Investors support newsprint merger

Stora Enso denies talks with Holmen and Norske Skog

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Share prices of three Nordic forest industry companies shot up so high on Thursday that trading in the stocks was suspended for a time.
      The spike was prompted by a story in Helsingin Sanomat according to which Stora Enso, the Swedish company Holmen, and the Norwegian Norske Skog were planning to set up a joint venture which would concentrate on the manufacture of newsprint.
      Share prices of Norske Skog surged by 10.2 per cent, Stora Enso’s rose by 4.25 per cent, and Holmen gained 6.7 per cent.
     
The strong positive reaction by investors suggests that there are expectations for decisive action by forest companies for improving results.
      The forest sector has suffered from low profitability for a long time, but the structural change has proceeded slowly. Mills and paper machines have been shut down here and there, but no market balance has been achieved, even though consumption is declining, or is stagnant.
     
The parties to the possible joint venture did not comment on the situation in the morning. In the afternoon, after being told to do so by the Helsinki Stock Exchange, Stora Enso issued a statement denying that it is holding talks with Holmen or Norske Skog.
      Asked if there had been any previous talks, Stora Enso communications director Lauri Peltola said:
      “As we have always noted, we are interested in structural moves that are in the interests of the company’s shareholders. But we will not comment on individual cases linked with single segments or companies.”
     
A statement by Norske Skog left the situation open. The company announced that it will not comment on speculation or rumours of strategies.
      “We have often previously said that structural arrangements are needed”, said Norske Skog spokesman Carsten Dybevig in a telephone interview. He commented that there is “tremendous” excess capacity in newsprint production. He added that the narrow profit margins make it necessary to make structural arrangements.
      Holmen’s statement largely echoed that of Stora Enso: no negotiations are underway.
     
Analysts say that from an investor’s point of view, rearrangements would be welcome news.
      “The biggest problem in the field is massive overcapacity. Consolidation is needed”, says Hans-Erik Jacobsen, forest industry analysis at the Norwegian banking house First Securities.
      According to Jacobsen, it is easier to shut down unprofitable newsprint mills if it is done by a joint venture of three forest giants. He says that such a merger would be beneficial to “everybody”.
     
“It would be good if something were to happen soon. The situation is quite urgent, as the losses are considerable”, Jacobsen says. He believes that a new newsprint company could turn losses into profits.
      Jacobsen does not think that a merger of newsprint production would be vetoed by EU competition authorities, noting that the sector is much more concentrated in the United States than it is in Europe.
      “What could happen is that after some time, others will want to join the joint venture”, Jacobsen ponders.
     
In the view of Katja Keitaanniemi, head analyst at Swedbank, the forest industry is in dire need of changes.
      “Especially in newsprint. Demand for it has recovered by only one per cent from the beginning of the year, compared with last year, which was really very weak indeed.”
      Keitaanniemi believes that the EU could approve even fairly extensive arrangements. “The Commission understands that if this sector is to be kept in Europe, matters have to be reconsidered.”
     
Portfolio manager Hannu Angervuo of the eQ asset management company believes that the need for change in the forest industry can be seen from their balance sheets. “Piles of money have been burned”, he says.
      He notes that prices of raw material have risen by ten per cent, and the price of the final product has come down by 20 per cent. “It is a lethal combination. There is certainly not a single paper machine in Europe that is making a profit."
      Angervuo believes that the indecision in the forest industry stems from the fact that investors have not lost enough money yet, and that “shareholders are soft”.


Previously in HS International Edition:
  Newsprint manufacturers consider Nordic joint venture to trim away excess capacity; Stora Enso denies assertions by Helsingin Sanomat (2.9.2010)

Helsingin Sanomat