Stora Enso: coming to America: Stora Enzo is already big. It also wants to the best.

In a global paper industry swamped by wave after wave of mergers, acquisitions, strategic about turns, and increasing product specialization, it's easy to find companies with interesting stories to tell. Some privately-owned, medium-size operations, for example, have plenty to say about being swallowed up by a larger company, then wrestling to reconcile longstanding and proud traditions with the "cut-and-thrust" business of contributing to shareholders' dividends. Then again, there is many a fascinating tale to be found examining how small-time, "mom and pop" producers consistently turn a profit on a single old machine.

Then there are the big guns--and the really big guns. When major-league players make radical new moves, the drama goes past interesting, past fascinating, all the way up to "must-see." The fact is, when file industry's biggest players make the biggest moves, it directly affects the rest of the business. And when you are 15 million metric ton producer Stora Enso, that is a big effect.

CHANGE IS CONSTANT

Over the past decade, Stora Enso has been no stranger to dramatic change. Following the earlier absorption of (among others) Tampella Forest, the Enso portion of the company remained two separate entities--Enso-Gutzeit and Veitsiluoto. Stora (which, ironically, means "big" in Swedish) would not have been quite so "stora" had it not absorbed Germany's Feldmuhle, among others. But Enso-Gutzeit and Veitsiluoto did merge to form Enso, Stora did buy Feldmuhle and Stora and Enso did merge to form Stora Enso.

This explains the names of three of the four meeting rooms in Stora Enso's London offices: "Helsinki," "Stock holm," and "Dusseldorf." The changes did not end when Stora and Enso got together, hence the name of the fourth meeting room (to be revealed later).

Following the merger of Stora and Enso in 1998, the company began rooting out some of the non-core businesses in its portfolio. It sold off most of its technical office paper business--consisting of its German subsidiaries Stora Carbonless Paper and Stora Spezialpapiere to Japan's Mitsubishi Paper Mills (MPM) and Mitsubishi Corp. on January 1, 1999, only clays after the merger. The deal gave the Mitsubishis a 76% stake in both mills compared with the combined 20% stake they held in Stora Spezialpapiere before the takeover.

Then, in February 1999, Stora Enso announced that it would sell at least two of its mills, with a third possibly to follow. The Tervakoski specialty paper mill, north of Finland's capital city, Helsinki, was one of the first to go, despite being a "profitable unit within Stora Enso Fine Papers." The thin printing paper and cigarette paper mill went to Austria's Trierenberg, the world's second-largest producer of papers for the cigarette manufacturing industry.

In a parallel announcement, Stoma Enso made public that it was selling off its Dalum mill in Demark to a Danish investor group because "Dalum's profitability was not satisfactory." The company also revealed at that time that it would "review options for the future ownership" of its Gruvon mill, which was "not a core business." While the Tervakoski and Dalum units were sold, the Gruvon story took a completely different turn. New developments in this situation led to the paper industry welcoming a Billerud back into the fold.

BILLERUD'S BACK

Stora had purchased the previous Billerud back in 1984. In its more recent incarnation within Stora Enso, the company has created a new Billerud by merging its Gruvon mill with the Karlsborg and Skarblacka paper mills of Sweden's AssiDoman. The new Billerud is owned jointly by Stora Enso and AssiDoman, but both companies promoted the deal with the intention of exiting the Billerud businesses. The partners plan a stock-exchange listing for Billerud by the end of 2002 at the latest. However, as Kari Vainio, Stora Enso's communications and investor relations chief, points out, "the process might be shorter."

Another Stora Enso business earmarked for disposal was the 85,000 metric ton Mondal fine paper mill, which currently runs two "relatively small" specialty paper machines. Stora Enso was looking for a buyer for the mill last year, and while it would still be sold if the right offer came along, the company is now redeveloping the mill with intensified research and development. The mill produces 30,000 annual metric tons of" colored papers and 50,000 metric tons of double-coated papers.

CONSOLIDATED--LITERALLY

The one common link between all of the above deals is common geography. True, Stora Enso also owned a mill in Canada and had interests in operations and opportunities in Asia and Latin America; but in all fairness, the Stora Enso deals that made the industry sit up and take notice were mostly European--at least until last year.

