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The Rising Sun Shines Down Under

The continuing globalization of the pulp and paper industry, at least in the Australasian region, was underscored by the recent announcement that, subject to the usual regulatory approvals, Oji Holdings of Japan together with Innovation Network Corporation of Japan (INCJ) will jointly acquire the pulp & paper business of Carter Holt Harvey Limited (“CHH”) and related companies (collectively “CHHPP Group”), which manufactures pulp, paper and packaging products in New Zealand and Australia. CHHPP Group is ultimately owned by Rank Group Limited.

Oji will take a 60 percent share of CHHPP and INCJ, a government-backed innovation agency that attracts private sector investment to "promote innovation and enhance the value of businesses in Japan," will have 40 percent of the joint venture vehicle that will make the investment.

This acquisition was almost inevitable given the way that Oji and Nippon Paper compete head to head in Japan. In 2009, Nippon Paper acquired the key manufacturing assets of Australian Paper, which was then the manufacturing arm of PaperlinX, which itself had been spun off from Amcor in 2000. The assets acquired by Nippon were principally the Maryvale and Shoalhaven mills. By any measure, the Australian Paper assets seemed to represent a good buy. For A$600 million (US$455m) at the time (with a potential performance bonus of an extra A$100m), Nippon Paper acquired a just completed major kraft mill expansion and new bleach plant at the Maryvale mill, which cost not a lot less than the entire purchase price. The kraft pulp mill had a capacity of 330,000 metric tons plus 100,000 tonnes of NSSC pulp. The 5 paper machines on the site had a combined capacity of about 600,000 metric tons. The Shoalhaven mill has an annual capacity of only 16,000 metric tons, but as a specialty mill, many of the products sell for very high prices. It was reported at the time that the book value of the assets purchased was A$1.1 billion.

The Oji purchase is somewhat more expensive (NZ$1.037 billion) and includes the Pulp Business (which has 2 bleached softwood kraft mills – one at the Kinleith Mill and one adjacent to – and previously part of – the Norske Skog Tasman Mill) with a total capacity of about 565,000 metric tons of market pulp. It also includes the Paperboard Business, which incorporates the linerboard machine at Kinleith Mill (annual capacity 340,000 tonnes) and a corrugating paper machine at Penrose (capacity 85,000 tonnes). The Packaging Business includes three corrugated packaging facilities in New Zealand at and two in Australia as well as paper bag and paper cup manufacturing.

CHH is understood to have been “on the market” since at least 2010, driven by pressure to reduce the $US18 billion of junk-rated corporate bonds held by Reynolds Group, which is controlled by the Rank Group (although apparently not legally owned by them). Naturally, the official line from the Rank Group is that CHHPP no longer fitted with the strategic profile of the Rank Group. Both reasons are probably relevant. After this divestment, CHH will consist of a building supplies business which has been previously, but unsuccessfully, offered for sale. This division includes significant timber and timber product manufacturing and marketing operations in Australia and New Zealand, as well as a trade supplies group in New Zealand. The CHH carton board mill at Whakatane was previously excised into the Reynolds group, when Hart sold off the Australian and New Zealand Printing assets of CHH principally to Australian printer Colorpack, with some also acquired by Amcor (but now part of the Orora assets).

The Rank Group is the private investment vehicle for Graeme Hart, who is reputed to be the wealthiest person in New Zealand. It has 3 main companies – Reynolds Group Holdings, Automotive Group and CHH. Reynolds Group Holdings has two segments – Food Packaging (which includes Closure Systems International, Dopaco, Evergreen Packaging, Graham Packaging, Pactiv, and SIG Combibloc) and the Consumer Products division, which is made up of the various Reynolds brands and subsidiaries.

The CHH businesses were acquired by the Rank Group for NZ$3.3 billion from International Paper when it decided to withdraw from New Zealand in 2006. Almost immediately, Hart began restructuring the company, selling CHH's forests to US-based Hancock Timber Group for about NZ$2 billion, as well as other assets for over NZ$300 million.

