SIn 2006 there were over 280 mergers and acquisitions (M&A) worth nearly $26 billion in the global forest, paper and fiber-based packaging sector, according to a report entitled Branching Out from Pricewaterhouse Coopers (PwC), Vancouver, BC. (All figures are in $US)

North America remained at the forefront with a two-thirds share of deal values in 2006. The second largest forest products company deal in 2006 was in Canada — Domtar Inc.’s acquisition of Weyerhaeuser Co.’s fine paper business and related assets for $3.3 billion. Cascades Inc.’s acquisition of 50% of Norampac Inc. for $476 million and West Fraser Timber Co. Ltd.’s purchase of 13 lumber  mills from International Paper Co. for $325 million ranked among the 10 largest deals in North America.

The average deal size increased from $90 million in 2003 to $169 million in 2006, a good indicator of growing and recovering deal confidence over the four-year period, said PwC. The momentum behind deal activity looks set to continue with opportunities still existing for consolidation as the transformation of traditional value chains in forest, paper and packaging continues.

“The global forest, paper and packaging industry continued to face challenges in 2006 – foreign exchange fluctuations,
increased energy and transportation costs, waning demand and the impact of emerging markets on global competition,” said Craig Campbell, partner, PwC  Global Forest, Paper andPackaging practice, based in Vancouver. “In spite of these challenges, M&A activity has risen, with companies selling in 2006 off underperforming and non-core businesses. The leading players are also  seeking to extend their reach globally.” Campbell added that the sector remains fragmented regionally and globally. This fragmentation is expected to drive more M&A activity.

Highlights of recent activity include:

• Deals involving pulp and paper production dominate, having risen over four-fold from $3.2 billion in 2003 to $13.6 billion in 2006. Forestland and forestry was the next most active sector, with deals totaling $15.7 billion in the last four years.

• There have been recent deals in emerging markets such as Brazil, China, India, Malaysia, Mexico, Poland and Russia.

• The top dealmaker in 2006 was International Paper which raised $11 billion in disposals and was behind 40% of the global deal flow, featuring in five of the 10 biggest deals.

Financial investors such as private equity investors and Timber Investment Management Organizations  (TIMO) have made their mark on the sector and were involved in almost 50%, or $12 billion worth of deals in 2006.

A recent PwC survey of forest, paper and packaging CEOs found that global M&A activity appears set to continue, with 27% planning a cross-border merger or acquisition. The fundamentals for deal activity in the sector remain strong, with a sound economic  environment, low interest rates andplenty of liquidity – most notably with private equity.

Almost $9 billion worth of deals were reported in the first three months of 2007, including Brookfield Asset Management’s acquisition of Longview  Fibre and the proposed Bowater –Abitibi Consolidated deal. (See also News Briefs)

North America will likely continue as a center of M&A activity in the sector, where private equity is expected to remain a pivotal player. Private equity and other non-traditional investors will be active as the global sector restructures. Although unlikely to be a driver of major deal flow in the shortterm, the moves towards greater renewable energy (including biofuels) from woody biomass, will drive future deals. Co-ventures between forest and paper companies and both new and established energy players are also expected.

Download a copy of Branching Out: Global deal activity in the forest, paper & packaging industry at www.pwc.com/fpp.

PI

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