ScratchMan, I just noticed this in today's On-Line Wall Street Urinal.
Dow Jones Newswires -- May 20, 1997
Paper Indus Seen Needing Mergers, But Few Occurring So Far
NEW YORK (Dow Jones)--Paper and forest products stocks rallied this month when investors
viewed a merger between two tissue makers as a catalyst for consolidation in a slumping industry.
But market sources said that, despite investor enthusiasm, the merger of James River Corp. (JR)
and Fort Howard Corp. (FORT) is not a sign of consolidation in the paper and forest products
industry. ''The Fort Howard-James River deal is not the beginning of a wave of consolidation'' in paper,
''but the end of a wave that started 25 years ago'' in tissue, said J.P. Morgan Securities Inc.
analyst Mark Connelly.
The paper and forest products industry is fragmented by products, and tissue is among the more
consolidated segments. The top five producers have 73% of the North American market, said
Connelly, who recently penned a detailed report on consolidation.
In comparison, the top five producers of newsprint, which has seen consolidation this year among
Canadian producers, controls just 45.7% of that market, according to J.P. Morgan estimates.
Market sources agree that the paper and forest products industry is ripe for mergers.
''The industry needs to consolidate,'' A.D. ''Pete'' Correll, Georgia-Pacific Corp. (GP) chairman
and chief executive, told Dow Jones recently.
Consolidation, in theory, would make the industry more profitable. The paper industry is cyclical
by nature, with growth that closely hews to the trends of the national economy.
Consolidation would create larger companies that would be better able to weather the low cycles
and lengthen the upturns, so the theory goes, with potential benefits including fixed asset and
overhead reductions, transportation and distribution synergies, reduced oversaturation of the
market and more rational and efficient expansion programs.
Such relief is sorely needed. The most recent industry cycles featured the longest downturn in
history, from 1989 to 1994, followed by the shortest up cycle, from February 1994 to September
1995.
The prices of pulp, the purest product and a bellwether commodity, rose from $410 a metric ton
in February 1994 to $985 in September 1995, then dropped 51% in just six months. (Pulp prices
have recovered moderately, averaging $560 in April.)
Consolidation doesn't mean that producers have license to fix prices. Tissue producers engaged in
a bloody price battle in the early 1990s that nearly wiped out profits, Connelly said. Tissue now is
very competitive, despite the fewer number of players.
Correll added that he hasn't seen ''any sign'' of consolidation from paper companies. ''There is not
much going on right now,'' he said.
Some analysts expect signs of merger activity to show up this year.
Mark Wilde of BT Securities Corp. said he wouldn't be surprised if there were five deals by the
end of the year.
Consolidation among Canadian newsprint producers has contributed to speculation of mergers in
the U.S., but the Canadian activity is unique, analysts said.
Canadian companies have embraced consolidation, partly from necessity, because they have been
poorly managed, J.P. Morgan's Connelly said.
Among the larger deals are Abitibi-Price Inc.'s (ABY) pending merger with Stone-Consolidated
Corp., while Domtar Inc. (DTC), Avenor Inc. (ANR) and Repap Enterprises Inc. (RPAPF) have
discussed a three-way deal.
Canadian papermakers, long under governmental control, now are more independent and taking a
fresh look at competition. The government had been more interested in expanding jobs at the
expense of profitability, which led to poor business decisions.
The ''Canadian necessity'' may spread to the U.S. if players here fail to respond to the oversupply
problem in most grades, Connelly said.
The analyst separates mergers into two kinds: those that reduce the number of companies and
those that reduce producers in a specific grade.
Cutting producers in a grade is clearly more important, Connelly said.
''Consolidation is good if you can eliminate a player from a market and take significant cost
savings,'' said Bear Stearns & Co. analyst Linda Lieberman.
Fewer players would mean more rational pricing, she said.
Five pulp producers, for example, could raise prices. But the increase would not hold if a sixth
producer doesn't go along.
Megadeals, or combinations involving large companies, isn't as important, but it can be as
valuable, Connelly said.
Large mergers, such as International Paper Co.'s (IP) 1995 acquisition of Federal Paper Board,
tend to have a consolidating impact on specific grades. International Paper now controls more
than 30% of domestic bleached paperboard capacity. Bleached paperboard is used to package
frozen food.
Clearly, Federal Paperboard investors benefited, but the remaining paperboard players - including
International Paper - won't see the improved supply-demand balance until years down the road,
Connelly said.
Federal's shareholders saw immediate improvement. Federal shares were in the low 30s before
the deal was announced and International Paper paid 55 a share.
Howver, price rationality and capacity control take a while to show up in the market.
Unless investors can find the next Federal or Fort Howard, ''this isn't the time to make money in
paper stocks,'' Connelly said.
The industry needs to consolidate to attract long-term investors, instead of cyclical timers and
momentum players, he said. But, the benefits of consolidation will takes years to play out. |
