June 26, 2006
Meet the new boss | What do investment groups see in Maine mills?
By Whit Richardson
When International Paper recently announced it had sold its paper mills in Jay and Bucksport, the news marked the end of a century-long relationship between Maine and IP. But the event also highlighted the role of a new kind of player in Maine's paper industry: the Wall Street investment firm.
New York-based investment firm Apollo Management, which has more than $10 billion in capital at its disposal, is purchasing IP's coated paper business for $1.4 billion. Apollo joins Cerberus Capital Management, a Wall Street firm with funds and accounts in excess of $14 billion that last year bought a mill in Rumford as part of its acquisition of Stamford, Conn.-based MeadWestvaco Corp.'s paper business. Smaller investor groups also are players in the state, including one led by John Wissman and Keith Van Scotter that purchased the bankrupt Eastern Pulp and Paper Co. mill in Lincoln in 2004, and an unnamed Maine-based investor group rumored to be interested in Georgia-Pacific's Old Town mill. (No deal for that mill had been announced as this issue of Mainebiz went to press.)
These new owners are changing the face of the paper industry in Maine, and some say their arrival bodes well for its future. "I think it can be a very good sign," says Jack Cashman, commissioner of the Maine Department of Economic and Community Development. "These are investment companies ˆ they invest money."
In an industry as capital intensive as paper manufacturing, investment is a necessary ingredient if Maine is to keep its paper mills open. "We still have the most forested state in the country, we have the best wood fiber in the world and we have great workers," Cashman says. "There's no reason for us to throw in the towel on the paper industry in this state."
Firms like Cerberus and Apollo must agree, since they are willing to pay a hefty price tag for these paper businesses. Cerberus paid $2.3 billion for MeadWestvaco's paper business, which included four mills besides the Rumford mill. (Cerberus would not comment for this story because it recently filed for an initial public offering of NewPage Corp. ˆ the paper company it created to manage the former MeadWestvaco mills.)
But a key reason investment firms are willing to buy these mills is related to the reason paper companies are selling them in the first place: In some cases, paper companies are unloading papermaking infrastructure not because it is unprofitable, but because increased competition in the industry has forced companies to focus their operations on certain sectors, sometimes jettisoning even strong businesses that don't match that focus.
Coated versus uncoated
In IP's case, the sale of its coated paper division is part of a corporate reorganization to help the company pay down debt and free up capital to invest in the businesses it's keeping ˆ uncoated paper, such as office copy paper and envelopes, and industrial and consumer packaging ˆ according to Amy Sawyer, media relations manager for IP, which is based in Stamford, Conn. "It wasn't that we wanted to get rid of anything, it was a matter of making choices," Sawyer says. "The coated paper business has been a very good business for us and I think it will continue to perform under Apollo."
A spokesperson for Apollo Management declined to comment until the deal is closed later this summer, but International Paper's coated paper division, which also includes a mill in Michigan and Minnesota, reported sales of $1.6 billion in 2005 and is operating in the black, Sawyer says. (IP does not publicly break out its coated paper earnings from its total printing papers operating profits, which were $552 million in 2005.)
Sawyer adds that the paper machines in its mills in Jay and Bucksport, which produce coated paper that ends up as the pages of Time magazine or an L.L. Bean catalogue, are competitive with machines all over the world. "Those are good mills," says John Williams, president of the Maine Pulp and Paper Association, "This was just a business decision by IP to sell off that particular division. But it is a division that had been profitable."
MeadWestvaco sold its paper business for similar reasons ˆ namely, to focus on its packaging business. In fact, North American demand for coated paper is expected to increase by 1.9% in 2006, 1.1% in 2007 and 2.3% from 2008 to 2010, according to Resource Information Services Inc., a global forest products industry observer based in Bedford, Mass. That might not sound great, but RISI's five-year forecast shows no net growth in demand for North American uncoated free sheet paper. "Coated paper actually is one of the types of paper that has been doing reasonably well," Williams says.
Because of those market factors, it is less clear who will see value in the Old Town mill, which was shuttered by G-P at the same time the company was planning to open new mills in other areas of the country. Unlike the mills in Rumford, Jay and Bucksport, the Old Town mill is mainly a pulp mill, according to Cashman. The mill produces 650 tons of pulp per day, but only uses 20% of that pulp on site to produce tissues and napkins. The rest is sold into a stagnant market flooded with pulp from Brazil, Cashman says.
And even mills acquired by investment firms aren't completely out of the woods, say paper industry experts. Despite having capital to invest, Maine's new mill owners also own mills in other parts of the country, and likely will weigh where to spend their investment dollars. In that process, they might encounter some of the oft-repeated disadvantages of investing in Maine mills, according to Lincoln Paper and Tissue CEO Keith Van Scotter ˆ who nevertheless is in the process of installing a new, $36 million tissue machine at the Lincoln mill. "The problem with Maine is that on balance, there are too many things in the state to drive you away from investing," Van Scotter says. "But that's not to say there aren't compelling business opportunities hereˆ there are just fewer of them and they are harder to realize."
