{"id":916,"date":"2017-10-15T20:32:40","date_gmt":"2017-10-15T18:32:40","guid":{"rendered":"http:\/\/forest-analytics.com\/?p=916"},"modified":"2017-10-15T20:32:40","modified_gmt":"2017-10-15T18:32:40","slug":"aggressive-acquisition-strategy-pulp-and-paper-industry","status":"publish","type":"post","link":"https:\/\/forest-analytics.com\/index.php\/2017\/10\/15\/aggressive-acquisition-strategy-pulp-and-paper-industry\/","title":{"rendered":"Does an aggressive acquisition strategy always pay back? – pulp and paper industry example"},"content":{"rendered":"

In the 1990s-2000s, Norske Skog invested tens of billions Norwegian Krone to become the world’s largest newspaper\u00a0(newsprint) and\u00a0magazine\u00a0paper company. Then the rapid development of internet occured, which clipped the wings of Norske Skog. During last years,\u00a0Norske Skogindustrier ASA\u00a0or\u00a0Norske Skog, which translates as\u00a0Norwegian Forest Industries, were in continuous troubles made mostly by\u00a0an oversupply in the paper industry and mounting debt. Few days ago, the final\u00a0recapitalisation proposal has been presented.\u00a0<\/strong><\/p>\n

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History<\/h1>\n

Norske Skog started up in 1962 with\u00a0the construction of a\u00a0paper mill\u00a0at\u00a0Skogn\u00a0in\u00a0Norway, with the plant opening in 1966 and a second paper machine in 1967. Half the capital for the project was issued by the\u00a0Norwegian Forest Owners Association. In 1972 Norske Skog started a cooperation with\u00a0Follum Fabrikker\u00a0in\u00a0H\u00f8nefoss. By 1989 Norske Skog had acquired Follum Fabrikker and\u00a0Union\u00a0in Skien as well as\u00a0Saugbrugsforeningen\u00a0in\u00a0Halden. With this Norske Skog controlled all the pulp and paper mills in Norway.<\/p>\n

International agressive acquisition strategy<\/h2>\n

The first international acquisition came in 1992 when\u00a0Norske Skog Golbey\u00a0in Lorraine, France. Norske Skog later bought the entire plant in 1995. Norske Skog expanded with purchases in\u00a0Austria\u00a0in 1996 and the\u00a0Czech Republic\u00a0in 1997. In 1998 Norske skog purchased mills in\u00a0Thailand\u00a0and the\u00a0Republic of Korea.<\/p>\n

In 2000 Norske Skog bought the\u00a0British Columbia\u00a0based\u00a0Fletcher Challenge Canada with nine mills and\u00a0Pacifica Papers\u00a0(formerly\u00a0MacMillan Bloedel) and created\u00a0NorskeCanada. It absorbed the Australian Newsprint Mills, a subsidiary of Fletcher Challenge at the same time.<\/p>\n

In September 2005 it acquired the Asian company\u00a0PanAsia Paper, in turn making Norske Skog Asia’s largest producer of newsprint and magazine paper.<\/p>\n

Norwegian Megalomania?<\/h2>\n

Jan Rein\u00e5s was the CEO of the Norske Skog between\u00a01994 and 2003. It was a time when the company started\u00a0to operate a business in international waters. Rein\u00e5s, before taking the lead of Norske Skog, was working as administrative director and later as a CEO for\u00a0Scandinavian Airlines<\/a>\u00a0(SAS). Under the management of Jan Rein\u00e5s 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\u00a0most 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?<\/p>\n

Norske Skog Began Well…but\u00a0Ended Badly<\/h1>\n

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.\u00a0Rein\u00e5s was elected the head of the year in 2000 by the Economic Report. In an interview with Dagens Perspektiv from 2000, Rein\u00e5s said that he saw no other opportunity than expanding the company internationally in the 1990s.\u00a0Rein\u00e5s said in the interview:<\/p>\n

“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.\u00a0It 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”<\/strong><\/em><\/span><\/p><\/blockquote>\n

Internet Boom<\/h3>\n

Since 2002 up to present day, the Web has become\u00a0ubiquitous, and by many it has been considered as a killer of the newspaper.\u00a0The Internet has become an astonishing source of free and ready information on just about every topic under the sun.\u00a0<\/span><\/p>\n

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Source: Wikipedia<\/strong><\/em><\/p><\/div>\n

Of all the \u201cold\u201d media, newspapers had lost the most from the internet.\u00a0<\/span><\/p>\n

>>READ ALSO:\u00a0The Internet harms global demand for paper products<\/a><\/strong><\/p>\n

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.\u00a0The 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.\u00a0Among 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.<\/p>\n

One study has shown that British people\u00a0aged 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 \u201cThe Vanishing Newspaper\u201d, 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.<\/p>\n

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.\u00a0It affected earnings to Norske Skog, which had to reduce staffing and cut costs. Tr\u00f8nderen Jan Rein\u00e5s eventually resigned as CEO, and was replaced by Jan Oksum.<\/p>\n

The\u00a0calm\u00a0before\u00a0the\u00a0storm<\/h3>\n

Oksum worked for 25 years in the company, and was Strategic Director under Rein\u00e5s.\u00a0He 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:<\/p>\n

“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.”<\/strong><\/em><\/span><\/p><\/blockquote>\n

In the interview for nrk.no (in Norwegian)<\/a>, 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:<\/p>\n

“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.”<\/strong><\/em>\u00a0<\/span><\/p><\/blockquote>\n

Shut downs<\/h2>\n

A number of factories have been closed or downsized. The closure of the Union paper mill in\u00a0Skien\u00a0in 2005 caused a massive outcry, including protests from a number of politicians.<\/sup><\/p>\n

>>READ ALSO:\u00a0Sawmill and paper mill closures: How can a community prepare?<\/a><\/strong><\/p>\n

Further closures include the closure of a factory in\u00a0Steti\u00a0in the\u00a0Czech Republic,<\/sup>\u00a0the indefinite closure of a factory in\u00a0South Korea, and the closure of one of the three paper machines at Follum.\u00a0<\/sup>From March 2007 to March 2008, the value of the Norske Skog\u00a0stock\u00a0plummeted from over 100 kr to below 18 kr.<\/sup>\u00a0An editorial in\u00a0Finansavisen\u00a0could not rule out the possibility of\u00a0bankruptcy.<\/sup>\u00a0In 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\u00a0bankruptcy has continued to hang over the company.<\/p>\n

\"pulp

Pulp logs in the yard. Photo credit: Rafal Chudy<\/strong><\/em><\/span><\/p><\/div>\n

Final recapitalisation proposal of paper giant<\/h1>\n

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:<\/p>\n