Industries Forest, paper & packaging

Branching out Global deal activity in the forest, paper & packaging industry April 2007

Review of 2006, the last four years and a look ahead Contents 01 Welcome 3 02 Last four years in highlight 4 03 Review of 2006 6 04 Deal drivers 7 05 Non-traditional investors 8 06 Regional focus 10 North America Europe Asia Pacific Latin America 07 The success of deals 12 08 Looking forward 14 09 Our transactions expertise 16

Key contributors: Robert Barnden, Clive Suckling, Craig Campbell, Ivan Berkes, Geoff Lucas, Victoria Marcer, Richard Skinner, David Rothnie, Michael Cracknell.

Design: Hamilton-Brown Business Graphics. 01 Welcome

In this, our first report on deal activity worldwide in the Forest, Paper and Packaging (FPP) industry, we examine the rationale behind overall deal trends, as well as regional and sectoral factors which are influencing deal flow. In doing so, we have focused on 2006, taking also a closer look at some of the key individual deals. In our first review, we have aimed to give last year’s activity some perspective, by reviewing trends over the last four years. The starting point of 2003 is deliberate as it represented the last low point in global FPP deal flow. The global forest, paper and packaging industry continued to face a period of great upheaval and a number of challenges in 2006. Macro-economic factors affecting the industry included foreign exchange fluctuations, increased energy and transportation costs, lacklustre demand at best in North America and Europe and the impact of emerging markets on global competition. Despite some relief on pricing, the pulp and paper industry in traditional producing regions continues to battle to earn its cost of capital. Some radical measures have been taken to better align supply and demand, but these do not go far enough. The industry remains too fragmented regionally and globally to take measures that would be more decisive in achieving an equilibrium that increasingly needs to be played on a global stage. Unsurprisingly in these circumstances, traditional value chains are undergoing a transformation and that is causing the break-up of vertically integrated providers, a phenomenon that is fuelling M&A activity. Companies are selling off underperforming and non-core businesses and the leading players are also seeking to extend their reach globally, whether the driver is growth, lower cost inputs, or both - and of course, ultimately, shareholder value. In this report, we reflect briefly on how the value chain for leading producers could look in the future and also on how non-traditional investors, most notably private equity, are coming to play a key role in this transformation. To date, the transformation has not happened on a significant scale - which is probably why deal levels although on the rise, remain relatively subdued compared with other industry sectors facing similar challenges. Hence 2006 can be viewed as a solid, rather than a vintage year for deal activity. Looking ahead, the fundamentals for deal activity remain strong, with a sound economic environment, low interest rates and large pools of liquidity in global markets. The question is whether the industry itself has the confidence to make the bolder moves which the forces of global competition and consolidation seem to demand.

Robert Barnden Clive Suckling

Global Leader, Global Director, Forest, Paper & Packaging Forest, Paper & Packaging PricewaterhouseCoopers PricewaterhouseCoopers

Stockholm London +46 (8) 555 330 16 +44 (0) 20 7213 1737 [email protected] [email protected]

Branching out • Forest, paper & packaging  02 Last four years in highlight

Deal values and volumes 2005 was the most active year for the Figure 2: Regional Deal Analysis sector with 296 deals worth US$43bn recover as globalisation transacted, but the statistics were 35 takes hold heavily skewed by the massive US$22bn 30 acquisition of Georgia-Pacific (G-P) by Global deal values in Forest, Paper and Koch Industries in the US. This is by far 25 Packaging (FPP) reached a peak in 2000, the largest single deal ever executed in 20 when transactions worth US$72 billion the FPP sector and we have chosen to 15 were executed with the US being the ringfence this transaction when looking at US$bn main theatre for a spate of large market deal trends. 10 consolidation activities. Since then, deal Figure 1: Global FPP Deal Trends 5 values have slumped in line with the wider

0 bear market, but also because companies 45 350 focused on repairing their balance sheets. 40 300 2003 2004 2005 2006 35 250 30 Other (Africa, Middle East) Europe (Incl. CEE, FSU) We have tracked deal activity in detail over 25 200 the last four years, since values bottomed n 20 150 Asia Pacific North America 15 at US$11.3bn in 2003. In headline terms 100 Latin America G-P

US$b 10 5 50 deal (in US$m) this shows: Source: Dealogic, PwC Analysis*

0 0 Volume and value per 2003 2004 2005 2006 • 1,057 deals worth US$98.6bn have • Transactions involving North American been transacted in the global FPP Total Deal Values G-P x targets have surged from US$4.2bn sector since January 2003. Average Value per Deal in 2003 to US$17.4bn in 2006, after Total Deal Volume • Deal values and volumes climbed adjusting for the skew effect of steadily between 2003 and 2005, while *ex exclxcl G-PG-P anandd dealsdeals wiwithth nono valuvaluee disclodisclosedsed Georgia-Pacific in 2005. Source: Dealogic, PwC analysis in 2006, 283 deals worth US$25.7bn Source: Dealogic, PwC Analysis* • Altogether the North American share were transacted. of global deal values has been rising, • Average deal size has increased from Regional highlights – last reaching 67% of total deal values in US$90m in 2003 to US$169m in 2006 and over 60% of deal values in 2006, a good indicator of growing or four years the sector since January 2003. recovering deal confidence. A look at the regional deal pattern shows • Although European M&A in the FPP that North America has remained at the sector has accounted for more than forefront of M&A activity in the last four 40% of global volumes since 2003, the years, with Europe lagging. dollar proportion has been only 20%.

 • Deal volumes in the Asia-Pacific region Forestland M&A surges as Converters hit M&A wall more than doubled over the four years, divestments accelerate but with average deal sizes remaining • Converting targets stole the show small – US$58m – this has yet to • Forestland and forestry targets have in 2003 with deals at US$4.1bn or translate into significant dollar value. been the subject of 134 deals worth 35% of global deal values in an US$15.7bn in the last four years, otherwise dull year. Since then, Emerging markets have become a making it the second largest sector in although transaction volumes have valuable source of M&A deals as FPP terms of dollar value. been maintained at around 100 deals becomes a truly global industry. In the per year, values have slumped and last two years, transactions have been • Deal volume has remained steady steadied at half their 2003 value. executed in Brazil, China, India, Malaysia, every year, with the continued Mexico, Poland and Russia. divestment of forestlands by integrated producers being the dominant trend Wood Products stays steady Figure 3: Sector Trends • From a low of US$0.9bn in 2003, deal Sector highlights – last values for wood products targets have four years 36 risen to over US$2bn per annum in 16 each subsequent year with a steady volume of deals. Pulp and Paper dominates 12 • 479 acquisitions of pulp and paper production businesses have been 8

transacted worth US$41.3bn since US$bn January 2003, representing 54% of deals by value (US$63.2bn and 64% 4 including Georgia-Pacific). 0 • M&A activity among pulp and paper 2003 2004 2005 2006

production companies has risen Pulp & paper Converters year-on-year from US$3.2bn in 2003 G-P Wood products to US$13.6bn in 2006 (excluding Forestland/forestry Georgia-Pacific). Source: Dealogic, PwC analysis*

*Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

Branching out • Forest, paper & packaging  03 Review of 2006

Deal values up 20% • Deals in Europe slumped from 2006 top deals and US$7.3bn in 2005 to US$3.3bn, on 2005 equivalent to only 13% of global deal dealmakers values last year, as companies scaled The FPP sector saw 283 deals with a • International Paper raises US$11bn in back in Europe and sought investment combined value of US$25.7bn executed disposals opportunities in the emerging markets. in 2006. The drop in deal volume was less • Domtar acquires Weyerhaeuser’s • Both volumes and values fell from dramatic, down from 136 to 107. uncoated woodfree papers business in 2005, when US$43bn worth of deals US$3.3bn deal • In Asia-Pacific, M&A was ahead of were struck. However adjusting for Europe at US$4bn, but down from • Graeme Hart’s Rank Group becomes a Georgia-Pacific, values were well up US$5bn in 2005, despite a strong rise major force in consumer packaging more than 20% on the US$21.1bn in of 18% in volume. 2005 - as was average transaction • Private equity makes further inroads size at US$169m versus US$128m. Pulp and Paper and Forestland • Financial investment in forestlands Volumes however stuttered, surges falling by 4%. deals up; Converting and Wood Products down The world’s largest forest products company, International Paper, accounted • Adjusted for Georgia-Pacific, activity North America dominates for a heady 40% of global deal-flow in was slightly up (from US$13.3bn to • The regional picture was mixed. Values 2006, featuring in five of the ten biggest US$13.6bn) in Pulp and Paper and well were down in all regions except North deals. up in Forestland and Forestry (from America (adjusted for Georgia-Pacific). US$2.1bn to US$8.0bn). However, In July 2005, International Paper Overall, North America dominated dollar values were down in Converting announced a US$8bn to US$10bn with US$17.3bn, or 67% of dollar and Wood Products. divestiture programme in order to focus value, and the five largest individual on uncoated woodfree papers, industrial transactions. packaging and selected consumer packaging (and retaining North American Figure 4: Top ten global deals in 2006 merchanting), with the proceeds to Deal Value Target Acquiror be used to reduce debt, returned to US$m Date Target Country Acquiror Country shareholders and for strategic investments 5,000 Dec 06 International Paper United States Resource United States – either enhancing core assets in its Co (3.8m acres of Management Service, forestland, Southern Forest Investment traditional markets or investing in platform US/0.4m acres, MI) Associates, and other capacity in the emerging markets. investors The main International Paper deals in 2006 3,300 Aug 06 Weyerhaeuser Co United States Domtar Inc Canada (Fine Paper business can be categorised as: & Related Assets) • The disposal of virtually all of its 1,400 Jul 06 International Paper Co United States Apollo Management United States remaining North American forest (Coated & SC Paper LP resource realised mainly through two Business) major sales to Timber Investment 1,130 Dec 06 International Paper United States TimberStar United States Management Organisations (TIMOs) Co (0.9m acres of forestland in LA, TX of 6m acres (2.4m hectares) of US and AR) forestlands for around US$6.6bn. 1,040 Jun 06 Smurfit-Stone United States Texas Pacific Group United States Thus, North American forestlands, Container Corp which had peaked at around 12 million (Consumer Packaging acres in the immediate aftermath of Business) the Champion International acquisition 990 Oct 06 Carter Holt Harvey New Zealand Hancock Timber United States in 2000, were reduced to not much Ltd (275,000 hectare Resources Group more than 0.5m acres (0.2m hectares) forestry estate) by the end of 2006. 650 Oct 06 Ilim Holding SA (50%) Russia International United States Paper Co. • Divesting non-core assets. The major 550 Sept 06 Celulose Beira Portugal Altri Portugal disposals were its US coated papers Industrial - Celbi SA business and Arizona Chemicals to 540 Nov 06 Portucel Industrial SA Portugal Investor Group Various private equity, its Brazilian coated (25.7%) papers business to Stora Enso, 500 Dec 06 International Paper Co United States Carter Holt New Zealand its Southern US sawmills to West (beverage packaging Harvey Ltd Fraser Timber and wood panel mills business) to Georgia-Pacific and its beverage Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006  packaging business to Carter capacity in uncoated fine papers of producing liquid packaging board and Holt Harvey (Rank Group). These around 5.0 million tonnes. “New Domtar” cartons, with no obvious synergies divestments and various smaller and International Paper together will with CHH. disposals, on top of the more than control over 60% of North American Before completing that deal, in December US$1bn proceeds raised in 2005, capacity. As such, the deal can be 2006, the Rank Group decided to extend brought total proceeds to over viewed as defensive, enabling costs to its international reach further when it US$11bn, more than was originally be rationalised as the operations are entered a takeover battle for Swiss-listed targeted. combined and capacity to be more SIG Holding. After bid and counterbid, in effectively managed as North American • Further investment in emerging March 2007, the Rank Group decided to demand for uncoated woodfree paper markets: up the pace, acquiring a substantial stake continues its secular decline. in SIG on the market and increasing its – In Russia, it already owned the Following this deal, speculation continues bid to 435 Swiss francs per share, valuing Svetogorsk mill, near the Finnish about Weyerhaeuser’s next move. It the group at about 2.8bn Swiss francs border but in October 2006, it remains North America’s largest vertically (US$2.3bn). This increased offer was radically increased its footprint integrated player focused very much recommended by the SIG Board. when it announced plans to acquire on regional markets. At the time of 50% of Ilim Pulp, Russia’s largest SIG is a distant number two to a writing, Weyerhaeuser was coming under pulp and paper company. The globally dominant Tetra Pak (Sweden) in valuation attributed to Ilim Pulp is mounting pressure to restructure and, aseptic beverage cartons with a strong around US$1.3bn. In March 2007, in particular, as the largest remaining presence in West and East Europe, completion of this deal is corporate owner, to unbundle its near 6 a growing presence in Asia and with still pending. million acres of North American forestland. sales of EUR1.35bn (circa US$1.77bn). On the other hand, Domtar wasted The beverage carton market is highly – It formed a joint venture in China no time in making its next move - it concentrated, with the leading players with Sun Paper to produce coated announced in December that it was to sell providing not just product but complete consumer board. its 50% stake in Norampac, a packaging packaging systems and solutions. As a – Announced an asset swap with joint venture with its Quebec neighbour, result, they exercise significant influence Votorantim Celulose e Papel (VCP) in Cascades, for Can$560m (US$476m) over the downstream value chain, creating Brazil, which completed in February in cash, in a deal intended to reduce barriers to new entrants. It is also an 2007, giving it one of the lowest cost gearing in “New Domtar”. For Cascades, attractive area due to above average uncoated woodfree paper mills in it represents consolidation in one of its growth prospects for the FPP industry. the world. chosen product grades. SIG complements Rank Group’s In short, International Paper rapidly In 2005, Graeme Hart’s Rank Group International Paper acquisition and the overhauled its traditional vertically acquired International Paper’s 50.5% combination will create a consumer integrated business from forest through stake in Carter Holt Harvey (CHH), a packaging business with significant global to a broad spectrum of pulp and paper, vertically integrated forest products reach. Elopak (Norway) with private equity wood products and fibre-based chemicals business based in Australasia. Until then, house CVC Capital Partners, was the rival businesses to become a product this successful and very private New bidder for SIG, and had been aiming to specialist with an increasingly global Zealand entrepreneur and dealmaker create a more powerful rival to Tetrapak. reach, focused on uncoated fine papers had not been active in the FPP industry. and packaging. In a series of further steps completing in H1 2006, the minority was acquired, in a The major consolidation in 2006 was the deal costing the Rank Group altogether US$3.3bn merger of Domtar, a Canadian a reported NZ$3.3bn (around US$2.1bn). forest products company, with the Since then, Rank Group has been highly uncoated woodfree papers business of active in the sector, the biggest deals Weyerhaeuser, a US integrated forest being the sale of the majority of CHH’s products company. New Zealand forestlands to Hancock The deal highlighted some of the forces Timber Resource Group for a reported at play in the sector. Domtar was being NZ$1.55bn (around US$990m) and adversely affected by the strong Canadian acquiring International Paper’s beverage dollar, while Weyerhaeuser wanted to sell carton business for around US$500m. its uncoated fine papers division as part of This latter deal is also highly significant in a restructuring. that previously, Graeme Hart’s business The “New Domtar” brings together the interests had focused on the Australasian number two and number three players region, but now his Rank Group gained in the North American market to create major North American exposure with a a clear market leader with combined business with sales of circa US$900m

Branching out • Forest, paper & packaging  04 Deal drivers

Transformation of Historically, the value chain (Figure 5) In response to growing product consisted of regionally-focused vertically commodisation and supply chain deflation value chains -integrated industry players seeking (Figure 6), a process of local and regional to maximise fibre value at all stages consolidation during the 1980s and 1990s The transformation of traditional of the value chain, from forestlands took place, as companies sought to value chains in forest, paper through pulp, paper and wood products increase scale in order to influence pricing and packaging is the central production and conversion and often and drive down supply chain costs. through to distribution. However, in the main, traditional business driver to M&A activity. Figure 6 - Historical Forest & Paper Value Chain models were retained. Despite these rounds of consolidation, which peaked in Figure 5: Historical Forest & Paper Value Chain the late 1990s, regional markets remained • Company owned forestlands relatively fragmented on the whole. Forest • Large tracks of land Figure 6: US consumer prices and Producer resource • Harvest pushes logs into the value chain prices for Pulp and Paper

• Produced strictly for paper mills 300 Pulp • Dependant on external energy providers Fragmented Vertically processing • Long-cycle pricing trends Integrated Industry • Capacity location close to fibre supply 200 • Capacity close to pulp mills and fibre supply Paper • Long-cycle pricing trends mills 100

• Small production facilities 0 • Log sort and allocation performed largely at production site Sawmills 1980 1985 1990 1995 2000 2004 2006 • Rigid production schedules and cut profiles based on costs and log sorts Index: 1980=100 • Integrated or closely located to sawmills / plywood facilities — NBSK — Repro Bond 20lb cut size Engineered • Non-core business • Speciality products with limited market acceptance — Unbleached Kraft linerboard 42lb US East wood — Consumer prices products Sources: Consumer prices-US Government; Pulp and Paper prices-Pulp & Paper Week Source: PricewaterhouseCoopers, 2006

 At best, these strategies brought especially China, and cheap fibre supply Figure 9: US consumer prices and Producer temporary relief. Good returns had been from Latin America and Asia are twin prices for Oil and Gas made when cycles were on the up, but factors changing the face of the industry. 600 the downswings were becoming more Traditional producers in North America protracted, locking the industry into a and Western Europe are becoming 500 trough of consistently poor returns displaced from both their export markets 400 (Figure 7). and, especially in North America, in their home markets also, by the new cheaper Figure 7: PwC FPP Top 100 - Return on Capital 300 Employed (ROCE) capacity in the emerging regions, as, amongst other matters, distance to market 200 14% has become less of a barrier and as 12% geopolitical risk has reduced. 100 10% Technology has also been a factor, as 0 1980 1984 1988 1992 1996 2000 2004 8% for example, low-cost short fibre from Index: 1980=100 6% the Southern Hemisphere has become — Natural gas 4% able to displace higher-cost Northern — Consumer prices — Crude oil 2% Hemisphere long and short fibres in most applications and as world-class paper Source: US Government 0% machine technology has become available 1996 1995 1994 1993 1992 1991 1990 1989 1988 2005 Through the twin process of consolidation to companies with the necessary capital. and rationalisation of assets, capital Through globalisation, access to capital Target ROCE Actual ROCE has begun to be reallocated, and will has become easier in the emerging regions. Source: PwC Global Forest, Paper & Packaging Industry Surveys continue to shift, to the emerging higher However over time, the industry was not Faced with these forces of globalisation, yield markets, thereby hopefully enabling only fighting supply chain deflation, but continued fragmentation and slow growth, mature markets at home to reach the slowing and increasingly erratic demand once-strong regional champions have correct equilibrium of production to allow for its products, as growth in paper been forced to reassess their value chains for profitable operation. M&A is a key demand either uncoupled from GDP and fundamentally re-evaluate their enabling tool as the regional champions growth or as industrial manufacturing strategies. divest those businesses reassessed as relocated to the lower-cost emerging non-core and as they seek to become On the one hand, further rounds of product specialists with true global reach. markets. Investors turned away from consolidation and the rationalisation integrated industries yielding poor returns of existing asset bases have become in the search of higher investment returns necessary. Companies have sought to exit elsewhere, which in turn hit the stock operations with little prospect of yielding prices of major pulp and paper companies acceptable returns, to concentrate on (Figure 8). product areas where they can gain Figure 8: PwC Global PPP Index v Datastream competitive edge either through cost World Market Index leadership or in specialist areas where 1 January 2000 - 2 March 2007 they can add value.

