Trend towards insolvency continues for North America as low level of transactions were primarily distress motivated sales
TORONTO, March 30 /CNW/ - Given the mainly dire economic environment and restricted credit markets, total deal value in the global forest, paper and packaging (FPP) sectors held up remarkably well last year due to blockbuster transactions in Latin America, according to Branching Out 2009 Annual Review a new report by PricewaterhouseCoopers (PwC) which studies mergers and acquisitions (M&A) in the FPP sectors.
At the same time, continued tight credit conditions and low valuations cast an overall damper on FPP transaction activity, particularly in North America, where deal values dipped to around the US$1 billion level with only 45 transactions and the focus shifted to restructuring high debt levels with a total face value reaching US$17.5 billion.
Other key findings include:
- Overall global deal volume remained fairly stable in 2009, with 369
deals slightly topping the 350 seen in 2008.
- Global deal value dropped to US$18.7 billion in 2009 from 2008's
- Global private equity activity was also down, accounting for only 11%
of deal values, compared to an average of 27% across the previous
Already-modest deal values in Asia-Pacific were slightly down in 2009, although deal volume stayed solid, largely due to interest in timberlands. The notable bright spot globally was Latin America, where pent-up demand and a quicker recovery helped spur an unprecedented level of deal activity, accounting for around two-thirds of global deal value, up from 5% in 2008. Two of the regions' biggest players, Votorantim Celulose e Papel (VCP) and Aracruz, merged in a deal value at close to US$8 billion to form Fibria, the world's largest pulp company by some margin.
"Many CEOs have been concentrating on short-term survival at the expense of longer-term strategies such as mergers and acquisitions," says Frédéric Bouchard, Managing Director, Corporate Finance and Montreal leader of the Forest, Paper and Packaging practice. "Only once genuine confidence about the future returns can we expect to see a return of larger value deals. Momentum in deal activity will depend on a combination of improved market fundamentals, strengthened balance sheets and stronger credit markets making those target assets look not just like good value but also financeable again."
In North America and Europe, the rationalization of capacity, general cost cutting and deleveraging of balance sheets have still to run their course. The major consolidation needed in Europe especially to address shrinking demand is likely to remain as elusive as ever in the near term. Distress, selective acquisitions to enhance market positions and disposals to exit non-core businesses are the factors likely to drive a continuing flow of smaller value deals in the immediate future.
Looking further ahead, PwC believes there are a few dominant themes that will drive deal activity as the decade unfolds.
- Most market structures within FPP remain fragmented and consolidation
will continue to provide the opportunity to enhance returns. The
financial imperative to consolidate remains greatest where end-
markets are mature and consolidation would enable capacity and the
cost base to be managed more effectively in the face of static or
declining demand. European paper remains a prime example.
- Product specialization has driven and will continue to drive
transactions as companies seek to focus on or strengthen their chosen
core businesses, through deals that bridge gaps in their core
offerings or that expand or maintain market share.
- The acquisition of fibre resources seems set to gain further momentum
driven by either the returns and/or the security in prospect from
controlling a sustainable and renewable resource. Specific drivers
will range from the attractiveness of timberland assets to financial
investors, and with the potential plus factors of carbon and even
entire ecosystem value sometime in the future to companies securing
the resources needed to generate returns downstream from wood and
paper products as well as energy and the bio-products of the future.
Similar considerations apply to waste fibre which is increasingly
seen as a valuable resource and not as waste.
"Looking ahead, the immediate prospects for any significant recovery in deal value look limited. The fundamental drivers for deals have likely strengthened over the past two years, so a return of confidence could release some pent up demand - the uncertainty is over timing. In the meantime we expect that distress and selective "voluntary" transactions will drive a continuing flow of small value deals," says Bouchard.
For more information including the full report, please visit www.pwc.com/fpp.
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