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The company wants to reduce dependence on traditional graphic paper.
The company wants to reduce dependence on traditional graphic paper.

Why Sappi bought speciality paper business in Europe

FMCG SUPPLIER NEWS

By Nick Hedley - Dec 19th 2017, 13:57

Sappi’s acquisition of a speciality paper business in Europe will help the company to reach its target of deriving a quarter of profits from speciality paper by 2020, says CEO Steve Binnie. 

But an analyst said on Tuesday he was surprised that Sappi was spending cash on a speciality paper acquisition when its most pressing need was for a dissolving wood pulp deal.

Sappi said it would buy Cham Paper Group’s speciality paper business — consisting of two mills in Italy and a digital imaging business in Switzerland — for about $149m (R2bn).

"We set ourselves a target of getting our specialities and packaging business to 25% of profits by 2020, and with this acquisition and the two conversion [projects] we should be pretty much there," Binnie said.

Sappi is converting a mill in the Netherlands to focus mainly on speciality paper and packaging and is investing in a paper packaging production line in the US. This followed a similar conversion project in Germany that had been "extremely successful", Binnie said.

"As a further extension to that strategy, this potential acquisition came on our radar."

Sappi’s 2020 Vision strategy is aimed at reducing its dependence on traditional graphic paper amid declining demand. Sappi is prioritising higher-margin growth markets — mainly dissolving wood pulp but also speciality paper and packaging.

Binnie said the markets that the Cham business was in "are growing at between 1% and 5% – there are a lot of subgrades – and they generate ebitda [earnings before interest, taxes, depreciation and amortisation] margins in the mid-teens".

The deal was likely to be concluded by the end of February and would add about €30m a year to Sappi’s ebitda.

It would be funded from existing cash reserves, Binnie said, adding that the company had more than $500m of cash at hand. The company was not pursuing further acquisitions "at this stage", he said.

"We’ve got a few projects underway at the moment, so our capex will be a little bit higher next year."

"We’re looking at $450m and that’s predominantly focused on the two conversion projects and a couple of smaller projects in SA to boost our dissolving pulp [business]," he said.

However, Investec Asset Management analyst John Thompson said a dissolving wood pulp acquisition would be necessary as Sappi’s major customers in this segment would require greater volumes of pulp from as early as 2019 or 2020.

Although the Cham deal would be earnings accretive, "strategically, it’s probably not the one which most people were expecting, which was dissolving wood pulp".

He added: "It just means that their balance sheet won’t have quite as much capacity [for a dissolving wood pulp transaction] as we thought."

The market expected Sappi to spend up to $600m on expanding its dissolving wood pulp business in order to meet growing demand. "That’s their primary need right now."

Thompson said that with higher pulp prices in Europe, Sappi might have to "pay up" for its next acquisition.

However, he said that Cham had "good assets" and that its product range was a "very good fit" with Sappi’s.

Sappi’s share price closed 1.5% down at R94.75 on Tuesday, while shares in competitor Mondi ended 2.75% lower at R307.97 as the rand firmed.

Sappi was previously hamstrung by debt. However, the company halved its debt over the past four years from $2.5bn to $1.3bn, allowing it to focus once again on growth projects.

© BusinessLIVE MMXVII 

Read more about: steve binnie | sappi | paper | packaging

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