Tips for Investors looking for M&A in the paper business

In this article, I have listed tips and the key questions to be asked when thinking about an acquisition of a paper mill or paper line.

Markets & asset location

Market

The buyer should gather information about the paper market where the mill is operating.

Market size, trends, value chain, business models, supply-demand balance, price development competition & substitution, cost structures, cost position of the assets. What kind of new market entry options are possible with the assets? Do we need investments for machine conversions into new markets?

Paper line conversion options

Can the asset(s) be converted into a new business? What are the options? What is the cost involved? Timelines? Who has experience with this? What are the market scenarios we base our decisions on? Can the asset make money in the new setup and in the current market? Is this asset somehow unique, different? What is the cost position? Target market trends? Investment needs? Market entry barriers? Time to market?

Location

What is the distance to markets and raw material sources? Price of raw materials and availability. What is the influence of location on the main cost elements?

What local and global policies affect us. Regulatory and taxes. What kind of agreements can be renegotiated? Can we get support from the local community, government, or EU? What is the flexibility of industrial unions, personnel, community, and government?

Products, process, and technology

Profit-making

What is the profit-making history of the asset? What kind of culture and performance history the company has? Turnover development, EBITDA, EBIT, Cash flow. What kind of development plans are in place; growth investments, cost-cutting programs. Cost position in current markets and in possible future markets if the paper line is converted into new business.

Technology

What kind of technology the asset has? Technical age? Raw material handling, wet-end, drying, sizing, coating, calendering, packaging, etc. This gives also an indication of what kind of cost would be involved in machine conversion into new business and about the flexibility of the product portfolio.

How innovative is the organization and have they been able to differentiate in the markets?

Operational efficiency

Time efficiency, waste levels in different parts of the line. Shutdowns (planned, unplanned).

How well has the asset been maintained? What are the future CAPEX needs? Investment history. Can major supply agreements be renegotiated to boost profitability? What changes must be executed to improve profitability?

Raw materials and other key cost components

What are the key raw material inputs, price, and availability: wood, virgin pulp, recycled fibers, fillers, coating materials. Energy sources (electricity and steam).

Level of backward integration to fiber source, fillers, and pigments, energy. This is important when thinking about cost development and business models in the future. Own generation and sustainability of fuels. Integration to pulp mill (fibers, steam, electricity) or sawmill (wood chips for pulp making). Filler production at the mill site?

Environmental issues

How has the mill performed in effluent handling (land, air, water) against local authorities permit levels?

What kind of quality and environmental certification are in place.

People and business processes

Is there a convincing vision & strategy in place for the asset? Is the organization customer-focused and innovative? Is the culture driving for high performance? What are the true values of the organization?

What is the commitment of the current personnel? Experience, skill, and knowledge level.

How engaged and committed to working under new ownership is the current management and organizations.

Demographics and skill level of the personnel. Will it be easy to hire new talent for the mill?

What kind of compensation models and benefits are in place? Are these competitive in the market?

What are the hidden liabilities e.g. pension fund payments, layoff costs?

Sales

Customer and market mix? Does the mill have long term relationships?

· Sales organization

· Target setting

· KPI development

· Sales process

· Performance management

· Customer agreements

Innovativeness

How unique are the products? Differentiation and position in the current markets?

What does the customer think? Has customer satisfaction been measured? How are the products performing? What is the asset position in the eyes of the customers?

What is the share of service sales? Are there innovative service solutions for customers?

How does the product portfolio and product development pipeline look like? Are there common R&D projects with customers?

Valuation

What, Why, When

What is the correct valuation of the company? What are the future expected cash flows? What is the real upside for the investment? How is the purchase financed?

What is actually for sale? In case of carve-out from corporate; what new functions are needed for the organizational setup? How to plan the takeover? How much must we invest yearly on top of the initial purchase price? What businesses come with the asset? Customer relationships? What kind of organization is included? Brands? IP? Debt? Other Liabilities?

How does the timetable for takeover look like? How long is there support from the old organization e.g. for sales? What kind of overlapping period is planned for takeover?

What additional HQ and shared service functions we need to organize in case of carve-out? Sales organization? It? Logistics? Customer service?

Why is the asset sold? How can we improve the situation as new owners? It is important to understand the market development in the current business. Why could your company make better business with the asset somebody is willing to sell?

What can we do differently? Can we bring synergy benefits? Cost-cutting? Improved sales? Improve processes? Better financial position? New investments? Machine conversions into a new business to improve profitability?

Comparison of fixed cost, variable costs: Special attention to finance, labor, energy, raw material costs, and delivery costs to each market?

Risks & Sensitivity

· Market scenarios for a current business and new business.

· Product selling price.

· Main input purchasing price.

· Currency risks.

Other:

· Non-compete clauses

· Environmental liabilities

· Asset closing costs

Heikki Hyvärinen

Founder, Partner

H&H Advisors Oy