North America's Top 50 paper companies becoming larger, more focused as they seek to improve financial performance amid global competition

Consolidation Produces Giants Hoping For Better Performance

These changes reflect the unprecedented scope of merger activity that began in the mid-1990s, accelerated towards the end of the decade, and apparently continues unabated. Names that have, or soon will, disappear from the corporate roll call-due to being acquired by a competitor-include MacMillan Bloedel, Union Camp, Consolidated Bathurst, Stone Container, Fort Howard, and James River, just to name a few. Add to that companies that are in our current list based on 1999 sales but have been eaten by bigger fish and are soon to become extinct: Champion International, St. Laurent Paperboard, Consolidated Papers, and Donohue.

The top of the North American Top 50 (see the Top 50 rankings on p. 38) is dominated by U.S. companies, with the first Canadian entry-Abitibi-Consolidated-at No. 11. Some Canadian companies, such as Abitibi, have grown via acquisition, but others have been taken over by companies outside Canada and thus will no longer be on the list. Some of these include MacMillan Bloedel (bought by Weyerhaeuser), Fletcher Challenge Canada (paper assets now owned by Norske Skog), and St. Laurent (purchased by Smurfit-Stone).

IS BIGGER BETTER? Is growing bigger a good thing? In general, performance for the larger companies has lagged that of small- to medium-sized firms, based on return on assets (ROA) or similar gauges. For example, based on data through 1998, financial performance can be measured by comparing the return on assets over the prior ten years. Several companies in the list are excluded from this calculation since data was not available. The performance of these top companies, and their ranking on our Top 50 is as follows: International Paper (24th in ROA, No. 1 in Top 50); Kimberly-Clark (2nd in ROA, No. 2 in Top 50), Georgia-Pacific (18th in ROA, No. 5 in Top 50), and Weyerhaeuser (12th in ROA, No. 6 in Top 50). Abitibi-Consolidated ranked 41st based on average ROA during the 1989-1998 period

Of interest in evaluating the ranking by return on assets is that Kimberly Clark makes virtually no commodity papers. Certainly, the higher returns for tissue products are a big factor in G-P's move to acquire Fort James. In contrast, large traditional producers that rely heavily on commodity paper and board products have poor relative performance.

However, in at least one area, industry consolidation is having the desired impact on the market, according to some of the experts. "In containerboard, industry consolidation has allowed the recent market up-cycle to continue longer than it might have in the past and endure a slowdown in cut ups," notes Chip Dillon, managing director of Salomon Smith Barney. "This is due to the fact that the now much larger producers are able to monitor inventory levels and take downtime-in some cases huge amounts-to avoid inventory building."

A brief profile of the Top 10 North American producers follows. P&P's rankings are based on 1999 paper-related sales, not total sales. Other rankings provided include the top producers by pulp, paper, and paperboard tonnage (see The Top Producers on p. 40) and the top producers by key grade (see The Tops: Grade-by-Grade on p. 42). Private companies, for which little financial information is available, are not generally included. Also excluded are foreign-owned producers such as Sappi Fine Papers North America.

International Paper

Long an industry giant, IP continues to aggressively expand its business, and in the last couple of years has made two huge acquisitions: Union Camp and Champion International. These mergers further increased the scope of the company's printing and writing papers business, as well as adding containerboard assets. To help pay for these moves, and to focus on core areas, a number of asset sales have also been completed. Nevertheless, the company remains the world's biggest paper company, and more than twice the size of the second largest company. If the G-P acquisition of Fort James proceeds, G-P's combined consolidated sales would approach I-P's, but its paper related sales would rank them a distant second.

The $9.6 billion acquisition of Champion makes IP far and away the leader in uncoated free-sheet, raising IP's capacity to about 5 million tons. Industry analysts in general applauded this aspect of the acquisition. One analyst commented that "this move makes IP to the free-sheet market what Smurfit-Stone Container is to linerboard," referring to Smurfit-Stone's rationalization or shutdown of containerboard capacity, and noting that over-supply is a major problem in free-sheet.

However, another analyst noted that IP has not made any major moves to shutter capacity yet and "we'll have to wait and see if they begin to phase out more high-cost capacity. They seem to have paid a full price for the Champion assets, and given the magnitude of this acquisition, their stock certainly has not-to date-been positively impacted. However, long term, if IP manages it well, it could be a potentially good strategic acquisition."

Another analyst noted that Champion's coated paper assets were really the gems that IP wanted for its coated paper division.

Kimberly-Clark

While not viewed by some as a true paper company, due to selling "personal care" products directly to consumers, K-C's North American paper capacity of 1.7 million tons and more than 150 paper machines makes it No. 2 in the Top 50 list.

