest industry group Stora Enso said it would buy Norway’s biggest paper wholesaler, Carl Emil.

“The lack of interest by investors has left these high quality assets at cheap prices,” said Kathryn McAuley, forest products analyst at Brown Bros. Harriman. “There is a big change in the industry and these are not the last deals we are going to see.”

Among the biggest decliners have been International Paper, whose stock closed off 69 cents at $42.50 on the New York Stock Exchange, down from $58 on Jan. 10.

Analysts say the decline reflects investors’ shift from basic manufacturing industries and raw material producers toward technology companies.

Many say the industry’s fundamentals are positive, with global demand strong on the back of economic recovery in Asia, a pickup in Europe and continued strong growth in North America.

“We are expecting good earnings for paper companies. All the fundamentals are good,” said McAuley.

The merger mania also has been triggered by a need to globalize and gain access to low-cost producing regions of the world, namely South America and Asia, analysts said.

Separately, the Justice Department said Thursday it was investigating the newsprint industry for possible anti-competitive practices. A spokeswoman for the department declined to identify any companies involved or provide further details.

Shares in Shorewood, which makes packaging used for videotapes, hair coloring and other products, rose $1.88 to close at $20.75, while Chesapeake closed up 13 cents at $25.38, both on the NYSE.