|It is interesting to reflect on the way the paper industry in Australia has evolved over the past decade against what was being predicted or speculated about it at the start of a new century.
Some of the outcomes are perhaps not surprising, but some suggest that there has been a fundamental shift in the prospects for the Australian industry.
In the mid-1990s, Amcor saw itself as building a significant global presence in papermaking and corrugated box manufacture, and it was investing heavily in acquisitions and capital for new plant. But in parallel, it was investing in other non–fiber-based businesses in the packaging industry, all funded by the papermaking cash cow.
As the clock ticked over to the new millennium, the world as we knew it may not have succumbed to the Y2K Armageddon that some had predicted, but for Amcor it was the catalyst to walk away from all but limited packaging-related paper manufacture. Retrospectively, we know that the year 2000 was effectively when consumption of publication papers peaked, but this was probably not identified by Amcor and not the reason for spinning off its paper assets.
What Amcor had identified and what was self-evident is that papermaking is a voraciously capital intensive business and Amcor had come to the view that its alternative development strategy was a better bet for the future. Amcor had already made the decision to retreat packaging paper manufacture to Australia; the greenfield linerboard mill in New Mexico and the Holfelder operation in Germany, along with the European corrugated packaging business, were sold off.
Amcor concentrated on its other businesses and became a major glass bottle manufacturer in Australia. Globally, the company is now the largest packaging company, with a leading presence in flexible and rigid plastic packaging.
So, at the start of the new millennium in 2000, Amcor made the decision to demerge its non-packaging paper business and established PaperlinX. For those investors in Amcor who retained their equity in PaperlinX, the loss in value has been breathtaking. At the time of the demerger, PaperlinX had a market cap of around AUD 1 billion (and got as high as AUD 2 billion in 2004). Fast forward to 2012, and the company has a market cap of AUD 60 million, with more than twice the volume of script on issue. By comparison, Amcor has gone from a market cap of about AUD 3.9 billion to AUD 8.8 billion over the same period. The canny investor who disposed of PaperlinX but retained Amcor stock has prospered, although Amcor has been a roller-coaster ride along the way. But that is another story.
PaperlinX now has no papermaking assets and accumulated losses of AUD 1.2 billion. PaperlinX had little choice but to sell off its only quality papermaking assets (mainly the Maryvale pulp and paper mill) to Nippon paper, probably for about a third of replacement value, and disposed of its substantial forest assets. The Burnie and Wesley Vale mills were unsalable and were permanently shut down.
PaperlinX’s foray into the paper merchant business has clearly been unrewarding and investors are not convinced there is any way out of this imbroglio. Current strategies of cost cutting and tinkering at the edges may have stemmed the flow, but the company is still hemorrhaging. The banks that effectively control the business have a delicate balancing act to keep the company trading but to try and recover the loans made to PaperlinX. Dutch bank ING is reported to be allowing PaperlinX to retain EUR 15 million of the EUR 45 million (about 90% of book value) it will realize from selling its Italian business to Lecta Group. Although this may seem a reasonable outcome, it has been reported in the press that part of the deal was for PaperlinX to source product from Lecta, now a supplier and a competitor.
This article is not so much about why PaperlinX is in this situation, but the fact that about the time this article is published, stockholders will have decided if the chairman will be removed and a private equity investor elected to join the board and become executive chairman. Andrew Price, an experienced paper trader, and associates have secured about 5% of the issued stock in PaperlinX. This is one of several examples of private equity involvement in the industry, albeit by a rather different route than has been usual. For readers with an interest in this saga, a vitriolic campaign by disgruntled stockholders is being waged on the Internet at www.paperlinx-sux.com.
Private equity seems to have become a vehicle for the salvation of struggling companies. History shows that such arrangements, whether by convenience or by market action, often end badly, particularly for many investors who really have little choice in the matter. PaperlinX investors are beyond despair and may feel that they cannot be any worse off if they vote against the incumbent organization!
But it is not just PaperlinX. SCA has taken a similar route with their Australian and New Zealand tissue business. Both Kimberly Clark Australia (KCA) and SCA have been doing it tough. KCA has significantly contracted its manufacturing operations and SCA has recently entered into a joint venture company with private equity firm Pacific Equity Partners (PEP). A new joint holding company has been established for the current businesses of SCA Hygiene Australasia, with each partner having a 50% stake. This was an unexpected outcome to industry observers; it had been expected that SCA would create a new greenfield mill to replace its existing operations in suburban Melbourne to improve its productivity and profitability.
The price paid by PEP for the 50% stake was SEK 3,200 million (about AUD 470 million), and consequently, SCA wrote off about AUD 100 million in this transaction.
At the same time, SCA confirmed they had made a binding offer to purchase Georgia-Pacific’s European tissue operations for EUR 1.32 billion and Taiwanese company Everbeauty for USD 290 million. This comes hard on the heels of its disposal of its packaging business to D.S. Smith, which will see SCA as substantially a hygiene products company. A global restructuring appears to be underway, but perhaps Australasia will not be part of SCA‘s empire in the longer term.
Another negotiated private equity attempt to gain a strategic position in the industry has spectacularly imploded.
Singapore-based New Zealand billionaire Richard Chandler’s company, Richard Chandler Corporation, had announced that it would acquire a 39% stake in Gunns through an AUD 150 million investment as part of a rights issue by Gunns to raise AUD 280 million. This deal would have enabled Gunns to reduce its debt burden and put it into a better position to attract a joint venture partner to facilitate progress on its proposed kraft mill in Tasmania. Somewhat like PaperlinX, Gunns has been gradually divesting its better assets to fund its pulp mill proposal to reality.
Without explanation, the Richard Chandler Corporation abruptly terminated its offer. Pulp mill opponents have declared the pulp mill project dead and are claiming that they precipitated the decision just as they had done some years ago with Gunns’ banker. The bank was threatened with massive investor and customer backlash if they funded the mill. Opponents claim they convinced the Richard Chandler Corporation during due diligence discussions that there would never be a “social license” for the mill. There does seem to be substance that there was a well-funded and well-orchestrated campaign by conservation groups against the project, and this may well have influenced the decision by the Richard Chandler Corporation.
Ironically, this further reversal in Gunns’ fortunes occurred just as there were signals that the pulp market was showing signs of price recovery. At the time of writing, Gunns was in a trading halt to enable alternative funding arrangements to be made. Analysts have questioned the future of the mill and Gunns itself. The company's bankers will certainly be reviewing the deadline for repayment of Gunns’ AUD 360 million debt facility. Many are wondering if Gunns will have any option but to sell off the rights to the project if it is to survive. That would be a whole new ballgame!
The winds of change are indeed howling. It seems that the landscape will be changed significantly; and not necessarily for the better.