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Sappi to Buy Potlatch Coated Fine Paper Business For $480-million

Tuesday, March 19, 2002

Press release from the issuing company

JOHANNESBURG, South Africa---March 18, 2002--Sappi Limited, the world leader in coated fine paper, announced today that it has reached an agreement to acquire Potlatch Corporation's coated fine paper business and its Cloquet, Minnesota, USA, pulp and paper mill for US$480-million in cash. As part of the transaction, Potlatch will cease production of coated paper at the 140,000 short ton per year Brainerd coated paper mill and bear the related costs. The acquisition is subject to customary regulatory approvals. Sappi expects the acquisition to create significant value for its shareholders. The transaction is immediately accretive to earnings even with current weak market conditions. By 2003, on an annualised basis, Sappi expects earnings per share accretion of US$0.20, even with taking a conservative view on the potential synergies. Sappi Chairman, Eugene van As, said today that "the purchase provides a compelling opportunity to advance both Sappi's strategic and financial agendas. The acquired businesses are an excellent fit with our existing operations in North America and Europe. A complementary product line and customer base should allow Sappi to capture substantial synergies immediately. The integration of the Potlatch assets and transfer of the business from the Brainerd mill to our existing mills in North America and Europe will materially strengthen the competitiveness and profitability of our entire North American operations. We are highly confident that the US$480-million investment will quickly generate returns that significantly exceed our cost of capital.'' "We believe that the Cloquet pulp mill and coated paper assets have the potential to generate world class returns. The acquired assets are well invested with a book value well in excess of the transaction value. A new, US$525-million state-of-the-art pulp mill with a design capacity of 450,000 short tons per year was commissioned in 2000 at the Cloquet site. It is the newest pulp mill in the USA. We are confident that bringing Sappi's knowledge of pulp manufacturing to this mill, which had initial start-up problems, will result in improved performance. Cloquet also has two paper machines and an offline coater - the newest machine and coater installed in 1988 and 1989, respectively. This is one of the few machines in the USA that can produce European style triple coated paper with minimal investment. The Brainerd facility, which was built in 1917, will cease coated paper production''. In 2001, the pulp and coated paper division of Potlatch had total annual net sales of US$464-million on sales of 363,000 short tons, all of it coated paper, and 147,000 tons of market pulp. Because Sappi has the capacity to supply the volume equivalent to Brainerd's output from its existing facilities in the USA and elsewhere, it will be able to avoid the US$60-million a year of overhead costs that were associated with operating the Brainerd facility. In addition to the Brainerd overhead costs, Sappi has identified a further US$60-million of savings and synergies which will be achieved within 12 months. These synergies consist of US$20-million of pulp efficiencies as well as rationalization in logistics, procurement and other administrative overheads of US$40-million. In summary, the integration of Potlatch into the Sappi system is expected to generate total annual pre-tax savings and synergies of at least US$120-million at existing prices. The total one-time costs to achieve these savings and synergies are not expected to exceed US$20-million. Bill Sheffield, the CEO of Sappi's global Fine Paper division, said "the purchase price represents an effective US$980 per annual metric ton for the Cloquet facility, which is an attractive price for a modern unit and we get a bonus of a 140,000 tons of additional business at no further cost.'' Commenting on the transaction, Sappi Fine Paper North America CEO, Kathy Walters, said today: "Potlatch produces excellent and well-known paper grades, in particular McCoy and Vintage, and is well known in the American designer and print community. The brands complement Sappi's own brand mix. The combined operation will be better able to service our customers and will increase Sappi's share of coated fine paper sales in the USA to 30%. It re-affirms Sappi's clear leadership position in this market segment.'' Commenting on the financing of the transaction, Donald Wilson, Chief Financial Officer of Sappi, said "the Group has existing financing facilities to cover the transaction at very competitive interest rates and debt-to-total capital will be approximately 44% immediately after the transaction which is within the Group's target of 25% to 50% range. In addition, because of the accelerated use of accumulated losses in a European subsidiary through which this transaction will be funded, the after-tax holding cost will be very low. We do not expect this transaction to affect Sappi's BBB credit rating.'' "The Cloquet site represents an important strategic move for Sappi. Imported coated sheets have seen rapid growth in recent years and now account for nearly half of the sheet fed market in the USA. American printers are changing to European style double and triple coated sheets because of price and performance. These products are less costly to manufacture than the traditional US grades, and also provide a superior surface,'' said Bill Sheffield. Sheffield continued "Sappi's Somerset and Belgrade ranges remain the pre-eminent number three/four (3/4) grades, but we have been looking for a facility to manufacture European style grades in America for some time. To date we supply these grades from our own European facilities. With Cloquet we will be able to convert the coater with minimal investment to make these products in the short term in the USA.'' Eugene van As today concluded by saying that the acquisition meets all of Sappi's strategic and financial criteria. "This deal meets all of our investment criteria. It is accretive to earnings immediately, the return exceeds our cost of capital, and the investment is more earnings enhancing than buying back our own shares. The site has interesting long-term potential for growth including the capability to accommodate a world class machine if and when the market demands it.''




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