Anatomy of a deal It’s an exciting time for corporate deal making

www.pwc.com/ca/deals
Anatomy of a deal
It’s an exciting time for corporate deal making
In light of rapidly changing technology, globalization of markets, uncertain
economic conditions and ever-increasing competitive pressures, organic
growth often isn’t fast enough. As a result, many public and private
organizations are looking to mergers and acquisitions (M&A) transactions
as a key enabler of their corporate strategies.
Recently we haven’t seen as many blockbuster deals in Canada making headlines as in years
past. But plenty of deals are still getting done. In some sectors, such as resources, buyers are
capitalizing on lower valuations due to a drop in prices of most commodities. In forestry, where
commodity prices have rebounded and seem to be stabilizing, companies are coming together
to cope with increasing competition for fibre and markets, increasing capital costs, and more
rigorous sustainability measures.
Executive panelists discussing the anatomy of a deal at the 28th Annual Global Forestry, Paper and Packaging Conference in Vancouver, BC.
While deals in the forest and paper sector are
a growing necessity, they’re not easy. As three
executives we spoke to at PwC’s 28th Annual Global
Forestry & Paper Industry conference attest, there’s
nothing simple about achieving real and lasting
value through a M&A. Their advice:
The conversations following take us through the
three main stages of the deal continuum: Thinking
of the deal, doing the deal, and delivering value.
Altogether, they are the anatomy of a deal.
1. Know your strategy and stick to it.
2. They’re complicated enough, so keep it simple.
3. The value is there, but you’ll have to work to
achieve it.
SAVE the date
for the 29th Annual PwC Global Forest & Paper Industry Conference taking
place in Vancouver, British Columbia, Canada on May 4, 2016 at the Fairmont
Hotel Vancouver
Thinking of the deal
Dr. Jon Ryder, CEO of New Zealand’s Carter
Holt Harvey Pulp & Paper Limited (CHH), says
experience in deal making and a commitment to
a broad, long-term strategy are attractive to both
buyers and sellers.
His company was recently purchased by a
Japanese consortium made up of Oji Holdings, a
manufacturer of paper products, and the Innovation
Network Corporation of Japan (INCJ). Oji has been
aggressively expanding its overseas businesses in
emerging markets, where it sees strong growth in the
pulp and paper business.
In 2014, to help deepen its resource base and
operational capacity, Oji and INCJ jointly acquired
Carter Holt Harvey, which manufactures pulp,
paper and packaging products in New Zealand
and Australia. The acquisition gives Oji access to
softwood resources and expands its wood product
business in the region.
That includes the transition away from the
declining markets in printed materials, such as
newsprint, into markets for packaging of food and
consumer goods which are growing rapidly due to
increasing population and a rising middle class,
especially in emerging Asian markets.
Ryder says Japanese investors have a longer-term
investment window, which provided Carter Holt
Harvey some certainty in doing the deal.
“It’s good to be owned by people who are doing
some long-term thinking and can share those
expectations and directions,” Ryder says.
The two corporate cultures also fit well, Ryder says,
including a shared focus on innovation, productivity,
health and safety and environmental concerns.
“They could see we had long term forest supply
agreements and reasonably good production
capacity,” says Ryder.
Oji also looked to invest in operational
improvements at CHH and leverage these
investments throughout its current portfolio. In
addition, through their partnership with INCJ, a
government and private-company funded group
focused on innovation, Oji will also be looking for
new markets for its forest products.
“They understand the long-term nature of this
game,” says Ryder.
Dr. Jon Ryder
CEO of New Zealand’s Carter Holt Harvey
Pulp & Paper Limited
In December 2014, Oji Holdings Corporation
(Oji) and Innovation Network Corporation of
Japan (INCJ) completed the acquisition of New
Zealand/Australia-based pulp, paper and packaging
businesses comprised of Carter Holt Harvey Pulp &
Paper Limited and certain related companies held
by Carter Holt Harvey from Rank Group.
Doing the deal
Larry Hughes, Vice-President Finance and Chief
Financial Officer at West Fraser Timber Co. Ltd.,
relies on his experience as a lawyer to help seek and
strike deals.
West Fraser has been expanding its product and
geographic reach through M&A, particularly over
the last decade.
In 2007, it bought 13 sawmills in the U.S., to
become one of the largest lumber producers in
North America. It acquired two sawmills in Alberta
over the past four years and bought two mills in
Arkansas in 2014, through separate deals.
“We are always looking for growth,” says Hughes. “You
need to find a strong fibre basket. That’s the strategy.”
He says West Fraser’s focus is on lumber, which
accounts for about two-thirds of the company’s
revenues. It also has a significant pulp and paper
business and is the largest plywood manufacturer in
Canada. West Fraser has looked at assets around the
world, but is today focused on North America where it
believes it can find a good fit with existing operations.
Valuation is key when doing the deal, Hughes says.
“Lumber is very cyclical, so your value depends on
how much your cash flows are going to be over the
short and mid term,” he says.
For West Fraser, the deal process begins by getting to
know the seller and seeing if their asking price is in the
same ballpark of what the company is willing to pay.
“What we tend to do is try to develop a relationship
and get to know what the seller’s needs are. That’s
what we want to focus on,” says Hughes.
For example, he says many sellers in the industry
today are small, sometimes family run businesses
that want assurances their employees will be well
treated under new ownership. To reassure them,
West Fraser often brings sellers to their mills,
allowing them to see their operations in person.
Hughes also believes both buyers and sellers should
offer some leeway during negotiations.
“Some of the greatest deal makers I’ve dealt with
have a broad set of knowledge and they are flexible.
They don’t draw lines,” Hughes says. “You have to
have an understanding of what the options are.”
