Does an aggressive acquisition strategy always pay back? – pulp and paper industry example
In the 1990s-2000s, Norske Skog invested tens of billions Norwegian Krone to become the world’s largest newspaper (newsprint) and magazine paper company. Then the rapid development of internet occured, which clipped the wings of Norske Skog. During last years, Norske Skogindustrier ASA or Norske Skog, which translates as Norwegian Forest Industries, were in continuous troubles made mostly by an oversupply in the paper industry and mounting debt. Few days ago, the final recapitalisation proposal has been presented.
History
Norske Skog started up in 1962 with the construction of a paper mill at Skogn in Norway, with the plant opening in 1966 and a second paper machine in 1967. Half the capital for the project was issued by the Norwegian Forest Owners Association. In 1972 Norske Skog started a cooperation with Follum Fabrikker in Hønefoss. By 1989 Norske Skog had acquired Follum Fabrikker and Union in Skien as well as Saugbrugsforeningen in Halden. With this Norske Skog controlled all the pulp and paper mills in Norway.
International agressive acquisition strategy
The first international acquisition came in 1992 when Norske Skog Golbey in Lorraine, France. Norske Skog later bought the entire plant in 1995. Norske Skog expanded with purchases in Austria in 1996 and the Czech Republic in 1997. In 1998 Norske skog purchased mills in Thailand and the Republic of Korea.
In 2000 Norske Skog bought the British Columbia based Fletcher Challenge Canada with nine mills and Pacifica Papers (formerly MacMillan Bloedel) and created NorskeCanada. It absorbed the Australian Newsprint Mills, a subsidiary of Fletcher Challenge at the same time.
In September 2005 it acquired the Asian company PanAsia Paper, in turn making Norske Skog Asia’s largest producer of newsprint and magazine paper.
Norwegian Megalomania?
Jan Reinås was the CEO of the Norske Skog between 1994 and 2003. It was a time when the company started to operate a business in international waters. Reinås, before taking the lead of Norske Skog, was working as administrative director and later as a CEO for Scandinavian Airlines (SAS). Under the management of Jan Reinås factories in Austria (1996), Czech Republic(1997) and in South Korea and Thailand (1998) were bought. The ambition of Norske Skog that time was to become the word’s largest manufacturer of newsprint, and to be the world’s most attractive company to invest in. After the biggest international acquisition in the history of Norway, which accounted for ca. 21 billion Norwegian Krone (1 NOK = 0.12 USD), the company could not solve the problem of this gigantic debet, up to now. What has happened?
Norske Skog Began Well…but Ended Badly
Somehow, the stock market was very supportive for Norske Skog after their international acquisition. The market value of the company more than tripled since the CEO’s upturn. Revenue came close to NOK 27 billion, and the Group had significant profits. Reinås was elected the head of the year in 2000 by the Economic Report. In an interview with Dagens Perspektiv from 2000, Reinås said that he saw no other opportunity than expanding the company internationally in the 1990s. Reinås said in the interview:
“We did not really see very many good alternatives. Of course we could have been a solid Norwegian company for many years which had done a little more in all the areas we were in. But the risk was great for us to have parked developments in our main area, i.e. paper production for newspapers, magazines and books. It costs three to four billion dollars to build a new paper machine. We might not have afforded that, and then we could lose market position”
Internet Boom
Since 2002 up to present day, the Web has become ubiquitous, and by many it has been considered as a killer of the newspaper. The Internet has become an astonishing source of free and ready information on just about every topic under the sun.
Source: Wikipedia
Of all the “old” media, newspapers had lost the most from the internet.
>>READ ALSO: The Internet harms global demand for paper products
From 2003 it became clear that overproduction of newsprint led to more difficult market conditions, and falling prices for Norske Skog and other paper producers. The main explanation was the internet and change of the media habits. Statistics Norway’s media barometer reported strong growth in the use of the internet. In 2003, four out of ten internet users, used it every day. Among those who use the Internet, there has been an increase in news websites reading from 2003 to 2004. More than half of Internet users now read news websites per day. 44 percent read news pages from web editions of paper newspapers, while 29 percent read news from other sources.
One study has shown that British people aged between 15 and 24 say they spend almost 30% less time reading national newspapers once they start using the web. The Economist wrote in 2006 that “newspapers have not yet started to shut down in large numbers, but it is only a matter of time.” In his book “The Vanishing Newspaper”, Philip Meyer calculates that the first quarter of 2043 will be the moment when newsprint dies in America as the last exhausted reader tosses aside the last crumpled edition.
The trend was not unique for Norway. The start of the newsprint free fall was underway, and was enhanced by the introduction of the Iphone and tablet some years later. It affected earnings to Norske Skog, which had to reduce staffing and cut costs. Trønderen Jan Reinås eventually resigned as CEO, and was replaced by Jan Oksum.
The calm before the storm
Oksum worked for 25 years in the company, and was Strategic Director under Reinås. He thinks it’s too easy to say that the strategy that was enforced in 1997 was crazy, indicating that the changes came faster and became stronger than anyone expected. He said:
“All applauded strategy. The owners put in 10 billion dollars through several shares issues in the 2000s. The lenders stood in line. The credit rating agencies rated the company as great investment option, which means that it is was considered relatively safe to borrow money for the company.”
In the interview for nrk.no (in Norwegian), Mr Oksum was asked about people who laugh today and say that he was able to predict the internet expansion and its influence on decreased demand for newspaper readings around the globe. Mr Oksum replied:
“We realized that it would affect newspaper readings. But we did not realize that it would happen as fast, and strongly as it is today. And there was no one else who realized, I think, 20 years ago, without any excuse for us.”
