Mead/Westvaco merger sets the pace for further deals

NEW YORK, Aug. 29, 2001 (Reuters) - The merger announced on Wednesday between paper producers Mead Corp and Westvaco Corp reminded investors that the consolidation of the fragmented global forest products industry is far from over and the focus will soon switch to other potential targets, analysts said.
The $3 billion stock-swap deal, which will create North America's No 4 paper company, follows a series of substantial takeovers in the forest products industry in the past few years. Yet still, the top five global players -- International Paper Co, Georgia-Pacific Corp, Weyerhaeuser Co, Kimberly-Clark Corp, and Stora Enso -- accounted for only an estimated 30% of the industry's sales last year, leaving much room for more marriages. By comparison, the top five players in the automobile or chemical industries control about 50% of their markets.
"This industry is not finished yet -- they are going to come in the next couple of years," Mark Connelly, analyst with Credit Suisse First Boston, said of further mergers among paper companies. While unlikely, some analysts said that Mead or Westvaco could attract counteroffers from anyone willing to pay even a slight premium to terms unveiled on Wednesday.
Recent consolidation in the industry has been spearheaded by European companies, as they tend to think more globally, he said. Big deals by European papermakers include Finnish-Swedish Stora Enso's acquisition of Wisconsin-based Consolidated Paper and Finnish papermaker UPM-Kymmene's purchase of four mills from German magazine paper maker Haindl.
Not just the Europeans
North American players have also been active on the acquisition front in recent years. In the last two years, International Paper bought Union Camp for $5 billion, Stone Container Corp of the US merged with the US unit of Jefferson Smurfit Group of Ireland and Weyerhaeuser Co bought Macmillan.
In Canada, Abitibi-Consolidated Inc joined hands with Norske Skogindustrier AS of Norway and Hansol Paper of South Korea to set up an Asian newsprint company in a $1.4 billion alliance. "Consolidation will continue to be global -- there is a whole lot more that needs to happen both here and in Europe," said Connelly.
Although the rate of consolidation has picked up in recent years, deals among the industry's main players may not pick up pace any time soon as giants such as IP, which acquired Champion International last year, digest their new holdings and streamline their businesses.
Low pulp prices, weak export markets due to the strong dollar, and slowing demand related to the softened US economy have made this process more difficult than previously envisaged. "It's like the tiger is digesting -- once he's finished digesting he's going to go on the hunt again," said Joshua Zaret, an analyst with ABN Amro. "Likely acquirers have other agendas right now." The big players may return to the acquisition trail within the next 12 to 18 months, Zaret said.
Companies with assets in Latin America are likely to be one target. A recent Standard & Poor's study of the forest products industry showed that the more profitable European companies now prefer investing in South America rather than pumping money into US assets, which have been hit by the strong dollar and increasing cost of energy.
Shares of several companies often pinpointed as potential acquisition targets rose on Wednesday on news of the Mead and Westvaco merger, including office and wood products maker Boise Cascade Corp and No 2 North American newsprint producer Bowater Inc.
"You will see a handful of players in each of the major grades," said Zaret when asked what the paper products industry will look like three years from now. "I think where we are we are well advanced with more to come."