130 On the other hand, soaring demand in

120 emerging markets such as China and Russia has forced traditional players to 110 develop a global offering through foreign 100 ventures, both greenfield and brownfield. 90 At the same time, new industry players are

80 emerging in the growth markets of Asia and the Southern Hemisphere. 70

60 Whilst traditional players have sought to adjust, cost pressures in the supply chain 50 2000 2001 2002 2003 2004 2005 2006 2007 have remained relentless. Notable has been the ending of cheap energy (Figure 9), as — PwC Global PPP Index first rises in oil and related energy costs — DS World Market Index have spiralled. In Europe especially, the cost

Source: Thomson Datastream / PricewaterhouseCoopers of carbon regulation under the Emissions Trading System has had to be borne by Further impacting the landscape has the industry, either directly or, and much been the rise of the emerging markets. more significantly, as it has lifted the prices Demand from markets such as Asia, charged by energy suppliers.

Branching out • Forest, paper & packaging  04 Deal drivers

Figure 10 portrays how the future forest globalisation in the wood products value All-in-all, this value chain transformation and paper value chain may shape up, chain continue to strengthen. has driven, and will continue to drive, where vertically integrated value chains Figure 11 - Future Forest & Paper Value ChainM&A in activity.the Future within regions are replaced with value Figure 10: Forest & Paper Value Chain in the Future chains that are consolidated horizontally and globally across stages in the value • Emergence of alternative equity in Forestland ownership chain. International Paper’s transformation Forest • Long-term supply contracts to pulpmills and sawmills resource is a prime example of this major shift and in the Pulp and Paper and Converting Globally Integrated Industry Consolidated Horizontally and sectors, several players are well down the • Mills located near forestlands Pulp • Enhanced power production capabilites and energy self-sufficiency road in making this transformation. processing • Non-paper uses for wood fibre (cellulosic ethanol, non-paper pulp application, etc.) In Wood Products, the globalisation influence, whilst evident, is providing • Located close to end use less of an imperative than in paper • Flexible production schedules and customer driven products Paper mills • High efficiency speciality producers in Western Europe and North America; value chains. Strategies to shed the old low-cost commodity producers in Asia and South America vertically integrated models have driven • Increase curtailment based on market prices the uncoupling of forestlands and pulp • Super-sized mills (400+ Mbf) of leverage technology and economies of scale and paper assets to enable focus on wood Sawmills • Customer “pull” production product specialisms and building scale • Increased and more exact log sorts and log optimisation in their chosen areas on a regional rather than a global basis. Canfor, Norbord Engineered • Core businesses and Louisiana-Pacific provide examples wood • Increased usage of OSB, OSL and other low-cost products • Short-cycle pricing trends with more extreme pricing of these strategies. This, however, can products be expected to change as the forces of Source: PricewaterhouseCoopers, 2006

The entry of non-traditonal investors

At the same time, as valuations of quoted – Hedge funds, which also typically • New strategic investors. Koch FPP companies have been allowed to fall apply leverage in order to drive Industries (Koch) is the most notable relative to the market, investment in the potentially higher capital gains. example. Koch is one of the largest upside potential has become attractive to Hedge funds mainly invest in publicly family-owned companies in the US. private equity and other non-traditional quoted companies and will often It has long been a strategic investor investors. Further fuelling the private build sufficiently sizeable stakes so in the energy sector and made two equity purchase mandate has been the that they can agitate for the changes small acquisitions of pulp mills, both fall in acceptable returns driven by the that they believe will drive up value. ironically divested by Georgia-Pacific high levels of liquidity in the marketplace. They can also support classic private before its mega US$22bn public- This new money is in effect entering the equity funds in buy-outs. Investment to-private acquisition of the same vacuums created as traditional players time horizons vary as, unlike buy- company in December 2005. As a realign their value chains, hoping to out funds, they are not limited by family company, its strategy vis-à- maximise returns in the new niche investable funds with finite lives. vis Georgia-Pacific is not on public markets created. record, but based on its activities in – Real estate investment vehicles the energy sector, we have assumed There are two broad categories of non- specialising in forestlands. These it fits the strategic billing. We also traditional investors in FPP: investors are most prevalent in North include Graeme Hart’s Rank Group in America where they comprise either • Alternative investment classes, this category. Timber Investment Management comprising: Organisations (TIMOs) or Real Estate Looking forward, we can anticipate that – Classic private equity houses using Investment Trusts (REITs). These the drive to generate renewable energy leveraged buy-out strategies who investors are looking for lower risk, from woody biomass, both bioenergy and are looking for capital gain-based stable, but improving cash flow biofuels like ethanol, will drive M&A in the returns, typically over a 3 to 5 year returns typically over periods of 15 sector in future. To date investment has time horizon. These players normally years or even more and therefore entailed either new build or modification take controlling stakes so that the attract investors looking for annuity- of existing production assets, but has investee’s strategy can be shaped to type returns. already attracted a diverse range of drive the required return, including players into the sector. As the renewables the exit route. field grows, we can also anticipate new categories of strategic, and possibly also financial, investor to enter the sector via M&A.

10 Branching out • Forest, paper & packaging 11 05 Non-traditional investors

Private equity Wood Products, no major buy-outs of Whilst these categories have also featured pure Wood Products businesses have in North American buy-outs, private equity Financial investors, comprising buy-out happened, probably due to the particular moves have been bolder and they have funds and forestland investors (TIMOs risks of that segment. We do however played a pivotal role in facilitating the and REITs) have certainly made their expect that to change. restructuring of the value chains of the mark being involved in at least one side of major producers. 15% of the deals transacted in FPP over the past four years. In dollar terms, their Buy-outs This differentiation between North America and Europe is not confined to FPP - it is significance has been even greater at 48% On a regional basis, buy-out activity has or US$12bn of deals in 2006 (Figure 11). evident in other traditional manufacturing been concentrated in North America and sectors as well. Although private equity Further, financial investor involvement has Europe (Figure 12). Buy-out volumes been consistently above 30% and rising has been in Europe for more than two have been steady in Europe and rising in decades, their entrenchment varies in dollar terms over the last four years. At North America. The stark difference is in this level, therefore, the penetration by significantly by territory. It is an arguable average deal size over the last four years - point, but it is an indication of structural alternative investment classes seems to US$515m in North America and US$225m be higher than most other industries. factors that have not yet enabled private in Europe, with the latter reducing to equity to play the transformational role Figure 11: Private Equity Investment US$111m, adjusting for the skew effect of it has in North America. These factors the Jefferson Smurfit acquisition in 2005 include, a lesser degree of maturity in 16 50% % of Kappa Packaging in a deal valued All Private Equity private equity models in Europe, the n 14 at US$3.2bn. 40% shortage of sizeable targets with so much 12 Figure 12: Buy-out trends in North America of European industry remaining in closely 10 30% Buy-outs and Europe controlled hands or simply, that major 8 European players have not yet felt the 20% 12 6 25 same imperative to divest at prices which

Deal values, US$b 4 ts 10% n 10 20 make targets attractive to private equity 2 Europe ou 8 y- (or indeed anyone else).

0 0% All Private Equity / Buy-outs NA bu

2003 2004 2005 2006 15 of

Further the FPP industry is not an All Private Equity 6 er Corporate Deals (excl G-P) 10 obvious target for buy-out funds, with its

4 mb Source: Dealogic, PwC Analysis* commodity cycles and potentially high Nu

Deal values, US$b 5 2 capital intensity. Nevertheless, perceiving the glass half full, rather than half empty, Figure 12 traces the penetration of these 0 0 investor classes on a combined basis, as 2003 2004 2005 2006 private equity has seen the opportunities hidden behind poor returns from public well as buy-out activity separately. This Europe: Corporate Buy-outs (SKG deal ) shows buy-outs at 19% of deal values in NA: Corporate Buy-outs companies, the potential value creation 2006, down on the 33% in 2005, but at Note: opportunities through a sharper and more 1. To facilitate comparison, forestland deals and the 23% of total deal value (Georgia-Pacific G-P acquisition have been excluded disciplined approach to the business adjusted) over the last four years it is 2. SKG = Smurfit Kappa Group and, in some situations, more creative above the global cross-industry average Source: Dealogic, PwC Analysis* management teams. The low cost of debt (20% in 2006). This activity has been has also helped to make deals attractive concentrated in Pulp and Paper and Buy-outs in Europe have centred on financially. Converting businesses; there has been divestments of small non-core businesses limited activity to date in pure Wood of major corporates, players in small but Products businesses. Although buy- growing niches and small companies out funds have been looking at deals in in family hands or in financial difficulty.

*Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

12 Figure 13: Top Buy-outs in 2006 Outside North America, the two largest Deal Value Target Acquiror deals were: US$ m Date Target Country Acquiror Country • KKR’s acquisition of a 50% interest 1,400 Jul 06 International Paper United States Apollo Management LP United States in Tarkett, one of the world’s leading (Coated & SC Paper Business) branded producers of wooden and other resilient floor coverings. Although 1,040 Jun 06 Smurfit-Stone Container United States Texas Pacific Group United States (Consumer Packaging classified as a Wood Products Business) business, its activities are well 487 Dec 06 Tarkett AG (45%) Germany Societe d’Investissement United States downstream in that sector. Familiale SA* • Eton Park Capital Management, 434 Nov 06 Kimberley-Clark de Mexico Eton Park Capital United States along with Impulso de Desarrollos Mexico (Industrial Management LP/ Mexico Estrategicos SA of Mexico (IDESA), Products division) (60%) Impulso de Desarrollos Estrategicos SA de CV acquired 60% of PIMSA, the industrial products division of Kimberly-Clark de 350 Nov 06 Field Container Co United States Texas Pacific Group United States Mexico (KCM) in a transaction valued 295 Dec 06 WII Components Inc United States Olympus Partners LLP United States at US$434m. PIMSA, to be renamed 268 Nov 06 Packaging Dynamics United States Kohlberg & Co United States Grupo Papelero Scribe, produces a Group range of branded paper products, 159 Nov 06 American Fibre United States SFK Pulp Fund Canada including educational products and Resources/Great notebooks for the Mexican market Lakes Pulp and in which it has high market * KKR’s acquisition was effected by a 50% stake in the French investment company, Societe d’Investissement Familiale, which shares. Eton Park is a New York- acquired the outstanding shares in Tarkett. Source: based multistrategy fund set up in PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006 2004, mixing hedge fund and buy-out approaches to investing; IDESA is a In 2006, six of the eight largest buy-outs • Kohlberg & Co’s packaging company, local investment fund. For KCM, the were in North America: Thilmany LLC, performed a US$268m locally listed subsidiary of Kimberly- consolidation roll-up by acquiring Clark, the move is seen as the first • Apollo Management’s US$1.4bn Packaging Dynamics, a producer of step towards an exit from the business buy-out of International Paper’s laminates and value added converted in order to focus on hygiene and North American Coated and paper, foil and film products. Kohlberg personal care products. This deal was Supercalendared papers business led & Co specialises in mid market buy-outs the largest acquisition of any type in the way. With US capacity of around 2 and has been active in the Pulp and FPP in Latin America last year. million tonnes per annum and annual Paper and Converting sectors previously. sales of around US$1.6bn, it makes Numerous private equity groups have Apollo via CMP Holdings, one of the • In a US$159m exit deal, Cerebrus been active, ranging from small leveraged leading producers of these grades in Capital Partners sold two de-inked buy-out funds to some of the largest. North America. For International Paper, pulp mills to SFK Pulp Fund, a Toronto Whilst some funds may have an industry it marks a complete exit from these listed income trust which owns one of focus, most, and especially the largest, product grades, and for Apollo their Canada’s largest market pulp mills. tend to diversify. Apart from the generalist first significant deal in the industry. nature of most private equity houses and Although just outside the top eight deals, buy-out funds, diversification mitigates • Texas Pacific Group’s (TPG) Third Avenue Management LLP, a New risk, by avoiding undue exposure to US$1.04bn buy-out of Smurfit-Stone’s York hedge fund built up a 38% stake any one sector. Amongst the largest consumer packaging business also in Catalyst Paper, a British Columbia houses, Texas Pacific Group and Apollo marks a first significant move by (BC) based newsprint producer that had Management have gained significant TPG into the sector. The business produced losses for several years. The exposure with their deals last year; was renamed Altivity Packaging and effective change in control was initiated Cerebrus Capital Partners has invested in subsequently bolted on Field Container in an attempt to drive costs out of the and out of smaller FPP businesses in the for US$350m, a family-owned business and generate a resulting increase past, but its current main holding is New company producing folding cartons. in share price. Subsequent to the closing Page, one of the largest North American For Smurfit-Stone, the deal marked its of this deal, Catalyst Paper’s CEO and producers of coated papers. Although not total exit from the consumer packaging CFO announced their resignation paving active in any major deals in the sector in business enabling it to concentrate on the way for the appointment of a new CEO 2006, Madison Deaborn Partners, based corrugated packaging where it is the selected by the new Board of Directors, in Chicago, continues with the largest clear market leader in North America. which is now comprised of a majority of exposure to the sector, with acquisitions non-executives hand-picked by in North America such as Boise Cascade, Third Avenue. Buckeye Cellulose, Graphic Packaging Corporation and Packaging Corporation

Branching out • Forest, paper & packaging 13 05 Non-traditional investors

of America. It is also the main shareholder Figure 14: Top Forestland Transactions in 2006 in Irish-based Smurfit Kappa Group, Deal Value Target Acquiror Europe’s largest industrial packaging US$ m Date Target Country Acquiror Country group, which went public in March 2007. 5,000 Dec 06 International Paper United States Resource Management United States Co (3.8m acres of Service, Forest Outside North America, the largest private forestland, southern Investment Associates, equity investor in the sector is London- US/ 0.4m acres, MI) and other investors based CVC Capital Partners. In Europe, its 1,130 Dec 06 International Paper United States TimberStar United States two main sector acquisitions have been Co (0.9m acres of the Dutch-based Kappa Group, since forestland in LA, TX rolled up into Smurfit Kappa, and Lecta, a and AR) group that combines three leading coated 990 Oct 06 Carter Holt Harvey New Zealand Hancock Timber United States wood free papers producers in Spain, Ltd (275,000 hectare Resources Group forestry estate) France and Italy respectively. Last year, via its Asian arm, CVC Asia Pacific, a joint 140 Jul 06 Mining Assets Canada Wagner Forest United States (500,000 Acres of Management Ltd venture with Citigroup, it almost sealed Timberlands in Nova a 30% stake in Shandong Chenming, Scotia, Canada), part China’s largest paper company, in the of Neekah Paper form of US$623m of new equity 90 Jun 06 Soterra LLC (56,000 United States Plum Creek Timber United States for expansion. acres of timberland), Co Inc part of Glatfelter In the emerging markets, the major Source: opportunities for private equity arise from PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006 businesses requiring capital for expansion and growth, rather than through traditional Producers have been replaced by TIMOs options, essentially selling land for higher- value chain restructuring. and also REITs, with the producers value development, such as for residential typically entering into long-term wood purposes. supply agreements at market prices The rush of non-traditional investors Forestland investors with the new owners in order to secure into US forestlands has driven up land Since its peak in around 1980, when fibre supplies. TIMOs are privately- prices and created fears of an “asset integrated forest products companies owned forestland investment structures, bubble”. However, ultimately, the value represented the largest ownership typically established as private equity of forestlands is constrained to the end category of non-public managed limited partnerships. Notable TIMOs use product, namely wood products and forestland in the US, there has been a include Hancock Timber Resources pulp. In recent years, demand for wood near role reversal with financial investors Group, Wagner Forest Management, products has benefited from a buoyant taking their place, as producers have The Forestland Group and Forest Capital US housing market, although the tide disavowed the virtues of land ownership Partners, all with their headquarters in turned sharply in 2006, causing US wood to ensure fibre security. Of the few who New England, US. prices to fall to their lowest levels for retain significant holdings, none seems REITs are often publicly quoted and several years by H2 2006. Turning into likely to maintain the full integrated usually have their origins as integrated 2007, these trends in wood markets had model, with all look set to unbundle their forest products producers which have not caused any appreciable capital flight forestlands voluntarily or under pressure. sought to enhance shareholder value by out of US forestlands, but it’s clear that Going into 2007, Weyerhaeuser, concentrating on forestland investment matters remain finely balanced at the time MeadWestvaco, Longview Fibre and and management and to do so have of writing. Temple-Inland were the only significant converted to REITs. The largest REIT is Looking ahead, wood-based energy and integrated producers remaining. Since Plum Creek, which owns close to 9m biofuels may offer a significant alternative then, Longview has been acquired by acres (3.6m hectares) of US forestland. route to monetising wood fibre and capital Brookfield Asset Management in a deal Both TIMOs and REITs enjoy tax is flowing in to exploit these opportunities. valued at around US$2.1bn, Temple- advantages compared with traditional However, it is still early days. Inland has decided to unbundle its corporate investors in real estate and this forestlands and MeadWestvaco has The largest TIMOs have ceased to be has helped boost the returns they can announced plans to sell around 300,000 wholly dependent upon North American generate. However as a consequence, acres (121,000 hectares) or about one- forestlands by extending their reach into they are subject to rules that require third, of its remaining US forestlands. At Australasia and Latin America, with other them to distribute most of their annual the time of writing, Weyerhaeuser, which regions also being eyed up. Overseas income and are most suited to institutional still owns more than 6m acres investment can be expected to take an investors seeking annuity type returns. (over 2.4m hectares), is known to be increasing share of investment money, Apart from the tax advantages, returns looking at its strategic options. thereby offering investors greater regional by these investors have been enhanced diversification. through using higher and better land use

