Analysis: A mega-merger could be answer to Europe's paper woes

Thu Oct 4, 2012 10:18am EDT
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Jussi Rosendahl

HELSINKI (Reuters) - Finland's paper giants UPM-Kymmene UPM1V.HE and Stora Enso (STERV.HE: Quote) have been looking at piecemeal solutions to the crisis in Europe's paper industry, but it may be that nothing less than a mega-merger will do.

Battered by the global debt crisis and the shift to online media, the region's industry is currently estimated to have 10-15 percent of overcapacity in paper grades such as newsprint, and magazine and office paper.

The world's two biggest producers of those graphic paper grades, whose headquarters are separated by a few hundred meters on Helsinki's seafront market square, have closed down several paper mills since 2006, but more consolidation in the European paper industry is seen as inevitable.

Analysts say the ideal solution may be a merger of UPM and Stora Enso that would create the world's number one paper company by any measure, which would give the combined entity substantial control over capacity and therefore, prices, helping rivals as well as themselves.

The move would be certain to draw scrutiny from European competition authorities, but had a good chance of going ahead with some modifications, sector analysts said.

"It would make good sense for the firms themselves. There would be a lot of synergies to look for," said analyst Markku Jarvinen from Helsinki brokerage Evli.

Paper making is still by far the biggest operation for the two companies, accounting for 69 percent of UPM's sales of 10.1 billion euros ($13.09 billion) and 51 percent of Stora's 10.9 billion euros last year.

Paper provides both with cash to help finance projects they consider to be key to future growth, such as their low-cost pulp plants in Uruguay and Stora's packaging board mill in China, but profits in the paper divisions have been disappointing.   Continued...

 
The Stora Enso company logo is seen near a packaging mill in Riga September 18, 2012. Finland's paper giants UPM-Kymmene and Stora Enso have been looking at piecemeal solutions to the crisis in Europe's paper industry, but it may be that nothing less than a mega-merger will do. REUTERS/Ints Kalnins