He believes in starting simple, which means
keeping professionals such as lawyers and bankers
on the sidelines at the start.
“The clients need to see if they have a basis for a
deal … and develop some trust,” Hughes says.
Some of West Fraser’s best deals have been made
during a downturn in the cycle, Hughes adds.
“It’s a bit of a survival of the fittest business. We
are a low-cost producer who invests heavily in our
assets. If you’re not a low-cost producer going into
a downturn you’re exposed to financial failure,”
Hughes says. “You have to be ready when a vendor
is ready to sell.”
Larry Hughes
Vice-President Finance and
Chief Financial Officer at
West Fraser Timber Co.
West Fraser Timber continues to grow its
lumber business in the U.S. South and in
western Canada. In April 2014, West Fraser acquired Bibler Brothers Lumber
sawmill and lumber manufacturing operations located in Russellville,
Arkansas. In March 2014, the company acquired Travis Lumber Company’s
sawmill and lumber manufacturing operations based in Mansfield, Arkansas.
Delivering the deal
Randy Nebel, president of Illinois-based KapStone
Paper and Packaging Corp., is a career forestry
executive and former mill manager who has worked
through a number of deals in his 35-year career in
the industry.
The latest is KapStone’s acquisition in May 2015
of Texas-based Victory Packaging/Golden State
Container. KapStone sees Victory as a “unique
strategic fit,” allowing it to derisk operations by
providing a higher level of integration.
Another notable KapStone deal was the 2013
purchase of Longview Fibre Paper and Packaging Inc.,
where Nebel was president. KapStone was looking to
Longview to help fulfill its goal of becoming a major
integrated company in the pulp and paper business.
“Longview was a step towards that vision,”
says Nebel.
KapStone, a North American producer of
unbleached Kraft paper and corrugated packaging
products, bought Longview from Toronto-based
Brookfield Asset Management Inc. which had
bought Longview Fibre and Longview Timberlands
LLC in 2007. Brookfield separated the two
businesses; turning around the paper business
before selling it to KapStone (while keeping the
timberlands division).
As a result of that history, Nebel says Longview
came to KapStone with a turnaround mentality and
aggressive cost-savings attitude. That helped to
drive the integration with KapStone.
Still, Nebel says combining the two companies was
challenging. There were painful job and operational
cuts and employees had to quickly adapt to new
ways of working. For KapStone, it was important
to act quickly and decisively to establishing the
new path for the combined company, and to find
immediate savings across operations.
“Patience isn’t always a virtue with integration,”
says Nebel. “The best thing you can do is get
uncertainty out of the way as soon as you can.”
Nebel has a list of “Must Dos” for integration, based on
KapStone’s experience with Longview. They include:
1. Must be highly organized. People need structure
and clear direction.
2. Must be able to navigate muddy waters.
Building trust is key.
3. Must have regular check-ins. That includes
setting targets and regularly reporting.
4. Must make necessary information technology (IT)
investments. IT forms the foundation of synergies.
5. Must be willing to do what’s best for the company.
Randy Nebel
President of Illinois-based
KapStone Paper and
Packaging Corp.
In July 2013, KapStone Paper and Packaging
Corporation completed the stock purchase of
Longview Fibre Paper and Packaging, Inc. Most recently, KapStone Paper
and Packaging Corporation and Victory Packaging/Golden State Container
jointly announced this past May (2015) that they have signed an agreement
for KapStone to acquire the assets of Victory Packaging in a cash-free, debtfree transaction for $615 million in cash, subject to post-closing adjustments.
Balancing risk and minding valuation
along the deal continuum
For Jason Boyer, a Partner in the Deals practice at
PwC Canada, a successful deal means getting it
right across the deal continuum.
Integration, he say is “absolutely critical” to the
long-term success of any deal, and it’s never easy.
“How integration is enhanced through people,
processes and organizational development is one
of those softer aspects not often considered during
the deal,” Boyer says. “But making it a reality
and capturing value now is important, difficult
and challenging.”
He says acquisitive companies, both public and
private, are looking for a strategic fit as well as
synergies in operations and back office functions
such as finance and IT.
“It’s about unlocking value,” Boyer says. “A lot of
the profit that can be earned by these companies
comes through the integration of the two systems.”
Valuations remain a challenge for buyers in the
resource sectors who must be ever mindful of
overpaying for assets should commodity prices once
again go south, and for sellers to whom a fair value is
critical to their succession plan or exit strategy.
Boyer notes, “While valuation is fairly straight forward
where public companies are concerned, it’s not always
the case for private companies. And, it’s in the private
space where we’re seeing a great deal of activity.”
But for deals to bring value, he says a strong strategic
foundation is the most important consideration of all.
“Buyers need to know what they want to achieve and
how an acquisition will help them get there,” he says.
So, when’s the best time to do a deal? For many, the
simple answer is “anytime.” On the buy-side, rapidly
growing business are constantly looking to build
capacity in existing markets, gaining access to new
ones, or deliver operational synergies and reduced
costs. On the sell-side, an opportunity to divest some
or all of the business could come at a moment’s
notice. In either case, it always pays to be ready.
Jason Boyer
Partner in the Deals practice
at PwC Canada
The PwC Deals team applies our solid industry experience
to help mid-market and large public clients to raise capital
and complete acquisitions, divestitures, and strategic
alliances. We also help clients in distressed situations, and
with executive decision making, litigation, loss and disputes,
including fraud and/or anti-bribery and corruption issues.
Find out more by visiting us at www.pwc.com/ca/deals.
To learn more about how PwC can help, contact:
David Planques
Partner
(416) 815-5275
[email protected]
Kevin Bromley
Canadian Leader, Forest,
Paper & Packaging Practice
(604) 806-7515
[email protected]
© 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 2075-196 0715