As one of the world's largest tissue producers, K-C is a household name that many paper companies look at with branding strategy envy. With major products such as Kleenex and Scott brands such as ScotTowels, tissue products account for more than half of the company's consolidated sales. Its flagship disposable products-Huggies diapers, Kotex feminine hygiene products, and Depends incontinence products-are also high profile consumer products. In the past few years, K-C has expanded aggressively, notably via its 1995 $9.4 billion acquisition of Scott, which created the world's largest tissue manufacturer and the second largest U.S. personal care products company (behind Procter & Gamble). It has also aggressively expanded overseas, and offshore sales account for about one-third of total sales.

Fort James

A new company formed by the $5.8 billion merger of James River and Fort Howard in 1997, Fort James is now being pursued by Georgia-Pacific. This would combine the No. 3 and No. 5 companies on our Top 50 list. The James River/Fort Howard merger produced the second-largest tissue producer in the world, but unlike the K-C/Scott merger, the combination of the two companies' assets was considered complimentary. James River had stronger consumer brands, while Fort Howard was a powerhouse in away-from-home brands.

With more than three million tons of global tissue capacity, Fort James is the No. 2 producer in the world and is the largest domestic producer, with 2.2 million tons of U.S. capacity. Based on 1998 sales, tissue accounts for about 70% of sales (45% in North America and 25% in Europe), with Dixie products (disposable cups, plates, etc.), packaging, and communication papers accounting for about 10% each.

Wall Street's view of Fort James' pending acquisition by G-P is a little mixed. "Fort James was a mess and never really was able to work out the combination of James River and Fort Howard," states one analyst. "G-P had a good track record with takeovers-e.g., Chesapeake Corp.-and thus one would hope they would be able to resolve problems more readily, such as different corporate cultures, management information systems, etc. more readily."

Smurfit-Stone Container

Viewed by many industry analysts as one of the best run paper companies, Smurfit-Stone Container (SSCC) is the largest packaging company in the world. The 1998 acquisition of Stone Container Corp. by Jefferson Smurfit, for $2 billion, propelled the company into that leader's role. SSCC is the largest U.S. corrugated box maker and the company's broad product portfolio includes both wood-based and recycled fiber-based grades. In conjunction with major acquisitions, it has aggressively sold assets to focus on its core businesses. These include major timberlands sales and the divestiture of its newsprint business at the end of 1999.

Wall Street's accolades and admiration are largely based on the company's noteworthy track record of rationalizing the company's huge containerboard mill asset base. Five days after the Stone merger, the company announced plans to shut down 1.5 million tons of capacity at five mills. This unprecedented decision effectively removed about 4% of U.S. containerboard capacity. These moves were viewed as critical to a surge in containerboard market prices that occurred in 1999.

SSCC added St. Laurent Paperboard to its portfolio in 1999, acquiring a company with a high value added focus on graphic paperboard grades and upscale packaging expertise.

Georgia-Pacific

G-P is probably best known to many people as one of the world's largest forest products companies, with sales of building products and distribution accounting for more than $10 billion annually. The pulp and paper segment, with sales of more than $5.7 billion, is based on 7.5 million tons of capacity, the third largest in North America.

G-P has been seeking to counter the highly cyclical nature of its commodity products businesses and has undertaken several major initiatives to accomplish this. It sold its huge timber base by first spinning off a new company (The Timber Co.) and then selling it to Plum Creek Timber. G-P has also shut down large amounts of hardwood market pulp capacity, and has been increasing its paper capacity.

However, in 2000, G-P has moved in a different direction, seeking to acquire Fort James in an $11 billion bid to become a powerhouse in the tissue business. This aggressive move would be a huge step in its bid to turn the company from a timber/wood products and pulp company into a producer of higher margin paper products. To help pay for the acquisition, the company is selling The Timber Co. for $4 billion and has announced its intention to sell off its core market pulp business.

The acquisition of Fort James propels G-P into the top echelon of tissue producers. The new company's total tissue paper capacity would be about 3.2 million tpy (1.1 million at G-P mills plus 2.2 million at Fort James), or 40% of the North American market.

Some analysts heralded the move as a means of propelling the company from a dependence on low-growth commodity products to higher margin grades. However, others on Wall Street view the merger differently. "I think it could be a good direction strategically, but I had hoped that given G-P's large position in wood products, that an acquisition of this magnitude would have involved that area," notes an analyst. "This would go a long way towards consolidating the fragmented lumber and wood products market." Several observers off the record noted that G-P and Weyerhaeuser would have been the perfect fit and a match they would have preferred to see.

