NEWS

MERGERS & ACQUISITIONS

Avenor bids for Repap in deal

Montreal-based Avenor Inc.-which has long professed a desire to diversify out of newsprint and uncoated groundwood-in December offered to buy high-end coated printing paper manufacturer Repap Enterprises Inc. in a stock transaction valued at about C$617 million (US$457 million). In addition, Avenor would acquire C$2.6 billion (US$1.85 billion) of Repap debt and convertible debentures. The acquisition would make Avenor, with C$5 billion in sales, the largest pulp and paper producer in Canada and that nation's second-largest forestry company behind MacMillan Bloedel Ltd.
The announcement follows months of speculation about who would bid for Montreal-based Repap. Hurt by a mountain of debt and poor financial performance, it was placed on the auction block in July last year. Paul Gagné, Avenor president and CEO, said during a conference call that the purchase, "shifts Avenor's mix to value-added and gives us a major market position in coated paper." He added that acquiring Repap would "yield substantial benefits" including strategic positioning in the top ranks of market pulp and coated paper producers and "modern, world-class facilities."
Investors, however, did not view the news as positively, partly because of Avenor's decision to suspend its dividend to help cut debt. In trading on the Toronto Stock Exchange, Avenor closed in December at C$19.40/share (US$14.23), down C$1.80. Repap closed down C$1.30 at C$4.20/share.
Under the proposed transaction, which has been approved by Repap's board, Avenor would exchange one newly issued common share for every 4.25 Repap shares, giving the equity component of the deal a value of about C$617 million or roughly C$5 for each Repap share. The transaction, expected to close Feb. 28, is subject to approval by two-thirds majority of each company's shareholders. Repap chairman and CEO George S. Petty has committed to vote his 23% stake in favor of the deal.
Some analysts appeared skeptical it would gain favor. "The feeling is the deal won't pass muster with the shareholders," said one Canadian analyst. "Here's a company that has prided itself on reducing debt and it finally is paying a dividend and now it's cutting the dividend and loading up the balance sheet. Sure it gets into value-added, but at what cost?"
However, another Canadian analyst said he was "not that pessimistic. It makes a lot of sense to Avenor. It can pick up high-quality assets at a relatively low price."
Asset sales? Gagné acknowledged that the debt-to-capital ratio would be 59:41. "There's no question that is too high, and we will take steps to reduce the leverage," he said. "We plan to reduce the debt by pursuing operating synergies and strategic divestitures."
In addition to tax benefits and a cap on capital spending, Gagné outlined savings of approximately C$128 million a year in operating synergies, and hinted at asset sales. Some analysts said it is unlikely Avenor would sell Repap's 500,000-tpy coated paper mill in Kimberly, Wis., saying more-likely candidates for divestiture would be the 495,000-tpy Skeena pulp mill in British Columbia, or the unbleached kraft paper mill in The Pas, Man. Among Avenor assets that could be divested, one analyst said, is the Ponderay Newsprint Co. subsidiary in Washington state.

CAPACITY Continued growth for paper industry
After increasing total production capacity by 3.5% in 1996, paper and paperboard companies plan to add capacity at a rate of only 1.5%/year between 1997 and 1999, according to the American Forest & Paper Assn. (AF&PA). Primary manufacturing capacity for all grades of paper and paperboard will increase by 4.6 million tons during the three-year period, raising the manufacturing base from 99.1 million tons in 1996 to 103.7 million tons in 1999. AF&PA's annual capacity survey includes the consolidated plans of more than 200 companies in the U.S., said Richard Storat, vice president for policy research.
The figures for 1999 are preliminary since expansion plans for that year are subject to substantial revision, said Storat. However, two major trends emerge from the survey: total capacity will grow below the 2.6% annual rate seen from 1986 to 1995, and the industry will continue its commitment to recycling. Consumption of recovered paper continues to outpace overall capacity growth. U.S. mills increased their use of recovered paper by 9.2% in 1996, approximately 2.5 times the rate of capacity growth. The survey results indicate the consumption of recovered paper will increase at an average annual rate of 2.9% between 1997 and 1999, almost twice the rate of manufacturing capacity increases.

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Feds urged to use more recovered paper

The U.S. government has acknowledged that despite President Clinton's executive order three years ago, many agencies are still not buying recycled-content printing/writing paper. Fran McPoland, the federal environmental executive, has promised to look into the matter.

The 1993 order mandated federal agencies to buy paper with at least 20% postconsumer content. It raised the requirement to 30% postconsumer content by Dec. 31, 1998.

According to Alicia Culver of the Government Purchasing Project, a nonprofit watchdog group, federal agencies spent about $116 million in 1995 on copy paper, most of it purchased through the U.S. General Services Administration (GSA). Only about one-fifth of that paper met the recycled-content standards set by the executive order and the U.S. Environmental Protection Agency (EPA). Culver and others have sent a letter to President Clinton, urging him to direct the GSA and the U.S. Government Printing Office to discontinue selling virgin copy paper. She said the paper industry has sufficient capacity to supply the federal government with enough 20% postconsumer paper to meet all of its needs.

McPoland announced formation of a working group to discuss issues of price, availability, and competition for paper containing 30% postconsumer fiber in order to meet the 1998 deadline.

In 1995, recovered paper provided just over 35% of all the raw material fiber used at U.S. mills. According to the American Forest & Paper Assn., 42% of all office papers are now being recovered.