TORONTO, June 27 /CNW/ - Total forest, paper and packaging (FPP) deal
values increased to US$27.6bn in 2007, up US$1.9bn on 2006, according to the
PricewaterhouseCoopers (PwC) Branching Out report. Deal values reached
US$11.8bn in the first quarter of 2008, although the outlook for the rest of
this year is more uncertain. Private equity has continued to play a key role
in deals particularly in North America. New dealmakers have also emerged on
the scene, such as New Zealand's Rank Group. Yet the main deal story is the
lack of significant - and urgently needed - consolidation deals in Europe. The
FPP industry is at the heart of the drive towards sustainable development and
we are seeing new investment trends reflecting this.
FPP companies continue to operate in a challenging, and rapidly shifting,
sector. Macro-economic factors have affected the industry, particularly
increased fibre and transportation costs, soaring energy prices, lacklustre
demand at best in North America and Europe and the impact of emerging markets
on global competition. The weakness of the US dollar versus other key
currencies such as the euro, the Brazilian real and the Canadian dollar have
also had a substantial impact on the industry - Canadian players have been
particularly hard hit, due to their dependence on the US market. The shift in
currency ratios globally has played havoc with many FPP companies' planning
and supply chain configurations - and is likely to have a noticeable influence
on deal making going forward.
Many of the largest FPP companies have radically altered their business
models, moving from vertically-integrated conglomerates to more
product-focused models, with International Paper as the most prominent
example. While this trend continues to play out to some extent in deals in
North America, a second strategy has also become apparent. Some companies,
particularly those based in Scandinavia, have retained vertically-integrated
supply chains. This type of structure is starting to be vindicated by the need
to secure fibre resources, which have come under increased pressure. Failing
to focus on one core business, however, can also indicate a reluctance to
restructure and consolidate, and consolidation is the necessary starting point
for addressing the continued imbalance between supply and demand in the
European market place.
The influence of private equity (PE) on the FPP industry remained strong
in 2007 - over US$10.4bn in deals, or around 38% of deal values included some
PE participation. PE involvement slowed down in the first quarter of 2008,
particularly in the pulp and paper sector, but some PE firms have substantial
funds awaiting deployment. PE participation has fuelled much of the
consolidation and restructuring which has taken place in FPP in North America
in recent years but this remains subdued in Europe.
"Total deal values increased in 2007, despite a lower average deal size,
due to a greater number of deals," says Craig Campbell, leader of PwC's
performance improvement practice for the global forest and paper industry.
"Looking ahead, the trend for the rest of 2008 is unclear. On the one hand,
developments in financial markets are making for a tougher deal-making
environment - on the other, 2008 could still emerge as a record breaking year
if long overdue consolidation in Europe takes place."
Timberland is a burgeoning asset class. In the past decade, many US
industrial players (forest products producers) have sold forestland assets in
order to improve their own financial performance. This sell-off triggered a
massive upscaling of institutional investment in the US via Timber Investment
Management Organisations (TIMOs) and Real Estate Investment Trusts (REITs)
specialising in forestland property. TIMOs are privately owned forestland
investment structures that have ballooned in size since 1990, moving from
around US$1bn to over US$25bn in assets under management by the end of 2007.
Timberland investment over the next few years will almost certainly drive
substantial levels of transaction activity over a broad geographic range.
There will be more institutional investment into forestland, as well as higher
levels of trading of existing institutionally owned assets as portfolios are
'Timber plus' investment strategies: As we look towards the future, the
definition of commercial timber values will continue to expand beyond
traditional sawlog and/or pulplog values to include the potential value of the
wood as energy. The developing potential of forests as renewable energy and
material sources is likely to drive future deals, as the full range of the
possible spectrum of uses expands, from wood energy today to biofuels and
value-added products in the future. A further set of opportunities is starting
to arise from the environmental services (or 'ecosystem services') provided by
forests. As time passes, awareness is increasing of the valuable role of trees
and forests in carbon sequestration and hence in mitigating some of the
effects of global climate change. Most notably the role of forests as a carbon
sink could become a source of significant revenue - and "timber plus"
investment strategies are receiving growing interest.
Bio-energy: redefining the industry: Wood biomass is emerging as an
important renewable energy source, creating competition on already strained
fibre sourcing. Still, substantial opportunities for forest products companies
are developing, these span from supplying or aggregating forest biomass, to
producing wood-based energy (heat and power) to producing wood-based transport
fuels and value added chemicals and other materials. FPP companies may need to
partner with oil and gas companies to leverage the expertise of both parties.
Deals in the (wood and agricultural) bio-energy area have started to pick up,
although most transactions to date involve co-ventures and start ups. In 2007
global bio-energy deals increased around sevenfold to nearly US$7bn in 2007,
with deals concentrated in North America, followed by Asia-Pacific and Latin
America. There will be more deals in the future and the forest products
industry will feature.
"The development of wood biomass as a renewable energy source is more
complicated than many other renewable sources, not only because many of the
various technologies are still in the research stage, but also because of the
inherent competition with established product value chains," says Bruce
McIntyre, Global Sustainability Leader for PwC's Forest, Paper & Packaging
practice. "The potential for wood-based energy and other new biomass-sourced
products to significantly transform traditional fibre supply/value chains, and
hence the current forest products industry, looks to be substantial. Companies
cannot afford to be complacent about their chances of competing in this
emerging scenario, since the most promising positions will likely rest with
those controlling significant volumes of forest biomass."
For a copy of Branching Out - Global deal activity in the forest, paper &
packaging industry, or for more information about PricewaterhouseCoopers'
activity in the forest, paper and packaging industries, please visit
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