In December 2006, the Rank Group also purchased International Paper’s liquid packaging business, Evergreen Packaging for NZ$725 million. In May 2007, Rank Group bought Swiss packaging company SIG for NZ$3.2 billion. SIG Combibloc is the world’s second largest food and drink carton packaging company after Swedish giant Tetra Laval. In August 2007, the Rank Group purchased for US$450M Blue Ridge Paper Products of North Carolina, which was merged with Evergreen Packaging. These assets make Rank Group arguably the world’s biggest paper packaging products business.

Oji was a logical buyer of the CHH paper businesses because it already owned Pan Pac Forest Products in Napier in New Zealand, which is an integrated forestry, saw milling and pulp facility as well as the CHH synergy with its domestic and global operations. Oji has identified synergies from joining the two businesses.

Oji identifies paperboard and packaging products as their core products and they have either acquired or built a total of 21 plants/facilities (including green-field projects) in Southeast Asia and India over recent years.

Back home in Japan, Oji and Nippon seemed to have been always locked into a contest to be No. 1. So far, Oji has remained triumphant, although there was not a lot in it until recently. Oji’s history goes back to 1873. It was divided into 3 companies after World War II, but subsequently through mergers and acquisitions it re-emerged as one of the largest paper companies in the world. In the PwC top 100 for 2012 (most recent data), Oji was rated the third largest company globally (up from No. 4) after International Paper and Kimberly-Clark with sales in excess of US$15B. Nippon Paper remains at No. 6 with sales down a little to just over US$13B.

Oji has a growing international face. Of its 156 subsidiaries, 70 are overseas. It has businesses in Asia, Europe, North and South America and Oceania. Its paper operations span the full range of paper products and enhanced papers. They have invested significantly in raw materials with several plantations in Australia, New Zealand, China, Vietnam and Cambodia.

More recently, there appears to be a divergence in the corporate aims of the two Japanese companies.  Even so, in their difference there is something of a sameness! Oji has a goal to restructure its business portfolio to grow through “incubation of its R&D oriented businesses, expansion of overseas business, establishment of a material and process integrated business model, promotion of forest resources and environment marketing, expansion of its trading business and enhancement of global competitiveness through aggressive cost reduction.”

In 2010, Nippon published a vision for 2015 to be one the top five companies in the global industry with 30% of its business to be international and 30% from sources outside of the pulp and paper industry. By 2013, the goal had been transformed to create a future as a “comprehensive biomass company” with significantly scaled back sales and profit targets. The new goals were launched as a “giant step toward the birth of a new Nippon Paper Group” in which there was a merger of its three main operating groups.

Under the new structure, Nippon’s domestic paper business will shrink in the long term. New businesses will be created while restructuring its existing businesses. Looking to the future, Nippon has significant forests in Japan and overseas, and its accumulated wood science technologies acquired in paper-making will be harnessed in their “advanced application to grow into a comprehensive biomass company that offers products and services with diverse values.”

Specifically, Nippon is exploring the huge potential of wood resources for the production of industrial materials, such as packaging containers and functional sheets, biochemicals - including cellulose nanofibers and other new materials - and agricultural and food materials, as well as energy business including the electricity supply.

In the Australian context, the company signalled its frustration with slow progress of its Australian Paper (AP) operations to achieve international competitiveness with recent changes in senior management. Part of the challenge with AP is that its main operations at Maryvale were developed to supply both the printing and communications papers market as well as the packaging market, but they are now an arm’s length supplier to the newly spun off Orora. AP is now at a distinct disadvantage to the soon to be Oji controlled CHH, which has vertically integrated containerboard through to box plant operations. Would acquisition of Orora by Nippon solve this problem and also assist with their business diversification goals? Conversely, would acquisition of AP by Orora make more sense (thereby recreating the company that started as Australian Paper Manufacturers back in 1868)? Despite the divergence of the Oji and Nippon strategies it seems unthinkable that Nippon would retreat and leave Australasia to Oji.

Whichever way the market structure evolves, Australasia is now inextricably part of the global scene. Although neither the CHHPP businesses nor the AP business have integrated ownership of the extensive biomass resources in Australia and New Zealand, they are significant customers, with the potential to be even more so. If the way these companies will grow their demand is unclear, it nevertheless seems inevitable that they will increase their biomass demands in the future and both may indeed shine brightly as comprehensive biomass companies.


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