That mystery fourth meeting room in Stora Enso's London office is named "Wisconsin Rapids," after the headquarters city of what used to be Consolidated Papers, which Stora Enso bought last year. Europe's biggest papermaker bought the biggest producer of coated paper and SC printing papers in North America, the world's biggest paper and board market. Furthermore, Stora Enso is now listed on the New York Stock Exchange and has truly international ownership, with about 70% of its shares owned outside of its home base of Finland. Big deals hardly ever come much more important than that.

The way toward this deal was paved by Stora Enso's new strategy, which the company announced in August 1999. As well as focusing on three core product areas--publication papers (magazine paper and newsprint), fine paper, and packaging boards--Stora Enso pointed out at the time that "our focus in magazine paper and newsprint is mainly in Europe. However, North America is the largest market for these products, and the consolidation process there is expected to accelerate. Through the Port Hawkesbury mill in Nova Scotia, Canada, Stora Enso already has a presence in North America, providing the opportunity to follow developments closely and possibly also to participate in the consolidation process."

As it happened, the Consolidated Papers deal changed "possibly" into "actually."

When the purchase was announced, Stora Enso's CEO Jukka Harmala stated, "this acquisition marks the first major step toward the successful execution of our North American strategy, with approximately 13 million metric tons of manufacturing capacity in Europe, and the integration of Stora and Enso behind us, the further development of our manufacturing base in North America is our highest priority. We believe that Consolidated Papers represents an ideal strategic fit for our business."

Vainio explains that the move was "ideal" not only "because of our strategy to build a platform on the North American market," but also "on our core products." Consolidated brought to the table seven mills with a combined capacity of well over 2 million annual metric tons of paper and board. About half of this is lightweight coated (LWC), complemented by some 400,000 metric tons of supercalendered (SC)and newsprint and not quite a million metric tons of coated woodfrees freesheet) and coated woodfree specialties.

As Vainio points out, "Our market share in coated papers in Europe varied from 15% to about 21%-22%. But through one single acquisition, we got a similar share in the world's largest paper market."

Despite the company's enthusiasm, though, Store Enso did not receive universal praise for the Consolidated deal. Some analysts were very skeptical of the price tag. The transaction valued Consolidated Papers' total equity at US$ 4 billion or US$ 44/share, representing a premium to Consolidated's shareholders of 69% based on a single-day closing price, as well as being 34% above the shares' 52-week high price.

But Vainio defends the company's strategy. "We were criticized [over the price we paid] for Consolidated, but that's short term. About half of the U.S$ 90 million annual synergies we targeted [for 2001] are market-based, and in current market conditions, it will be difficult to achieve those this year. But when the market improves, it will be a different story." Stora Enso and Consolidated further predicted annual pretax operating synergies of about US$ 110 million, "with the full amount achieved in 2002."

BIGGER AND BETTER

The main driving force behind the decision to make serious headway in the U.S. market was the fact that "Europe was fairly saturated in certain [publication paper] grades," says Vainio. And now that Store Enso has this significant platform, its goal in North America is, as Vainio puts it bluntly, "to get bigger." He explains that "We want to increase our presence [in North America] and now that we have a platform, we can go further with smaller steps in case there is a mill available in our core products. We do not necessarily need to take big steps." On the related subject of whether the company has any such smaller targets in mind so soon after the Consolidated deal, he names no names but admits that "we must be alert all the time to opportunities for mergers and acquisitions."

Spearheading this operation is the senior executive vice president of Stora Enso North America, Kai Korhonen. He is supported by, among others, the senior vice presidents of Store Enso North America's two key business units: magazine papers (Ronald Swanson) and fine papers (Aulis Ansaharju). The magazine papers unit makes LWC and SC papers and newsprint, while the fine papers business produces fine papers, specialty papers and paperboard. Stora Enso's Port Hawkesbury mill, is part of the Stora Enso North America Division as well.

While the people on the ground at Store Enso North America may be working for North America's largest producer in certain sectors with the goal "to get bigger," they are not in the business of pushing production just to report big output numbers. Indeed, late last year the business permanently retired two coated paper machines with a combined annual capacity of 80,000 metric tons-the 57,000-tons/year PM 15 at Wisconsin Rapids and PM 61 at the 23,000-tons/year Whiting mill, both in Wisconsin. These machines were both already on stand-by before the decision, and both units had been idle for more than a year by the time of the announcement. The company said at the time that "by today's papermaking standards, the machines can no longer compete with the larger, faster, more efficient paper machines in North America and Europe."

