Pulp faction: Sappi acquires a Canadian mill

Sappi on Thursday 1 August announced alongside its third-quarter results that it had acquired the Matane hardwood pulp mill in Quebec, Canada, from Rayonier Advanced Materials for $175-million. The company said the acquisition would support its “fast-growing packaging businesses in both North America and Europe.”

The mill also produces “high-yield pulp” used in speciality papers. Sappi said the move “ … establishes certainty of supply for Sappi’s increasing need for high-yield pulp to support its recent investments” and “will enable supply to be increased over time to Sappi’s mills in North America and Europe as demand increases and capacity expands in certain growth businesses.”

The transaction will also reduce the cost of pulp for the company and is part of a pivot to areas with prospects for higher margins.

This follows its acquisition last year of the speciality paper business of the Swiss-based Cham Paper Group for approximately $150-million. In a digital age when demand for paper is generally on the decline, there are still niche markets that a company of Sappi’s size and breadth can branch into.

Such diversification is probably needed as Sappi has struggled of late, a point reflected in its share price. Its share price over the past 12 months is down over 50% versus about 15% for rival Mondi (see graph). The company’s Q3 results for the three months to the end of June 2019 showed a fall in profit to $8-million from $51-million in the same period last year.

The company is also adding to its debt load. The latest acquisition will be “funded through internal cash resources and available debt facilities,” Sappi said. Its net debt at the end of June was $1.728-billion versus $1.603-billion the year before. So it is under some pressure to bring down costs and lift margins, which acquisitions such as this are aimed at doing.

Time will tell if this strategy pays off in a market that is a state of rapid change. Expansion into North America and Europe certainly reduces the company’s exposure to South African political and economic risk. Sappi’s shareholders will hope that the board is seeing the forest for the trees. BM