14 The reported value of forestland is one of the oldest TIMOs, it had been In Europe also, institutional investment divestments to financial investors hovered fairly small until this deal. Timberstar, the has been attracted to forestland. However, around US$2bn per annum between TIMO which acquired 0.9m acres (about direct ownership of forestland by 2003 and 2005. Needless to say the 360,000 hectares) for around US$1.13bn European producers has always been on massive divestment by International Paper is believed to have acted alone. a much less significant scale than for their caused deal values to shoot up in 2006 to US counterparts. In the main, European US$7.7bn and their divestments to TIMOs One non-North American transaction forest and paper companies that own represented the two largest transactions featured amongst the top deals, this being forestland have tended to retain these last year. Hancock Timber Resources Group’s assets; a notable exception is Stora Enso, Resource Management Service (RMS) led acquisition of most of CHH’s New Zealand which divested majority ownership of its the consortium that acquired 4.2m acres forestland estate of 275,000 hectares forestland holdings in Finland and Sweden (about 1.7m hectares) of mainly US South (about 680,000 acres) with a reported deal between 2002 and 2004 to Nordic-based forestlands for around US$5bn, with RMS value of around US$990m. financial institutions. retaining more than half. Although RMS

Branching out • Forest, paper & packaging 15 06 Regional focus

North America US firms have completed the biggest Since then, the industry has been tasked deals, with a wave of major mergers with transforming its value chain with the North America has led the way and acquisitions in the run up to the non-traditional investors into the sector new century: Georgia-Pacific buying facilitating the way. And consolidation in regional consolidation in the Fort James, International Paper buying has continued with the result that in pulp, paper and converting Champion International and Union Camp, most grades, the North American market sectors as domestic players the merger of Stone Container and the is now more, and in areas such as US arm of Jefferson Smurfit to create containerboard, far more consolidated have built up scale by merging Smurfit-Stone, Weyerhaeuser snapping than in Europe. with or acquiring rivals. up Willamette Industries and the merger At the time of writing, the US$2bn between Westvaco and Mead. These were plus merger of Bowater and Abitibi- all deals individually valued in the range Consolidated is pending clearance by of US$5-11bn. As a result, the top five the competition authorities. If approved, producers moved from a combined share this would create the world’s largest of about 25% of the total North American newsprint producer, with some 40% of market to close to 40%, a significant the North American market and also with advance but still relatively fragmented a high share of the market for uncoated given the maturity of markets. magazine grades. This is a defensive There was a cost however. Many carried move, linking the top two North American a heavy debt burden into the weakening producers giving the opportunity to markets of the new century and many manage capacity downwards as the of the deals left acquirers with sprawling market for newsprint continues to decline. portfolios of assets across a wide range Canadian companies have had special of forest product sectors. In short, many difficulties, with a soaring Canadian dollar, of these deals didn’t pay their way and which has hit exports to its southern investors lost interest. neighbour especially and the government has supported the industry with subsidies.

Figure 15: Top deal in North America in 2006 Deal Value Target Acquiror US$m Date Target Country Acquiror Country 5,000 Dec 06 International Paper United States Resource Management United States Co (3.8m acres of Service, Forest forestland, southern Investment Associates, US/ 0.4m acres, MI) and other investors 3,300 Aug 06 Weyerhaeuser Co United States Domtar Inc Canada (Fine Paper business & Related Assets) 1,400 Jul 06 International Paper Co United States Apollo Management LP United States (Coated & SC Paper Business) 1,130 Dec 06 International Paper United States TimberStar United States Co (0.9m acres of forestland in LA, TX and AR) 1,040 Dec 06 Smurfit-Stone United States Texas Pacific Group United States Container Corp (Consumer Packaging business) 500 Dec 06 International Paper Co United States Carter Holt Harvey Ltd New Zealand (Beverage Packaging business) 476 Dec 06 Norampac Inc (50%) Canada Cascades Inc Canada 350 Nov 06 Field Container Co LP United States Texas Pacific Group United States 325 Nov 06 International Paper Co United States West Fraser Timber Canada (13 lumber mills) Co Ltd 296 Dec 06 WII Components Inc United States Olympus Partners LLP United States

Shaded deals involve private equity Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

16 This has not stopped widespread capacity Europe big focus on energy costs, increasing the closures. In wood products, these share of renewables and reducing energy difficulties were compounded in 2006 Europe is a story of two halves. usage- apart from the knock on effects of by the slump in the US housing market. higher oil and gas prices, producers had Eastern Canada is currently the highest Although generally less mature to contend with the pass through costs of cost producer in the world and its leading than North America, Western carbon regulation under the EU Emissions companies are in difficulty. European markets are showing Trading Scheme. Indeed, spiralling energy costs have been the death knell of many For timber producers, some respite has similar pains; in contrast, marginal mills; Rottneros Bruk (Sweden) been provided by the settlement of the Central and Eastern European went further, announcing recently that long running softwood lumber trade it planned to dissemble and relocate its dispute with the US, which has resulted in markets are growing strongly. modern CTMP market pulp mill from Canadian-based wood exporters receiving Sweden to South Africa for this reason. around US$4bn in compensation. For Western Europe some, this provides the opportunity for For Western European producers, it has An issue to challenge producers is the debt alleviation- for others, it provides the been a benefit to have growth markets appreciation of the Euro versus the opportunity to enhance competitiveness next door, providing new markets for US dollar. Despite cuts, capacities still with select acquisitions. West Fraser product and investment. However, this assume that Western European producers Timber is a case in point, acquiring has not been enough to haul producers can export their surplus. This is looking International Paper’s sawmills in the from the trough of low returns suffered by less sustainable with the strength of the Southern US for US$325m thereby their North American counterparts. euro and with Asian producers becoming strengthening its sourcing and supply more competitive in Western European base in one of the lowest cost regions of Over the past four years, although M&A producers’ traditional export markets. North America and gaining access to new volumes have remained fairly steady, Looking at the larger deals last year, the customers. This deal propels West Fraser dollar values have dwindled and at two biggest were in Portugal. Stora Enso Timber into the number two slot in sawn US$3.3bn in 2006, they were under a third (Finland) sold its Celbi eucalyptus market wood production in North America behind of their value in 2000. The major European pulp mill to Altri, a local holding company Weyerhaeuser. players have been busy with operational improvements, including adjusting which has been building up its interests in Despite the slump in US housing demand, capacity downwards to better align with the Portuguese pulp and paper sector in North America remains by far the largest demand. Apart from mill and machine a deal worth EUR428m (about US$550m). market worldwide for construction-grade closures, there have been many smaller The deal allows Stora Enso to concentrate wood products, and it is reasonable size disposals and acquisitions, on building up its pulp interests in to assume that the current downturn including buy-outs. South America. is cyclical. The market remains highly The second was the seasoned equity fragmented, so there is plenty of scope for Some of the larger investment budgets offering by the State of Portugal of its further significant regional consolidation were devoted to building capabilities remaining 25.7% stake in Portucel, the in wood products. In consequence, the in emerging markets-from plantations country’s largest pulp and paper company rationale for leading producers to acquire through to production. Otherwise, and one of the largest producers of or set up operations overseas is less investment budgets have become more uncoated woodfree paper in Europe. The compelling. modest, with money at home being spent on improving core asset quality tender offer to private investors raised In contrast, for the major paper and and performance. This has included a EUR415m (about US$540m). packaging producers, growth must come from overseas and in the emerging markets especially. Ironically, many of Figure 16: Top deals in Europe in 2006 the leading producers recognised the Deal Value $ Target Acquiror opportunity of the emerging markets million Date Target Country Acquiror Country at an early stage and set up operations 650 Oct 06 Ilim Holding SA (50%) Russia International Paper Co. USA there. However, few have grown their 550 Sep 06 Celulose Beira Industrial- Portugal Altri Portugal presence and, indeed, some have exited. Celbi SA With consolidation now becoming well 540 Nov 06 Portucel Industrial SA (25.7%) Portugal Investor Group Various advanced in most grades, the opportunity for major acquisitions in North America 487 Dec 06 Tarkett AG (45%) Germany Societe d’Investissement France Familiale SA has reduced. Amongst the largest producers, International Paper for one 430 Sep 06 Aker Kvaemer ASA (Pulping Norway Metso Finland and power business) has set its eyes firmly on growth in the emerging markets in its chosen product 120 Dec 06 Demolli Industria Cartaria Italy Sonoco Products USA SPA (75%) categories. Shaded deals involve private equity Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