Weyerhaeuser

One of the top forest products companies in North America with a long history and famous name, Weyerhaeuser has major positions in containerboard, pulp, and printing and writing papers. Wood products account for about half of consolidated sales. In 1999, Weyerhaeuser became the second-largest forest products company in North America with the $2.4 billion acquisition of Canadian forest products giant MacMillan Bloedel. The combined company had sales of nearly $14 billion just from forest products and related operations.

In the past two years, Weyerhaeuser has also acquired a major fine paper mill in Ontario. The company's pulp and paper operations generate sales in excess of $4.3 billion, accounted for by board/packaging ($1.9 billion), market pulp (nearly $1 billion), and printing and writing papers ($870 million). Long able to rely on its vast timber holdings to provide low cost and readily accessible fiber to its operations, the company has been restructuring recently to focus on its core business lines. As the world's largest market pulp producer, Weyerhaeuser has eight primary mills (producing two million metric tons annually), and the company is one of the largest producers of absorbent and specialty pulps.

Champion International

Obviously the big news for Champion has been the buyout by IP, which outbid Finnish-based UPM-Kymmene to purchase Champion. The financial community had long criticized Champion for being a sub-par performer. Its return on assets over the decade ending in 1998 ranked it 38th out of the 44 companies listed in Pulp & Paper's Company Profile report. In response to this performance and prior to the IP purchase, the company underwent a massive restructuring seeking to focus on its core businesses of fine paper, containerboard, paper distribution, pulp, and timber.

Mead

Mead's major product lines include coated paper and coated kraft paperboard. The company is one of two major global producers of coated unbleached kraft used for beverage carriers and operates a number of converting operations worldwide to support use of carrier stock. Mead's sales for its major product lines are paper ($1.8 billion), packaging and paperboard ($1.5 billion), and distribution and school products ($482 million). With more than one million tons of coated paper capacity at three major mills, the company produces a wide array of grades, and is one of the top North American producers.

Willamette Industries

A medium-sized company that often competes with much larger companies, Willamette's financial performance has historically been solid, and the company is viewed as a well-managed, lean performer. It ranked No. 6 in return on assets and No. 9 in return on equity among North American producers in the past decade (through 1998).

Contrary to current conventional wisdom, Willamette has been one of the few companies to invest heavily in new printing and writing paper capacity in North America. It recently announced an investment of $475 million for a new uncoated free-sheet machine at its Kingsport, Tenn., mill, with startup slated for 2002. In addition, Willamette said it plans to purchase and restart later this year an idled market pulp mill in Port Wentworth, Ga., which will be used to supply pulp for the new paper machine and to secure fiber for its operations over the long term.

Industry analysts have been less than enthusiastic, but the company has strongly defended the move. It points out that while other producers, such as those in Asia, have lower cash manufacturing costs, when transportation is included Willamette is cost competitive in the U.S. uncoated free-sheet markets. One Wall Street analysts commented that "if the cost of capital is included, then I still feel it was a mistake. And regarding Willamette's ability to be low cost in domestic markets, while that may be true versus Asian mills, I don't think it's true compared with a mill in Brazil."

Westvaco

Similar to Willamette, Westvaco is a medium-sized paper company with major market positions in coated free-sheet, envelope papers, and packaging. Its bleached products group has sales of nearly $2 billion (excluding the Evadale mill formerly owned by Temple-Inland), and includes coated papers and bleached board, where it is a well known producer of high quality coated board for folding cartons.

Westvaco's coated paper grades are recognized as among the industry's finest premium products, where it has a strong position. The company has reorganized its packaging business into a single entity, combining bleached and unbleached to capitalize on growth prospects in both North America and overseas.

Abitibi-Consolidated

The largest Canadian-based company on the list, Abitibi-Consolidated has grown considerably recently, with the latest move being a C$7.1 billion acquisition of Donohue announced in early 2000. This was preceded in 1997 by the $4.1 billion amalgamation of Abitibi-Price and Stone-Consolidated.

The Donohue deal will maintain Abitibi's position as the world's largest newsprint maker (combining No. 1 and No. 3 in North America). The new company has a 16% share of the world newsprint market and 6.3 million metric tons of capacity at 25 mills worldwide. It also creates North America's fifth largest lumber producer. The new company would have 1.7 million mtpy of groundwood specialty capacity, and 444,000 tpy of market pulp. Since the announcement, the company has moved to shut down considerable high cost capacity, which it states will total 400,000 tpy over the 18 months following the proposed merger.

"They have historically been exposed to the worst in commodity price swings and hindered on the margin side with a wide array of obsolete facilities," an analyst notes, referring to Abitibi's poor financial performance. "Recently, however, they have made aggressive acquisition moves (Donohue) and have shed assets at a much quicker pace. I think the change in management's thinking, and an indication that 'they get it' is their recent position that they would not sell the idle Gaspesia mill unless it was converted to a grade other than newsprint."