Total deal value in the forest, paper and packaging sector fell 23% to US$21.3 billion in 2008, down from US$27.6 billion in 2007, according to a new report by PricewaterhouseCoopers (PwC).

The report says that continuing financial market uncertainty, economic slowdown and a collapse in worldwide demand is plunging the sector towards a record M&A low in 2009.

Total deal value in the first half of 2008 surpassed that of 2007 which itself had been a high point in recent years. Buoyed by International Paper’s US$6 billion purchase of businesses from Weyerhaeuser, first half total deal value across the sector in 2008 was US$16 billion. However, second half total value fell to just US$5.3 billion. The fall in overall sector deal value takes M&A back to the underlying level seen in 2005 and, if it continues, puts it on course to rival or surpass lows last seen in 2003.

“Many companies in the forest, paper and packaging industries are facing unprecedented tough market conditions,” says Bruce McIntyre, leader of the PwC Canada Forest, Paper and Packaging industry practice. “As 2009 unfolds, many companies in the sector find themselves on a knife-edge and the industry looks set to undergo an intense round of painful distress-led transformation and likely to emerge in two or three years time looking very different from today.”

As in previous years, pulp and paper production delivered by far the largest average deal size and, in turn, the largest total deal value. With US$11.9 billion worth of deals, pulp and paper production accounted for 56% of total industry deal value. Average pulp and paper production deal value was down 19% to US$233 million from an average of US$288 million recorded in 2007 and total deal value was down 10%.

Behind pulp and paper production, deals in converting (including distribution, such as packaging and tissue product producers, paper converters, paper merchants), comprised the second largest segment of deal value, with a total US$3.8 billion of deal value or 18% of all industry deal value. Converting’s total deal value was 35% down on 2007 levels and average deal value was down from US$82m million to US$61 million. Even bigger was the fall in the total value of forestland and forestry deals which fell 45% on 2007 levels to US$3.5 billion in 2008. Average forestland and forestry deal size fell 16% from US$188 million to US$159 million.

Wood products was the sector where total deal value was most resilient, edging down just 1% or US$21 million to US$2.1 billion in 2008. The 3% rise in wood product deal volume continues a trend of significant increases in deal activity in recent years. Deal numbers in this sector are running at twice the level of two and three years ago, albeit with smaller deal sizes and without any corresponding rise in total value. Wood products accounted for 34% of all deals in the sector in 2008 but, with an average deal size of just US$38 million, only 10% of total deal value.

Pure private equity (PE) players featured in three of the top ten deals and the PE influence on deal-making in the sector remained very strong in 2008. Excluding forestland and forestry where real estate investment trusts (REITs) and timber investment management organizations (TIMOs) play a dominant role, PE played a part in 18% of all deals, accounting for 24% of deal value. REITs, TIMOs and PE together were involved in 19% of all FPP deals and 34% of total FPP deal value in 2008. Private equity will continue to play a major role in the sector with PE players seeking to capitalise on distress situations. PE is also likely to play an increasing role in the consolidation of the sector in the growth markets. In China, for example, there has been increasing involvement of PE players and this looks set to gain momentum although, thus far, mismatches in valuation have restricted deal activity.

McIntyre adds, “In summary the deal-making environment is overwhelmed with many challenges and opportunities. Ultimately, deal-making is driven by relatively few factors, the most important of which are the existence of benefit and/or need and the availability of the required finance. With the industry on course towards significant restructuring, the first of these exists in abundance. It is the second which will determine the level and pace of activity in the period ahead.”

@page_break@Copies of the Forest, paper and packaging industry deals review are available to download at www.pwc.com/fpp.

IE