Branching out • Forest, paper & packaging 17 06 Regional focus

In another sizeable deal, Metso, the Pacific’s announcement, later withdrawn, industry of growing strategic importance world’s largest pulp and paper machinery that it was reviewing the options for its as evidenced by the recent revisions to builder, acquired Kvaerner’s pulping sizeable European tissue business and the country’s Forest Code and recent and power machinery business in a the US$2bn plus bidding battle for SIG increases in export tariffs on unprocessed deal valued at around EUR335m (about Holding described earlier. timber. It is also becoming increasingly US$430m). The deal enables Metso attractive as an end consumer market. Further, as the battle for SIG drew to a to extend its technology and service conclusion in March 2007, the scene Unlike other “emerging” markets, Russia offering in chemical pulping, chemical continued to heat up with the IPO of has an established forest products recovery and pulp process-related power private equity-backed Smurfit Kappa infrastructure, which dates from the Soviet generation. To comply with an EC Group (SKG), listing in Dublin and London, era. Given the dufficulties associated competition authority ruling, certain parts in a float valuing the equity at around with greenfield, investment in pulp and of the business were resold. EUR3.4bn (US$4.5bn) and giving an paper has tended to focus on upgrading There were no other deals approaching enterprise value of around EUR7.7bn the ageing asset base and related these in value, reflecting the paucity of the (US$10.2bn). Proceeds raised by way of infrastructures where economic. Indeed, FPP deal market in Europe last year. There new shares of EUR1.3bn (US$1.7bn) are this has been the strategy of the two had been expectations that conglomerate to be used mainly to repay debt. largest FPP acquirers into Russia to date, Anglo American, the natural resources Mondi and International Paper. With Mondi’s IPO also pending, there group, would demerge Mondi, its paper is expected to be a feast of new public Further, with the concentrated ownership and packaging business, in autumn 2006 equity in the sector in Europe, something structure of much of Russian industry - but the transaction, likely to involve a that hasn’t happened for very many years. and the long tail of poor quality assets dual listing in London and Johanesburg, that it is uneconomic to upgrade, quality is now scheduled for mid-2007. Valuation Also in March 2007, SCA (Sweden) acquisition targets are in short supply. estimates range - with most centring announced it will be acquiring Procter This is reflected in the small scale of on an equity value of around £4bn & Gamble’s (P&G) European tissue deal activity in the past four years, where (US$7.8bn). operations in a deal valued at EUR512m typical transactions have involved the (US$680bn). Tissue is one of the higher The absence of significant deals in recent acquisition of logging contractors with growth areas in Western Europe and years is something of a surprise. Of timber concessions by Scandinavian this deal will consolidate SCA’s market- course, the European industry has never and Far Eastern businesses seeking to leading position in that segment in that been as heavily invested in forestlands strengthen their wood supply chains. region with the potential to extend its as its North American counterparts, but reach in both branded and private label The introduction of a series of steep otherwise the essential conditions that products. For P&G, it marks a strategic increases in export duties on unprocessed have driven the larger transactions in exit from a region where its market share timber starting from April 2007 is designed North America are present in Europe, was small to concentrate on to encourage investment in local value- not least a relatively fragmented industry North America. added processing. This could mean that structure and a large pool of private some of the many greenfield schemes equity money. In the first three months of 2007, the under discussion will eventually come acquisitions of SIG Holding and P&G Western Europe ten years ago was to fruition. Europe together with Pfleiderer’s ahead of North America in terms of (Germany) SEK2.73bn (US$390m) Somewhat bucking the above trend is market consolidation, but has since been acquisition of laminated floorings International Paper’s planned acquisition overtaken, with the top five European producer, Pergo (Sweden) with a of a 50% interest in Ilim Pulp. Assuming producers now controlling less than 40% combined value of almost US$3.4bn is the transaction completes, it will provide of regional capacity and with a long tail greater than the total value of transactions immediate access to the most extensive of smaller producers. By major product in Europe for the whole of 2006. This is vertically integrated paper products grade, North America is ahead or well an indicator perhaps that confidence is value chain (sawmills are excluded ahead of Western Europe in consolidation, growing stronger and 2007 will produce a from the deal) in the country. Further, except in magazine papers. much stronger deal flow. it could provide potential for significant The pattern of smallish deals is consistent further growth as signalled by the with a deal market lacking in confidence, Eastern Europe - Russia related announcement of plans to invest which is certainly not consistent with the Russia is starting to emerge as a key US$1.2bn in Ilim Pulp’s four mills over the M&A market in Europe as a whole. Instead region in the globalisation of FPP based next five years or so. it indicates there are organisational and on its vast forest resources. Comparatively institutional barriers that are preventing or low labour costs and low energy costs at least delaying the flow of major deals. (for the moment at least) are other pluses. That said, as a dull year drew to a close, Further, although not on par with oil & some sparks were provided by Georgia- gas, forestry, pulp and paper is clearly an

18 Asia Pacific used overseas markets to secure fibre The Hokuetsu situation triggered a supplies for many years. However, moves number of smaller defensive cross- Asia Pacific is a diverse region to build or acquire paper production shareholding moves, which all-in-all overseas, and hence secure new sources suggest the Japanese paper industry ranging from the mature of growth, have been more limited. In remains unprepared to fundamentally Japanese and maturing short, the Japanese pulp and paper realign. companies have played a limited part as Australasian markets to the One consolidation move, however, which the global FPP industries realign. huge and fast-growing Chinese did succeed was in speciality paper with market and other fast growth In 2006, Oji Paper, the market leader, Tokushu Paper acquiring Tokai Pulp & sought to break the stalemate with Paper in a Yen22.6bn (US$190m) deal. markets of South and South- an almost unprecedented attempt at East Asia. Deal drivers in this a hostile takeover of Hokuetsu Paper China region are therefore equally Mills, Japan’s sixth largest producer. Its In a relatively short space of time China US$1.4bn takeover bid failed, as a series diverse. has become the world’s biggest paper of defensive measures came into play, and packaging market behind the US and Japan which in effect preserved the status quo. it has become central to the strategy of These measures accounted for some of major players. Significant consolidation has already the largest completed deals in Japan occurred and in all the main paper last year. The increased supply of paper, packaging grades, the top five players, all domestic, and wood products is primarily export Hokuetsu issued new shares to the giant control between 70% and near 100% driven with huge investments in world- trading house Mitsubishi for Yen30.4bn of the market. However, this has not class production facilities having been (US$265m) giving Mitsubishi a 24.4% been enough to boost performance and made and continuing. In some areas, stake at a price which undercut Oji measures to solve overcapacity have been especially low cost labour for producing Paper’s offer and making it the largest limited, even as the problem has been joinery products, furniture and certain shareholder in Hokuetsu. The support of made more acute by the steady erosion speciality papers, China has been playing Nippon Paper Group, Japan’s second of domestic and regional market share by to its strengths, but otherwise enjoys largest paper producer, was also enlisted, Chinese producers. In effect, a position limited natural advantages for FPP buying an 8.85% stake in Hokuetsu, for of near stalemate had developed as the production. US$133m. Nippon Paper Group also major players watched and waited for their offered Hokuetsu a friendly alliance and Indeed, capacity has been expanded to competitors to make the first move. a ceiling of 10% on its stake - a loose the point where in 2006, China became a All major Japanese companies, quite often operational alliance was announced significant net exporter of paper products, through the giant trading houses, have towards the end of 2006. with the potential to significantly disrupt established trade flows in the region Figure 17 Top deals in Asia Pacific in 2006 and more widely. Many in the industry Deal Value Target Acquiror are holding their breath and hoping that $4m Date Target Country Acquiror Country capacity expansion in China will slow to 990 Oct 06 Carter Holt Harvey Ltd New Zealand Hancock Timber United States allow domestic demand to catch up. (275,000 hectare forestry Resources Group With the emphasis on new build (and estate) forest planting), deal activity has focused 355 Jun 06 Carter Holt Harvey Ltd New Zealand Rank Group New Zealand on fund-raising and joint-venturing rather (14.3%) Investments Ltd than conventional M&A. With only a trickle 265 Aug 06 Hokuetsu Paper Mills Ltd Japan Mitsubishi Corp Japan of smallish deals occurring in 2006, in the (23.7%) near future, this pattern seems unlikely 261 Dec 06 Sabah Forest Industries Malaysia Ballarpur Industries India to change. Sdn Bhd (97.78%) Ltd|JP Morgan Securities (Asia Pacific) Many international players who are not Ltd in China already are waiting to see how 220 Jun 06 PT Kiani Kertas Indonesia United Fiber System Singapore the market shapes up, in anticipation Ltd that there will be casualties from over- 190 Nov 06 Tokushu Paper Mfg Co Japan Tokai Pulp & Paper Japan investment. Ltd Co Ltd 140 Mar 06 Shandong Sun Paper Co China International Paper Co United States The headline transaction last year was the Ltd (Coated paperboard IPO in Hong Kong of Nine Dragons Paper manufacturing business) (Holdings). The IPO valued Nine Dragons 133 Aug 06 Hokuetsu Paper Mills Japan Nippon Paper Japan at around HK$13.5bn (around US$1.8bn) Ltd (2.47%) Group Inc with HK$3.4bn (around US$438m) being Shaded deals involve private equity raised, equivalent to 25% of its enlarged Source: equity. Funds raised were used to reduce PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

Branching out • Forest, paper & packaging 19 06 Regional focus

the sizeable debts it had accumulated towards organised retailing – all key Kiani Kertas pulp mill in East Kalimantan to fund its phenomenal growth. The float drivers of growth for forest products. in July 2005 with a view to acquisition. excited considerable interest and was However, the shortage of native wood The Kiani Kertas mill had been troubled significantly oversubscribed. fibre, along with prevailing regulations on from its inception and had been unable plantations, is a potential limiting factor. to operate anywhere near its 525,000 Nine Dragons Paper exemplifies the cut tpa design capacity. In February 2006, and thrust of paper production in China. This was a major driver behind Ballarpur UFS reported that it had entered an Just over ten years ago, its business in Industries’ acquisition of Lion Forest agreement to acquire the mill from its effect comprised the import of waste Industries’ controlling interest in Sabah Indonesian owners. However, no deal was paper. Since then, it has grown to become Forest Industries for US$261m -a deal executed and in December 2006, UFS the largest China mainland producer of for which Ballarpur, India’s largest released an update statement explaining containerboard with a share of around papermaker, teamed up with JP Morgan that “the Company continues to review 20% and ambitions for further major Securities (Asia Pacific). the various alternatives to move forward domestic expansion. This was the first overseas acquisition of with the acquisition and that the funding South and South-East Asia an integrated pulp and paper business for the proposed acquisition remains in by an Indian company. The acquisition place”. In the meantine, it is understood Asia, other than Japan and China included a long-term lease from the that UFS continues to provide working represents a huge population of mainly State Government of Sabah (Malaysia) capital, but in the absence of any further good growth markets and which is seeing of 289,000 hectares (around 710,000 announcement, it is assumed that the significant investment in capacity for acres) of forestland. The deal expands deal, reported to be valued at US$220m, wood processing and pulp and paper Ballarpur’s presence in the region, and remains on ice. production. Indonesia and to a lesser the company believes that the forest extent Malaysia are the fibre baskets concession will support growth, with for the region, although plantation suggestions that the site could support developments linked to wood products a large new pulp mill in the future, to go and pulp/paper production are taking towards meeting Ballarpur’s growing place across the region. All of this is fibre needs. driving a good volume of smaller sized deals. In another transaction centred on fibre supply, United Fibre System (UFS), a In India, demand is growing fast, with Singapore listed investment company, a rapidly increasing middle-class, with interests in forestry and property and urbanisation, growing literacy, industrial plans for pulp investments in Kalimantan and service sector growth and movement (Indonesia) took over management of the

