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Paper chase: A pandemic-driven supply squeeze lifts pulp & paper dealmaking

A run on toilet paper grabbed early-pandemic headlines. But supply chains snarled by Covid-19 also caused a squeeze on the overall paper industry that persists to this day, pushing up prices, profitability and dealmaking.

Transactions targeting North American-based pulp and paper companies have surged in 2022, even as mergers and acquisitions overall have sunken. In the year to date (24 October), deals worth USD 13.7bn have taken place, up from USD 10.6bn for all of 2021, according to Dealogic. With more than two months remaining, 2022 has only been bested four times this century: 2000 (USD 43.85bn), 2005 (USD 27.6bn), 2007 (USD 14.9bn), and 2018 (USD 20.3bn).

In the last 12 months, at least four publicly traded companies have disappeared from North America’s bourses: Last November Domtar sold for USD 3.88bn to Canada’s Paper Excellence, backed by Indonesian forestry giant Sinar Mas, before the duo offered to buy Resolute Forest Products for USD 1.94bn in July. Verso closed its USD 785m sale to Billerud Korsnas in March. Two listed paper manufacturers – Neenah and Schweitzer-Mauduit International – merged to become Mativ Holdings [NYSE:MATV] in July.

Private-equity firms have also featured heavily as buyers: HIG Capital sold Sustana Group to Blackstone, Atlas Holdings bought Crown Paper from Goldberg Lindsay, Wynnchurch Capital acquired Appvion’s assets, and Jackson Paper sold to HIG.

What's driving dealmaking?

Demand for paper over plastic has grown in recent years as cities and states push decomposable straws, cups or bags. The explosion of ecommerce during the pandemic’s lockdowns also drove demand for cardboard boxes and tissue.

Yet the biggest cause for today's levels of dealmaking began with a reduction in paper demand at the turn of the century, noted Sokol Cano, who heads the paper and packaging practice at DA Davidson. As digital devices usurped the printed page, many paper mills either shut down entirely or converted to packaging-grade paper between 2000 and 2020.

When Covid-19 crippled supply chains in early 2020, demand for paper outstripped the reduced supply. Mills imposed allocations, meaning customers received a reduced inventory compared to past orders. That gave paper mills pricing power for the first time in two decades, leading EBITDA margins to rise from 10% to between 15% and 20%, said Cano. Profitable growth led to stronger balance sheets as paper manufacturers paid down debt, turning them into more attractive acquisition candidates, he noted.

Opportunities ahead

Sellers have commanded valuations ranging from 9x to 12x EBITDA for manufacturers of corrugated, containerboard or box packaging and 6x EBITDA for makers of printing paper, said Cano.

Yet many of North America’s 15 largest, publicly-listed paper and packaging companies are trading at valuations significantly below that, including International Paper [NYSE:IP] and WestRock [NYSE:WRK]. “Valuations in the public markets have gone too low and that could attract investors,” noted Cano.

One type of buyer is the family office with long-term investment horizons, said Cano. Examples include the Koch brothers’ Koch Industries, which bought Georgia-Pacific in 2005, or Warren Buffett’s Berkshire Hathaway [NYSE:BRK-A].

Strategic players also remain keen buyers and their pursuit of bolt-on acquisitions continues unabated, noted Cano. By contrast, the 10 or so private-equity firms that invest in the sector are throttling back on new platform purchases as financing costs rise.

Some laggards are already in the crosshairs, according to Activistmonitor. Glatfelter’s [NYSE:GLT] share price is trading at nearly one-eighth of its 52-week high. On October 17, activist hedge fund Carlson Capital
disclosed a 12.1% stake in Glatfelter, stating it will look at ways to enhance stockholder value. The chase for paper profits is on.