The Target Report: The Paper Industry in Transition


Paper industries are booming

Due to changes in the paper industry, many printing and packaging companies are struggling to get the paper they need, the qualities they need, when they want them and in sufficient quantity to meet customer orders. This is a dramatic turnaround for many companies that have struggled for years to increase customer orders, always fully confident that the required paper substrates would be available just in time. Distributors were happy to stock and warehouse several grades at their own expense, ready for immediate shipment, and often delivered paper on demand with extended credit terms. Some printers even had paper stored at their premises on consignment, ensuring sufficient supply without tying up excess working capital.

At least for the foreseeable future, those days of paper abundance are over. Printing and packaging business owners report that they spend a considerable amount of time each day sourcing the paper they need. The inherent efficiency of longer print runs is lost when orders are filled with multiple shorter print runs requiring repetitive press preparations. Picky buyers lowered their paper standards, accepting lower grades in order to meet deadlines. Shortages are filled by substitute grades, sometimes several different papers used in the same print run. Distributors apply paper allocation systems based on previous years’ usage, which hinders the growth of their customers in the printing industry. Credit conditions have tightened considerably, with slow payers cut off or required to adhere to self-liquidating payment policies. Price increases have become routine, which must be passed on to customers who have considered and will consider other alternative (electronic) communication choices.

To compound the problem, printers buy whatever paper they can get as soon as it is available and stock up. This is completely understandable as each company seeks to defend its own position and viability, but it clearly compounds the problem for the industry as a whole. Stockpiling has a cost, takes up valuable space and increases net working capital requirements. This will eventually run its course as the hoarded paper reaches equilibrium with the available space and capital. However, during the accumulation phase of increased inventory levels, the tendency to hoard only aggravates the situation. Just like that other paper shortage, that of toilet paper when the pandemic broke out.

M&A activity affects all levels of the paper industry

The paper industry has been in flux over the past year, with transactions impacting all levels of the supply chain, from pulp to distribution.

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Paper manufacturing consolidates, specializes and converts

The Canadian company Kruger has acquired the DKP paste subsidiary of Domtar in a transaction that was a derivative forced sale by Domtar. The Canadian Commissioner of Competition demanded that Domtar divest itself of the plant as a condition of approving its acquisition by Paper Excellence. DKP Pulp owns and operates the Kamloops mill in British Columbia which produces bleached softwood pulp and unbleached softwood kraft pulp. Kruger announced that the acquisition will ensure the supply of pulp for some of its paper mills, notably in Quebec where the company is building two state-of-the-art tissue paper mills. Not limited to tissue papers, Kruger also manufactures coated publication printing grades, newsprint and paper designed specifically for inkjet web presses.

In a transaction announced in May 2021 and closed late last year, a 175-year-old publicly traded company Domtar was acquired in an all-cash deal for $3 billion by relatively newcomer private group Paper Excellence. Domtar, much larger and with 21 manufacturing plants and customers in 50 countries, is now privately owned and controlled by the much smaller BC-based Paper Excellence which operates seven plants in Canada. However, despite protests to the contrary, Paper Excellence appears to have links and support from Indonesia’s billionaire Widjaja family, owners of Asia Pulp & Paper, among other holdings. This relationship is important to those concerned about the environmental impact of deforestation and wildlife habitat destruction, accusations that have plagued AP&P’s operations in Indonesia and Brazil.

Domtar is currently well on its way to completing the process of converting a printing and writing paper mill in Kingsport, Tennessee to a containerboard mill. The mill was closed at the start of 2020 in an effort to balance supply with the steadily declining demand for printing papers. When the pandemic hit and demand for printing papers temporarily dropped, Domtar moved forward with tentative plans to convert the mill that was in the works prior to its acquisition by Paper Excellence. The conversion will be completed by the end of 2022 and the plant reconfigured to supply regional corrugators with products made from 100% recycled fibres. As a result, there will be no more print-grade papers from this mill. The Kingsport mill general manager recently confirmed Domtar’s long-term goal of converting other mills to produce recycled corrugated products, including mills in Arkansas, Kentucky and South Carolina. These are expensive capital projects, with each conversion costing hundreds of millions of dollars. Now, with the backing of Paper Excellence and apparent family money backing North American investments, the writing is on the wall that funding will be in place to drive more conversions, further tightening supply in the market for print quality papers.

The sale of what remains of Back to Swedish paper company BillerudKorsnäs, announced in December 2021 and completed in March. The impact of this transaction will be keenly felt by the printing industry over the next seven years as BillerudKorsnäs executes its plan to convert approximately three quarters of the acquired papermaking capacity to paperboard grades. designed for packaging applications. Long-time print industry veterans will recognize the Escanaba name as production-grade paper used in publications, catalogs and commercial applications. The mill that gave the paper grade its name, in Escanaba, Michigan, the largest in the Verso portfolio, is set to be fully converted to packaging grades. The resulting loss of printing paper production capacity will further tighten the supply of the trade, book, direct mail, catalog, label and publication segments of the industry.

In April, HIG Capital, which has significant holdings in printing, packaging and related companies, acquired Pixelle specialized solutions. Pixelle was established in 2018 by private equity firm Lindsay Goldberg with the express intention of creating a profile of specialty paper mills that ultimately included four mill sites with twelve paper machines. Specialty papers produced by Pixelle include release papers, cast liners, book papers, carbonless papers, security papers and various other niche products. Two of the mills were from Verso Corporation, itself recently acquired. Notably, Pixelle assiduously portrays its products as specialty grades and strives to find niches in the broader market for basic print grades.

For more details on the transactions that impacted the conversion to brown paper, as well as the shift to specialized niches within the larger paper industry context, see Printing papers are squeezed out – February 2022).

Paper distributors move to Jan-San; Jan-San goes to paper

As demand for printing papers has waned in recent years, major paper distributors have maintained a steady pace of acquisitions, buying up many formerly independent paper distribution companies. Lindenmeyr Monroe, a subsidiary of industry giant Central National-Gottesman, recently acquired the much smaller New Jersey-based company Paterson Papers, in a move indicating that the main pickings have already been picked. Mac Papers & Packaging, a Monomoy Capital portfolio company, has acquired Reliable packaging solutions, a distributor of corrugated products, point-of-sale displays and packaging supplies based in South Florida.

In another concurrent trend, paper distributors began to branch out and distribute other graphics supplies and, in some cases, act as sales representatives for graphics production equipment, including wide-format machines. . Further declines in demand precipitated a move by some to more widespread supplies tied to the maintenance and sanitation needs of their customers’ facilities, otherwise known as jan-san activity. Mac Paper & Packaging, Lindenmeyr Monroe, and Veritiv all offer jan-san deals on their websites. In a deal that portends possible moves in the other direction, Imperial Dade, a family-owned company headquartered in Jersey City, New Jersey, has acquired the Canadian company of Veritiv. Imperial Dade’s operations focus on supplies for food service, housekeeping, other facility-related needs, and now printing. The company grew through acquisitions; Vertiv’s Canadian operations are Imperial Dade’s 47 operationse purchase. Expect further blurring of lines between jan-san and print paper distributors as print paper distribution becomes less of a specialty and is subsumed by larger distribution companies.

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View the target report online, with transaction logs and source links for May 2022.

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