20 Latin America 1 million tpa bleached eucalyptus pulp mechanical papermill, together with mill jointly owned by UPM and Metsaliitto, a sawmill and approximately 50,000 Due to the high availability of both of Finland, on the River Uruguay hectares (about 120,000 acres) of land (scheduled to open later this year at an of which 60% is planted mainly with quality, fast-growth fibre, Latin investment cost of around US$1.2bn), pine. The deal provides Stora Enso with America has seen significant represents Uruguay’s largest ever a strong platform from which to develop greenfield investment. industrial project. its regional presence in one of its core grades, offering also the potential for Given the large volume of greenfield The region is dealing with many of the export. Since doing that deal, Stora Enso investment, conventional M&A volumes same issues as their counterparts around has been looking at options in regard in the sector to date have been modest. the world, with increases in fuel prices to the sawmill along with related wood However the average deal sizes, where and other input costs also affecting supply arrangements, as this asset does reported, have been a good size and their business. The main producing not fit with its strategy in Latin America. countries are also facing appreciation running close to the global average. of their currencies versus the US dollar. In years prior to 2006, many of these Arauco was at the centre of another large Nevertheless, they remain among the featured Brazilian pulp and paper deal in the region, buying Cementos lowest-cost producers. companies repositioning their local Bio Bio’s forestry assets located in portfolios. Chile comprising pine plantations and a Brazil has been the biggest magnet sawmill. In a deal valued at US$135m, In 2006, the largest deal was the asset for major investment by domestic and this represents a further consolidation swap between International Paper and international companies in plantation- of the export-oriented forestry sector in local producer, VCP, although no value based forestry with forward integration Chile, where Arauco and CMPC together has yet been reported for that transaction. into pulp and wood products production dominate forestry operations in the Under the terms of the deal, International and with a strong focus on export country. markets, from North America to Europe Paper exchanged its in-progress pulp mill and even as far as China. Investment in at Tres Lagoas in Mato Grasso do Sul With the growth, strong financial paper production has been more muted (with around US$1.15bn in pre-funded performances and competitive positions of but is increasing as the local market project costs) and surrounding plantation the major Latin American producers and becomes more interesting in its own right. forests for VCP’s Luiz Antonio uncoated the increasing reach of their products into paper and pulp mill and adjacent global markets, it would be unsurprising Chile’s leading producers and also the plantations in the state of Sao Paulo. if at least one did not emerge as a truly largest forest products companies in International Paper plans to expand global player in the coming years. the region - Arauco and CMPC - have uncoated paper capacity at the site and continued to invest principally in domestic the deal enables VCP to increase its focus pulp and wood products businesses again on pulp. with an eye to export markets, and also in The next largest deal in Brazil also production in neighbouring countries. featured International Paper, this time Uruguay is now witnessing a surge selling Vinson Industria de Papel Arapoti of mainly inward investment offering, and Vinson Empreendimentos Agricolas to as it does, an attractive environment Stora Enso. Located in the southern state for plantation forestry and forward of Parana, the deal valued at US$420m processing. In particular, the Metsa-Botnia comprised South America’s only coated Figure 18: Top deals in Latin America in 2006 Deal Value Target Acquiror US$m Date Target Country Acquiror Country 434 Nov 06 Kimberly-Clark de Mexico Eton Park Capital United States Mexico SA de CV Management LP / (Industrial Products Impulso de Desarrollos Division) (60%) Estrategicos SA de CV 400 Sep 06 Vinson Industria Brazil Stora Enso Oyj Finland de Papel Arapoti Ltda / Vinson Empreendimentos Agricolas Ltda 135 Apr 06 Cementos Bio Chile Celulosa Arauco y Chile Bio SA (Pine tree Constitucion SA plantation, sawmill and manufacturing plant, Chile)

Shaded deals involve private equity Source: PricewaterhouseCoopers analysis based on published transactions from the Dealogic “M&A Global” database, December 2006

Branching out • Forest, paper & packaging 21 07 The success of deals

22 Despite growing deal activity, consolidation deals in the FPP sectors have not been an unqualified success. Earnings and stock prices of companies in the FPP sector have continued to lag and generally have failed to create much in the way of shareholder value The huge challenge of making acquisitions add value beyond an initial rise in share price is not confined to FPP. Research from PricewaterhouseCoopers, consistent with similar studies, shows half of all mergers since 1990 have eroded shareholder value primarily due to poor integration planning. Acquisitions rarely fail due to a flawed strategy; rather failure is most often a result of not executing the strategy in a timely fashion. Successful integration must happen fast and systematically – the first 100 days are crucial. In its keenness to execute a deal, an acquiring company does not always consider all of the integration issues that will prove crucial to a deal increasing shareholder value. Issues particularly relevant to the FPP sector are the traditional values of its companies; its ageing workforce; and its entrenched business procedures and supporting technology. Due diligence is often limited to financial and operational risks with little or no focus on differences in corporate cultures, operating philosophies and management practices. These factors can be among the most challenging aspects of an integration effort. Industry leaders also recognise the challenge. Indeed, PricewaterhouseCoopers 10th Annual Global CEO Survey, which surveyed the views of 1,100 CEOs across all industries, revealed that three quarters of FPP CEOs felt that cultural issues were an obstacle in completing deals, especially cross-border, compared with 45% of their peers. Successful integration efforts are run as a project with a Steering Committee, or equivalent, empowered to establish a vision of integration success, to make decisions and to allocate resources. Integration teams consisting of employees from each of the legacy companies should be established well before the deal closes to develop and implement detailed integration plans. Engagement of employees in these teams generates morale and builds momentum and support for the integration effort. Effective evaluation of integration success is often neglected. Synergy targets need to be identified as part of the planning process so that the key value drivers of the deal are incorporated into the integration plans and ownership for achievement of these targets can be identified. Progress against the vision of success and measurement against synergy targets must be evaluated on a regular basis in the post-merger period, and shortfalls immediately addressed to ensure the benefits of the merger are not lost or diminished. This is a key learning from successful serial acquirers.

Branching out • Forest, paper & packaging 23 08 Looking forward

Despite recent nervousness will come from the emerging markets, the 2007 is already off to a strong start fragmentation in home regions cannot with almost US$9bn of deals reported in the capital markets, the be ignored whatever barriers need to be in the first three months, well up on broad fundamentals for a good overcome. In turn, both strategies will the same period last year. Featuring deal flow remain in place – a likely entail the largest players shedding significantly in the first quarter have businesses to focus on fewer been Brookfield Asset Management’s sound economic environment, product areas. acquisition of Longview Fibre, the agreed low interest rates, plenty of combination between Bowater and Abitibi In the emerging markets, major deal flow Consolidated and Rank’s recommended liquidity, most notably with cannot be expected in the near future. bid for SIG Holding $2.3bn, deals with a However at some stage, we can expect private equity. In FPP too, combined value of around US$5.5bn. If a process of portfolio restructuring and the conditions are there to this is the tone of things to come, 2007 consolidation to gain sway. drive activity – continued could turn out to be busier than last year. underperformance, the need to And what role will private equity play? A poll of North American buy-out fund realign portfolios, to consolidate managers earlier this year revealed and extend reach into the that the vast majority are looking to do more deals in Europe and the emerging emerging markets. Indeed markets. Whilst North America can be continued underperformance expected to remain a favourite hunting must act as a spur for the major ground, the higher levels of private equity penetration, the greater competition for players at least to remodel and deals and the need to diversify to keep reposition themselves in the risks at acceptable levels, mean that it changed environment of global makes sense to be looking elsewhere. A competition. similar pattern can be expected in FPP. Private equity can be expected to remain Deal sentiment within the FPP industry a pivotal player in North America. In is also strong. PricewaterhouseCoopers Europe, their role can be expected to Annual Global CEO Survey revealed that enlarge if the consolidation and product 27% of FPP CEOs were planning a cross- focus moves that need to happen do take border merger/acquisition versus 15% place. Indeed, they could become the amongst the peer group. prime movers. In the emerging markets, North America will continue to be a centre their opportunities will be fewer; however of deal activity. More mergers can be with their ability to execute quickly, they expected to consolidate market positions can be expected to be key actors where – the exit from forestlands will continue as acquisition opportunities arise. In the will moves towards a more singular focus meantime, private equity could become on core products. a source of growth capital to emerging market players. The downturn in the US housing market could act as a spur for consolidation in Although unlikely to be a driver of major wood products as the stronger players deal flow in the short-term, the moves sweep up their smaller competitors towards greater renewable energy or even pair up bigger players in what (including biofuels) from woody biomass, remains a highly fragmented marketplace. will drive deals in due course. Indeed, Canadian sawn timber producers some FPP players are already adopting armed with funds from settlement of strategies to establish energy generation the softwood lumber dispute might be as discrete business units. The shape of expected to be key players. deals can only be a matter of speculation at this juncture, but in the early stages, In Europe, deal flow so far in 2007 co-ventures between FPP companies has been much stronger than in and both new and established energy 2006. However will the momentum be players can be expected. In the short maintained? The major players have term however, the main impact of the choices. Do they seek to consolidate push to renewable energy will be greater market positions in Europe or do they competition for wood fibre, as is already focus on the emerging markets? In reality, being witnessed in many parts of Europe. they will need to do both. Whilst it is clear This is turn will add pressure for FPP that organic growth or low cost inputs companies to restructure.

