Making a splash in the markets. MoDo has been going all out to win over investors with its shareholder friendly approach

MoDo uses its assets to good effect

Analysts have been bowled over by MoDo's abandon and fallen for the whole package. Even the normally restrained commentators at Morgan Stanley Dean Witter were moved to mimic the hyperbole of tabloid journalism. "Momentous dividend; New trend", cried the analysts as they described the dividend package as "the most important announcement for investors in the European paper industry for several years".

The man behind the new approach to shareholder-friendliness is the president and CEO of MoDo, Bengt Pettersson. Compared with the reactions he has attracted in the markets, he appears positively shy. "In my opinion, we got the reaction that we ought to have got and we are satisfied," says Pettersson. But he does admit that "right now, we are very popular with investors".

The timing itself could not have been better for MoDo. Just when investors are casting about among cyclical stocks to identify low-priced companies with underlying value, MoDo is found setting out its stall to become the darling of the sector. Again though, Pettersson refuses to get involved in the hype - in public at least. As Pettersson says, "The stock market has had a life of its own recently and historically there have been moves into cyclical stocks when people feel that they are going up, but I'm not really the person you should ask about that. There are many other people who can comment on the stock markets."

Cash bonus

The main reason for the bumper payout - SKr 10/share plus a SKr 35/share extra dividend - made earlier this year lies in the capital structure of MoDo. With a debt/equity ration of 0.17, the company was carrying comparatively expensive equity at a time when debt was cheap. The payout took the debt equity ratio to some 0.5 and the company plans to keep that at between 0.5 and 0.7 for the foreseeable future. As Pettersson explains, "We were aware that we didn't need quite such financial strength. We now have a much more efficient balance sheet."

It was also the balance sheet that drove the decision to set up a partnership with SCA. Holmen was performing well in the newsprint market and Iggesund Paperboard was showing healthy returns, but MoDo Paper's profitability was "not satisfactory", according to the company. As a result, the MoDo/SCA fine paper alliance was born, creating a company with 1.7 million tons of fine paper capacity and a merchanting unit with deliveries totaling some 1.1 million tons.

At a time when economies of scale are becoming ever more important in the sector, the 50:50 venture will be the third largest fine paper group in Europe. Annual consolidation gains are estimated to be at least SEK 650 million within a couple of years. Assuming the deal clinches European Commission approval, the idea is to float the new company on the Swedish stock exchange within two years. No timetable has been set in stone as yet, and Pettersson is even still open to the idea of welcoming other partners to the party. "Our plan is to list it within two years. But of course, if some other good idea occurs then we could go ahead in a different way," Pettersson says.

While the two companies await regulatory approval for the deal, the only thing left to do for the moment is to try to get the best of the existing units in today's market. According to Pettersson, there is some price pressure on newsprint, although Holmen is seeing good order inflow. Paperboard suffered from a weakening in demand during the latter part of last year, but things have improved slightly, although prices are still weak. Fine papers look to be doing well though, with strong order inflows, good deliveries and the prospect of pulp price increases helping to support paper rises during the course of this year, Pettersson believes.

When it comes to the stock markets, MoDo looks to have done well on the timing so far. All it needs now is for the markets to strengthen and a round of price rises to go through and who knows - perhaps investors will start a love affair with the pulp and paper sector.