Canadian forestry industry to continue consolidating in 2011

Canadian FPP deals in 2010 shaped by restructuring and divesting non-core assets

TORONTO, April 4 /CNW/ - The majority of Canadian and US deal-making in the forestry sector in 2010 involved pulp and paper companies in or coming out of bankruptcy protection and further consolidation is expected in 2011, according to PwC's annual global forest, paper and packaging deals report Branching Out.

In 2010, North American deal numbers rose 47% to 66 deals worth US$3.2 billion from 45 deals worth US$1 billion in 2009. However, this is a far cry from the US$17 billion per annum worth of deals that were transacted in North America in 2006 and 2007, and the US$30 billion seen in 2005. In 2010, there were 15 Canadian deals worth US$1.8 billion, more than half of the value of all North American transactions.

North America's largest deal in 2010 was when Canadian-owned AbitibiBowater divested US$940 million of non-core land and assets to an undisclosed buyer before emerging from creditor protection. Financially troubled Grant Forest Products was sold for US$400 million to Georgia Pacific and Eacom Timber Corporation bought the non-core forest product business from Domtar for US$78 million.

"On a positive note, deal activity in North America revived after a virtual collapse the previous year," says Frédéric Bouchard, national transaction forest, paper and packaging leader, PwC. "However, distress lay behind many of the 2010 deals as many Canadian and US pulp and paper producers had to seek bankruptcy protection in recent years amidst declining demand."

Companies that have not been in bankruptcy proceedings have been busy rationalizing their operations with closures, smaller divestments and repositioning. With companies becoming more certain about the economic outlook, there will likely be a wave of deals as more companies consolidate. Domtar's sale of its wood products business to Eacom Timber in 2010 is a case in point.

Globally, there were 385 deals struck in 2010, up 4.6% from 2009, but total value fell to US$12.7 billion in 2010 from US$18.7 billion in 2009. For the first time since PwC began collecting FPP deal data in 2003, Europe had the largest share of deal value with US$4.6 billion, or 36%, of the total FPP deal value.

"North American companies are further advanced than their European counterparts in consolidating, reducing capacity and restructuring in the face of declining demand for newsprint, printing and writing grades," says Bouchard. "However, we expect this to begin to change in 2011 with Europe following in North America's footsteps in consolidating capacity to be in line with market demand."

As predicted in last year's report, market distress continued to affect many non-integrated pulp and paper companies in mature markets caught between high input prices and low demand. In contrast, integrated producers are continuing to emerge out of the downturn with relatively healthy balance sheets.

Private equity (PE) accounted for 22% of total FPP deal value in 2010 and more than half (56%) of converter deal value. Although 2010 was a low year in terms of numbers of PE-backed deals—just 56 deals down from 107 last year—some larger transactions ensured the US$1.8 billion low point in 2009 was bumped up to US$2.8 billion in 2010. This boost was aided by PE coming up with the biggest deal of 2010 with UK PE firm Candover Investments' sale of Europe's Ontex to TGP Capital and GS Capital Partners.

2011 Outlook

  • Deal momentum is returning to the FPP sector and is likely to continue for 2011 and into 2012. Key themes underpinning this are: consolidation (long awaited in Europe), security of fibre supply, geographical diversification into new, growth markets and repositioning of product and operational portfolios.
  • Private equity is returning to the sector and is playing a very large part in downstream packaging and converting.
  • The Asian fibre deficit, most notably in China, will be a continued force behind outbound acquisitions of foreign fibre resources by Chinese and other Asian companies. As the FPP market in China continues to remain heavily fragmented, both government interaction and market logic will have a core part to play in this area over the coming months.

About PwC's Deal Team
PwC's Deal Team ( helps clients to achieve deal success—from concept to close and beyond. As part of the world's largest Transaction Advisory practice , and with our global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year , the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.

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For further information:

Kiran Chauhan, PwC
Tel: 416 947 8983

Jessica Draker, PwC
Tel: 416 869 8723

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