CASES CLOSED

Consolidated Papers had already begun a cost-reduction process before it was purchased by Stora Enso, and "the process has intensified since we acquired the company," says Vainio. "It is a normal procedure at Stora Enso, and it is still taking place."

Evidence that this is not a phenomenon confined to America was seen in the shutdown of the 45,000-metric ton board machine at the still-unsold Molndal mill in Sweden, which was "considered too small to be competitive." The company explained that in addition, the "average capacity utilization of the board machine in Molndal has been very low in recent years, causing profitability to deteriorate."

More recently, Stora Enso closed its 40,000-metric ton Newton Kyme packaging board mill in the UK earlier this year. The mill's products were described as "no longer commercially viable."

The company does not take such decisions lightly. Far from being a closer of mills, one of Stora Enso's big profitability thrusts is productivity improvement. As Vainio explained, "we have over 100 paper machines in this company. Of course their profitability is different, but the target [13% return on capital employed] counts for all units."

AN OPEN AND SHUT CASE

The company has actually announced the future closures of two more machines, although these are to take place in conjunction with the startup of a new 400,000-metric ton recycled newsprint machine in Langer-brugge, Belgium. As the new line is being bedded in, the closures of 120,000-tonne SC PM 2 at Langerbrugge and the 110,000-tonne newsprint PM 1 at the Summa mill in Finland will reduce the headline capacity increase to 170,000 annual metric tons.

While machines to be closed may not be the largest in the world, they're also certainly not the smallest. As ever with Stora Enso, it is far more than a question of mere tonnes. The company argues that "these measures are being taken to increase the overall competitiveness and to improve machine specialization and shut down units that are not profitable in the long term." Jukka Harmala adds that "Consolidation is obviously needed in our industry, but so is the improvement of the existing asset structure. I believe that our record of delivering better-than-average financial results has been due to the on-going, balanced development of our paper and board production."

RESTRUCTURING PULP

The company has a similar attitude to its raw materials supply, and although it recently dissolved its pulp division ("We are not a market pulp company"), that does not mean it is hesitant about investing in pulp capacity. The volume of pulp that Stora Enso sells is more or less balanced out by the amount it buys, meaning that the company's own internal capacity is roughly equivalent to 100% of its needs. Since it sees itself as self-sufficient in pulp, optimizing the competitiveness of its own supply is a byword for the company in this respect too.

One example is the recently-completed new 600,000-metric ton bleached hardwood kraft line at Imatra in Finland, where the new capacity replaces an older, smaller line. But it's not just a case of out with the old, in with the new. Projects must fit the company's stated strategy. The Veracel pulp mill project in Brazil is a perfect example. As Stora Enso explains: "The aim of the Veracel project is to integrate competitive southern eucalyptus pulps into the company's fiber sourcing."

Following delays due to negotiations over the previous ownership structure, the company is now an equal 45% partner with Aracruz in the Veracel pulp mill project in Brazil, on which a final decision is now scheduled for the end of next year "subject to international pulp market conditions." If it gets the green light, the project will set up a 750,000-metric tons/year bleached eucalyptus pulp mill. The timing should allow a separate 700,000-metric ton expansion by Aracruz to be completed and absorbed before Veracel's tonnage comes Oil stream.

WHAT NEXT?

Stora Enso is certainly not short of ambitions for the future. The company's stated vision is "to be the leading forest-products company in the world." Considering the fact that this company has an annual capacity of just over 15 million metric tons of paper and board, many observers might understand "leading" to signify what many companies mean when they use the word--"the biggest."

But as Vainio points out, "that's not what we mean. It's more of a qualitative statement. We want to create a situation where, if any representative of our stakeholder group [from suppliers to customers to shareholders and more] is asked to name the number one forest products company in the world, they will answer 'Stora Enso'. It's about being well-focused--it's definitely not the size. We want to be the best, not the biggest. It's a tall order, but we also feel it's a realistic vision."

Stora Enso North America: Capacity
('000 metric tons/year)

MILL               COUNTRY    CAPACITY    GRADE

Biron              USA        415         LWC
Duluth             USA        220         SC
Kimberly           USA        245         LWC
                              235         Coated Fine
Niagara            USA        205         LWC
Port Hawkesbury    Canada     350         SC
                              190         News
Stevens Point      USA        175         Coated Specialty Fine
Whiting            USA        200         LWC
Wisconsin Rapids   USA        485         Coated Fine

TOTAL                         2720