Shut downs
A number of factories have been closed or downsized. The closure of the Union paper mill in Skien in 2005 caused a massive outcry, including protests from a number of politicians.
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Further closures include the closure of a factory in Steti in the Czech Republic, the indefinite closure of a factory in South Korea, and the closure of one of the three paper machines at Follum. From March 2007 to March 2008, the value of the Norske Skog stock plummeted from over 100 kr to below 18 kr. An editorial in Finansavisen could not rule out the possibility of bankruptcy. In September 2008, Norske Skog Korea was bought by both Morgan Stanley Private Equity of Asia and Shinhan Private Equity. Norske Skog was drowning in the debt since its agressive acquisition strategy, and the bankruptcy has continued to hang over the company.
Pulp logs in the yard. Photo credit: Rafal Chudy
Final recapitalisation proposal of paper giant
After weeks of serious discussions with its stakeholders, Norske Skog presented recently a final recapitalisation proposal, which was supported by more than 65% of the company’s secured bondholders and major shareholders. The key elements of the proposal are:
- The issuance of a new senior secured €250 million bond loan carrying 8.5 % interest with a 2022 maturity to the owners of the €290m bond loan and the €100m NSF facility. The new bond loan will have the same collateral security as today’s secured debt. The existing claims of the secured bond loan holders and NSF lenders in excess of €250m, including accrued interest, will be converted to equity.
- The conversion into equity of all outstanding unsecured bond debt amounting to approximately €500m including accrued interest.
- After such conversions, the equity ownership of Norske Skogindustrier ASA will be split as follows: secured note holders 91.0 %, unsecured noteholders 6.3 %, existing shareholders 2.7 %
- The board will propose an equity offering by Norske Skogindustrier ASA of up to approximately NOK500m with preferential rights for existing unsecured bondholders and shareholders, allocated by approximately NOK300m to the unsecured bondholders and approximately NOK200m to the shareholders. If fully subscribed, this will entail an increase in their ownership interest from 9 % to approximately 28 %. The subscription price will be set at a valuation of 6x the revised 2017 GOE guidance of €75m.
- Warrants will be issued for up to 10 % of the equity in Norske Skogindustrier ASA to those who have subscribed to the above equity offering. The warrants entitle the holders to subscribe for shares if the sum of the group’s average net debt and market value exceeds €525 million in a consecutive period of 6 months prior to 30 June 2019. The subscription rights expire worthless on 30 June 2019 if not exercised. If the proposal is successful, the transaction will reduce the group’s gross debt from approximately NOK9bn to approximately NOK3bn. Annual cash interest costs will be reduced from approximately NOK600m to approximately NOK200m. The bondholders have 7 business days, until Thursday 19 October 2017 (17:00 CET), to accept the proposal.
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Norske Skog’s chairman Christen Sveaas said :
“Although the new proposal also would result in significant losses for the group’s bondholders and material dilution for its shareholders, all other options would be worse for the unsecured bondholders and the shareholders. If the recapitalization proposal was effected, it would provide a solid platform for the company’s seven business units in the future”.
Professor Ola Honningdal Gryttenat from the Norwegian Trade High School (NHH) gave an interview to Klassekampen and expressed his concerns about employment in Norske Skog. Grytten believes the company should look into which countries it is going to do business in, and warns Norwegian employees against taking their jobs for granted. He said:
“Norway is not a low-cost country, and not the cheapest country to produce in. It is therefore not certain that this plan saves Norwegian industrial workplaces”
Norske Skog has about 2,500 employees. In Norway, the company has about 370 employees in Skogn and about 500 in Halden.
What can we learn from Norske Skog?
After the agressive acquisitions, Norske Skog has suffered from an oversupply in the paper industry and mounting debt.
Definitely, the internet was one of the main reasons behind decreasing demand for the newsprint, what in consequence put the Norske Skog in very uncomfortable position, just after agressive acquisition strategy.
The second reason, maybe even more important than the first one, was related to international ambitions of the management and board, which in the 1990s and 2000s led to a massive build up of debt. Of course, nobody was able to predict how the internet will affect newsprint consumption that time. Nevertheless, the strategy of the Norske Skog could be more reserved, and not driven by megalomania and ambitions of becoming the largest newsprint producer in the whole world. Always the pessimistic scenario should be considered, and appropriate measures should be planned ahead of time how to deal with the worst case. This time, the worst case scenario happened, and it has only shown that nobody in the company was prepared for it.
This history shows also that sometimes it is not the best case to be the largest or have the largest share in the market in the world. Definitely, it shows that the largest companies also get into financial troubles and sometimes they even bankrupt. The consequences of such bankrupties always hurt, especially people who lose their jobs. Nevertheless, market, the same as forest, does not like gaps, and early or later will fulfill the void. Same as young offspring fulfills the gap after the giant tree falls down. Cases of AIG or NOKIA only confirm it.
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Author of the post:
Rafal Chudy – PhD Candidate in forest and resource economics at the Faculty of Environmental Sciences and Natural Resource Management, Norwegian University of Life Sciences (NMBU). He has acquired the international experience in forestry and forest economics at North Carolina State University, Swedish University of Agricultural Sciences, Oregon State University, University of Helsinki, University of Hamburg and Warsaw School of Economics. Rafal has gained profesional experience as forest economists and analyst at United States Department of Agriculture, National Forest Holding in Poland and many other companies from private sector.
Contact me at: rafal@forest-analytics.com
Main photo: Pulp mill in Norway. Photo credit: Rafal Chudy