24 Branching out • Forest, paper & packaging 25 09 Our transactions expertise

PricewaterhouseCoopers Transaction Services Our Operations team can help identify value in the pre-deal phase and capture that value in the post-deal 100-day planning and Corporate Finance teams bring unparalleled phase of the transaction. In addition, our industry specialists strength – in people, knowledge and services bring with them the experience and knowledge of having – to ensure your deal decisions are informed handled international manufacturing plant transfers in a range of ones and your investments are successful. Our environments. financial, operational, strategic, structuring and Our Strategy team can help you to develop acquisition, disposal and growth strategies by considering key everyday issues corporate finance specialists work alongside including market drivers and the impact of the economy, new our other specialists within the firm including tax market opportunities, reviewing performance across a business M&A, pensions, valuation, IT and environmental. portfolio and diagnosing drivers of underperformance. Our exit support and vendor assistance services help clients Transactions Services avoid the pitfalls of going to market under-prepared. Value can be lost if the vendor has not anticipated or cannot articulate the Within our Transaction Services team, our FPP capability strategic, operational, or financial analysis needed to satisfy comprises consultants, accountants and experienced industry bidders’ requirements. Poorly prepared disposals often fail to practitioners with first-hand knowledge of the FPP industry. We generate auction tension, with today’s bidders keen to apply an also connect directly with our global network to access local uncertainty discount if information is inconsistent or incomplete. knowledge and contacts across the world. Our team has deep functional experience and a breadth of skills that enable you to Corporate Finance extract maximum value from your business before, during, or after a transaction. Within our Transaction Services team, our FPP capability can help you access new markets, assets, technologies, personnel, Due diligence has increasingly become an exercise not only intellectual property and sources of finance. We can also help in preserving value, but in identifying and testing the upside you to restructure the asset base of your business by disposing opportunities that may be contained within the business which of underperforming assets or non-core parts of the business. We may be crucial to winning the deal. Our integrated service provide advice to public and private organisations, management combines financial, operational, and commercial due diligence teams and private equity houses on valuation, deal structuring and can help you interrogate and justify your vision for a deal. and implementation. We can provide a single report that provides a 360-degree We provide creative solutions for disposals, fund raising, IPOs, perspective of the state of the business today, its future private equity and M&A deals, as well as project finance & prospects, and the prospective shape of the business and its Public Private Partnerships. We also deliver expert valuation marketplace. Alternatively, you can choose to benefit from and rigorous financial, economic and strategic advice on your individual elements of our experience and expertise. business, brand, products, services, customers and markets.

PricewaterhouseCoopers transactions expertise – key contacts

GLOBAL Clive Suckling Phone: +44 (0) 20 7213 4887

AUSTRALIA CHINA POLAND SWEDEN Bob Prosser David Brown Mike Wilder Claes Dahlén Phone: +61 (2) 8266 2740 Phone: +852 (2) 298 2400 Phone: +48 (2) 2523 4413 Phone: +46 (0) 8 5553 3055

BRAZIL FINLAND RUSSIA UK Marcelo Orlando Michael Hardy Anthony Sacca Alastair Rimmer Phone: +55 (11) 3674 3875 Phone: +358 (0) 9 2280 1442 Phone: +7 (495) 967 6433 Phone: +44 (0) 20 7213 2041

CANADA (East) INDIA SINGAPORE US Frederic Bouchard Rajan Wadhawan Kok Keong Lie Scott Snyder Phone: +1 (514) 205 5079 Phone: +91 (11) 4125 0788 Phone: +(65) 6236 7288 Phone: +1 (267) 330 2250

CANADA (West) NEW ZEALAND SOUTH AFRICA Carlo Valente Eric Lucas Simon Venables Phone: +1 (604) 806 7157 Phone: +64 (0) 9 355 8647 Phone: +27 (0) 11 797 5660

26 PricewaterhouseCoopers Global Forest, Paper & Packaging practice is comprised of a network of industry professionals located in over 30 countries around the world.

Other publications and articles CEO Perspectives - Viewpoints of CEOs in Forest, Paper & Risks & Rewards - Forest, Paper & Packaging in Russia Packaging Companies Worldwide Addresses the state of the industry in Russia and reflects on the key considerations anyone thinking of investing in the sector there should The publication summarises the thoughts of 17 CEOs in the forest, paper make. Sets the scene on the background of the Russian marketplace, & paper-based packaging sectors around the global on key issues facing the regulatory environment and its “forest wars”; provides analysis sector the industry. The thoughts of the CEOs, from North America, South by sector (forestry and logging; processed wood products; pulp, paper, America, Europe, Russia, China, India and South Africa, are drawn from and paperboard; paper/non-paper packaging); and explores the risks and face-to-face and telephone interviews. rewards of doing business in Russia. Global Forest, Paper & Packaging Survey 2006 Comprises an analysis of the financial results of the PwC Top 100 – the Global Investment Trends – A Call for Action in 100 largest forest, paper and paper-based packaging companies in the North America world, ranked by sales revenue. Also includes an overview of the 19th Looks at the declining competitiveness of the North American Industry, Annual PricewaterhouseCoopers Global Forest and Paper Conference as well as opportunities for enhancing the competitiveness of the industry held in May 2006 in Vancouver, Canada. in that region.

China Risks & Rewards – Paper & Packaging Industry Presents an overview of the impact of China on the paper and packaging sectors including an in-depth look at some key issues of particular importance to companies operating – or looking to invest - in the Chinese Download our publications free of charge or join our marketplace. mailing list at www.pwc.com/fpp Key contacts

Global Leader Global Director Robert Barnden Clive Suckling Phone: +46 (8) 5553 3016 Phone: +44 (20) 7213 4887

Argentina Finland Netherlands SOUTH KOREA Mariano Tomatis Johan Weckman Frans Vestergaard Kwang-Oh Kim Phone:+54 (11) 4850 4716 Phone: +358 (0) 9 228 01353 Phone: +31 (10) 4076 458 Phone: +82 (0) 2 709 0690

Australia France New Zealand Spain Andrew McPherson Benoît Pinoche David Randell Mar Gallardo Phone: +61 (2) 6271 9350 Phone: +33 (0) 2 5184 3636 Phone: +64 (9) 355 8042 Phone: +34 (91) 568 4456

Austria Germany Norway Sweden Ian Murdoch Manfred Krawietz Erling Elsrud Robert Barnden Phone:+43 (1) 5018 81420 Phone: +49 (0) 89 5790 5823 Phone: +47 95 260 005 Phone: +46 (8) 5553 3016

Brazil IndIA Poland SWITZERLAND Marcelo Orlando Ashwani Puri Antoni Tyminski Frank Scharnagl Phone: +55 (11) 3674 3875 Phone: + 91 (11) 4125 0513 Phone: +48 (061) 850 5103 Phone: +41 (0) 58792 2600

Canada Indonesia Portugal UK Bruce McIntyre Jusuf Wibisana António Correia Clive Suckling Phone: +1 (604) 806 7595 Phone: +62 (21) 52 12901 Phone: +351 225 433 114 Phone: +44 (20) 7213 4887

Chile Ireland Russia US Ricardo Arrano Neil Murphy Alexei Ivanov Marc Silverman Phone: +56 (2) 940 0000 Phone: +353 (1) 704 8556 Phone: +7 (812) 326 6969 Phone: +1 (203) 539 5604

China Italy Singapore Uruguay Kenny CH Yeung Maria Teresa Bernelli Teck Soon Chew Daniel Garcia Phone: +86 (20) 3819 2033 Phone: +39 (461) 237 004 Phone: +65 6236 3328 Phone: +598 (2) 916 0463

ColOmbia Malaysia Slovakia Venezuela Gustavo Dreispiel Ramesh Rajaratnam Maria Fruhwaldova Victor Nieto Phone: +57 (1) 635 4802 Phone: +60 (3) 2693 1077 Phone: +421 2 5935 0400 Phone: +58 (281) 418 7935 EcUADOR Mexico South Africa Roberto Tugendhatl Javier Monroy Heinz Zastrau Phone: +593 (04) 2288 199 Phone: +52 (55) 5263 6000 Phone: +27 (11) 797 4431

Branching out • Forest, paper & packaging 27 www.pwc.com/fpp

The firms of the PricewaterhouseCoopers global network (www.pwc.com) provide industry-focused assurance, tax and advisory services to build public trust and enhance value for clients and their stakeholders. More than 130,000 people in 148 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. © 2007 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.