Market Issues

SCA gets a grip on Central Europe

SCA’s announcement at the end of 2011 that it is making a binding offer to acquire Georgia-Pacific’s (G-P) European tissue business for €1.32bn indicates a substantial change to the market dynamic within the European tissue sector.

The move would include G-P’s consumer and AfH tissue paper products, personal care businesses and manufacturing assets across Europe. Its consumer brands as well as AfH and private label products would also be included.

The transaction is subject to consultation with employee representatives and subject to approval by relevant competition authorities in the EU.

Implications for the European tissue sector

The implications for the European tissue sector are substantial. Increased consolidation within the European tissue industry will ultimately result in the balancing of the industry’s position against the strong retailer groups. This is likely to benefit the whole sector. In selected countries, the deal means that SCA is going to get a significant share of capacity allowing it to restructure and gain synergies which will improve its own financial results.

“SCA is not just running after varied market opportunities that are out of its control, but is showing a clear ability to take its fortunes into its own hands.”

At the same time, the potential for overcapacity can be better controlled, which also benefits the whole sector. However, the move will undoubtedly impact the competitive environment shifting the pressure dynamic to competitors. Despite that fact, overall the move is likely to be viewed by the industry as more positive than negative.

SCA’s new European market share

Following the acquisition, SCA will have a 35% overall share of the European consumer tissue markets, a 30% share of the AfH market, and some 33% of the total European tissue markets. However, the European Commission is interested in the market share in ‘relevant markets’. The definition of what is a ‘relevant market’ has in the past been case specific and somewhat varied.

Will there be a geographic split of the markets or can it be split by segment or product category?

When looking at how this works in practice, there is no pan-European overall tissue market as typically tissue markets are highly regionalised – often within a country. If seen this way the question of ‘relevant markets’ may arise in some countries, for instance in France, which has been the traditional stronghold of G-P. It’s feasible that SCA’s new share in France may now exceed 50% of the total tissue market. In the UK/Ireland, Spain and Benelux, the new shares are also high, and depending on what is perceived to be the ‘relevant market’, may become a key issue. For example, in the UK and Ireland the new share is around 40%, but if the segments are taken separately the combined share of G-P and SCA (for instance in private labels) may be higher.

The acquisition is likely to go through, but some restructuring is expected to take place if not caused by the competition authorities then as rationalisation moves by SCA. Most certainly these matters will be widely discussed.

Consolidation in Europe

The market consolidation activity is indeed very welcome for the European tissue sector. One reason why the big multinationals are stepping out from Europe is due to the fragmented nature of the European tissue market. If the situation is compared with North America, where in practice three very strong players dominate the market, the business environment is very different and this is also reflected in the economic results of the companies. The profitability of the North American tissue companies is clearly on a higher level than the average in Europe. European producers have been squeezed by the strong retailers, but now with a more equal tissue player the situation may improve.

The competitive situation may in some parts of the markets become distorted, and can have some negative impacts, but all in all the consolidation and grip on fairly large volumes is certainly welcome.

G-P’s stepping out from Europe offers no surprise

G-P has also sold its two Italian mills to Cartiera Lucchese, along with a 50% stake in the Turkish joint venture, Ipek Kagit, to Eczacıbası Group.

G-P will step out from Europe entirely and as it has attempted to do so earlier, this move was expected. The fact that Cartiera Lucchese acquired the Italian mills may well result from the history of the deal, as before the deal with SCA G-P also seemed to be ready to divest individual mills and regional businesses separately.

Eczacıbası Group (EG) is now the 100% owner of Ipek Kagit in Türkey. EG has had the 50% share for a long time and has been a very strong partner. It is no wonder that EG didn’t sell but would rather acquire the other half. The strong consumer brands (Selpak) continue locally and are separate from the rest of the G-P brands.

Conclusion

SCA is using its unique position in Europe to truly exploit its consolidation power and synergies. The move shows that SCA is not just running after varied market opportunities that are out of its control, but is showing a clear ability to take its fortunes into its own hands. Too long has the tissue industry been at the mercy of raw material price fluctuations, developing overcapacity and other external issues.

Pöyry Management Consulting advises players within the global paper, pulp, packaging and hygiene sectors. [email protected] www.poyry.com

After writing this, the G-P sale of the Italian mills has been completed and SCA has divested its packaging operations to DS Smith to enable increased growth in the hygiene business.