New York-based investment firm Apollo Management, which has more than $10 billion in capital at its disposal, is purchasing IP's coated paper business for $1.4 billion. Apollo joins Cerberus Capital Management, a Wall Street firm with funds and accounts in excess of $14 billion that last year bought a mill in Rumford as part of its acquisition of Stamford, Conn.-based MeadWestvaco Corp.'s paper business. Smaller investor groups also are players in the state, including one led by John Wissman and Keith Van Scotter that purchased the bankrupt Eastern Pulp and Paper Co. mill in Lincoln in 2004, and an unnamed Maine-based investor group rumored to be interested in Georgia-Pacific's Old Town mill. (No deal for that mill had been announced as this issue of Mainebiz went to press.)
These new owners are changing the face of the paper industry in Maine, and some say their arrival bodes well for its future. "I think it can be a very good sign," says Jack Cashman, commissioner of the Maine Department of Economic and Community Development. "These are investment companies ˆ they invest money."
In an industry as capital intensive as paper manufacturing, investment is a necessary ingredient if Maine is to keep its paper mills open. "We still have the most forested state in the country, we have the best wood fiber in the world and we have great workers," Cashman says. "There's no reason for us to throw in the towel on the paper industry in this state."
Firms like Cerberus and Apollo must agree, since they are willing to pay a hefty price tag for these paper businesses. Cerberus paid $2.3 billion for MeadWestvaco's paper business, which included four mills besides the Rumford mill. (Cerberus would not comment for this story because it recently filed for an initial public offering of NewPage Corp. ˆ the paper company it created to manage the former MeadWestvaco mills.)
But a key reason investment firms are willing to buy these mills is related to the reason paper companies are selling them in the first place: In some cases, paper companies are unloading papermaking infrastructure not because it is unprofitable, but because increased competition in the industry has forced companies to focus their operations on certain sectors, sometimes jettisoning even strong businesses that don't match that focus.
Coated versus uncoated
In IP's case, the sale of its coated paper division is part of a corporate reorganization to help the company pay down debt and free up capital to invest in the businesses it's keeping ˆ uncoated paper, such as office copy paper and envelopes, and industrial and consumer packaging ˆ according to Amy Sawyer, media relations manager for IP, which is based in Stamford, Conn. "It wasn't that we wanted to get rid of anything, it was a matter of making choices," Sawyer says. "The coated paper business has been a very good business for us and I think it will continue to perform under Apollo."
A spokesperson for Apollo Management declined to comment until the deal is closed later this summer, but International Paper's coated paper division, which also includes a mill in Michigan and Minnesota, reported sales of $1.6 billion in 2005 and is operating in the black, Sawyer says. (IP does not publicly break out its coated paper earnings from its total printing papers operating profits, which were $552 million in 2005.)
Sawyer adds that the paper machines in its mills in Jay and Bucksport, which produce coated paper that ends up as the pages of Time magazine or an L.L. Bean catalogue, are competitive with machines all over the world. "Those are good mills," says John Williams, president of the Maine Pulp and Paper Association, "This was just a business decision by IP to sell off that particular division. But it is a division that had been profitable."
MeadWestvaco sold its paper business for similar reasons ˆ namely, to focus on its packaging business. In fact, North American demand for coated paper is expected to increase by 1.9% in 2006, 1.1% in 2007 and 2.3% from 2008 to 2010, according to Resource Information Services Inc., a global forest products industry observer based in Bedford, Mass. That might not sound great, but RISI's five-year forecast shows no net growth in demand for North American uncoated free sheet paper. "Coated paper actually is one of the types of paper that has been doing reasonably well," Williams says.
Because of those market factors, it is less clear who will see value in the Old Town mill, which was shuttered by G-P at the same time the company was planning to open new mills in other areas of the country. Unlike the mills in Rumford, Jay and Bucksport, the Old Town mill is mainly a pulp mill, according to Cashman. The mill produces 650 tons of pulp per day, but only uses 20% of that pulp on site to produce tissues and napkins. The rest is sold into a stagnant market flooded with pulp from Brazil, Cashman says.
And even mills acquired by investment firms aren't completely out of the woods, say paper industry experts. Despite having capital to invest, Maine's new mill owners also own mills in other parts of the country, and likely will weigh where to spend their investment dollars. In that process, they might encounter some of the oft-repeated disadvantages of investing in Maine mills, according to Lincoln Paper and Tissue CEO Keith Van Scotter ˆ who nevertheless is in the process of installing a new, $36 million tissue machine at the Lincoln mill. "The problem with Maine is that on balance, there are too many things in the state to drive you away from investing," Van Scotter says. "But that's not to say there aren't compelling business opportunities hereˆ there are just fewer of them and they are harder to realize."
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