SCA cleans up in the 'niceness' stakes: for Europe's SCA, "play nice" isn't just good advice--it's a winning business strategy.
In fact, Svenska Cellulosa Aktiebolaget-to give the company its full title--is one of Europe's heavy hitters in both financial performance and production capacity. SCA's 2001 results reported net sales of SEK 82,380 million (US$ 8.88 billion) and an operating profit of SEK 9492 million (US$ 1.02 billion). The group has delivered steady sales and profit growth over most of the past decade, much to the delight of investors and analysts alike.
Despite industry cycles, the group has become one of the steadiest ships on the paper industry sea. Not only that, but SCA has achieved this steady earnings growth while managing to swallow a number of large acquisitions along the way--including Tuscarora in the United States and CartoInvest in Europe--apparently without any signs of indigestion.
The result of this achievement is that, without any prompting, even some of the most hard-bitten analysts will happily volunteer fulsome praise of the company's strategy and management team.
SCA is not laying claim to any secret formula for corporate success. Indeed, the group's chairman, Sverker Martin-Lof, appears on the company's web site spelling out its growth strategy:
* Acquisitions must create value for shareholders and be earnings enhancing in the first year. The CVA index--the net present value of the cash flow generated by the acquired company--must be 20% above the price paid for the company. (As Martin-Lof notes, "This is a safety margin which we consider integral to our acquisition strategy.")
* Decentralization of initiative and execution to business areas
* A bonus system linked to the result of the acquisition as a way to motivate managers to ensure that the acquisition is successful in the long term
* Maintain such a strong position that the group can afford to wait for the right moment to buy
* Make an acquisition only when you are a welcome buyer.
According to Martin-Lof, "To be able to be successful as a buyer and ensure a smooth integration of the companies, you need the management to support the acquisition. They need to appreciate SCA as a buyer. If you don't have that backup from your management and personnel, your chances of success are slim."
So far; the formula seems to work. The group's share price is holding relatively steady in a bearish market and the group's results in the last quarter outpaced estimates, showing a surprisingly strong performance in the hygiene segment.
Indeed, as Harri Taittonen, analyst at UBS Warburg, noted, "you have to give credit where credit is due. For all the acquisitions in the past five years, they have done quite well to keep a smooth earnings growth. Even with quite large deals, it's really been a solid earnings growth right throughout that period."
UP IN VALUE
Taittonen is among several industry commentators who believe that the company has done well incorporating the likes of CartoInvest and Tuscarora, alongside a host of smaller acquisitions and several significant machine investments--most notably the new SEK 2 billion Super Calender (SC) paper machine at Laakirchen in Austria.
Across the board, the group's strategies have paved the way for SCA to move steadily up the value chain and bolster margins. Recently, SCA announced packaging acquisitions in Spain and North America while concurrently enhancing the competitiveness of its packaging operations in Denmark. The group acquired the Spanish packaging company Bertako for EUR 17.50 million (US$ 17.09 million) on a debt-free basis.
This deal follows the EUR 131 million (debt-free basis) acquisition of the German packaging company V+D Stabernack earlier this summer in a move that strengthened the group's position in the field of packaging products with advanced printing. As the group's president and CEO Jan [Angstrom]strom noted, "With this acquisition, SCA is now the new market leader in Germany."
Previously, SCA's interests in this field comprised mainly SCA Nicollet in France. According to [Angstrom]strom, the Bertako and Stabernack purchases "should make for a very strong European network" in value-added packaging products with high quality printing.
SCA has also been making headway in the United States. The group snapped up North American protective packaging company Packaging Resources for US$ 6 million on a debt-free basis. As the company noted, "With two production units outside Denver, Colorado, Packaging Resources manufactures customized packaging, primarily for the electronics industry. Based on the proximity to Tuscarora's existing plants in the region and inherent consolidation potential, the acquisition offers considerable synergies."
On top of that, the group has restructured its Danish operations and is set to carry out an investment project in Grena--the company's largest corrugated box plant in Denmark. All-in-all, the most recent investments amount to some SEK 253 million (US$ 27.26 million) and are scheduled to be completed early in 2004.
Of course, SCA is not having everything its own way. After all, the paper industry always has its cycles and as Taittonen notes, the increase in wastepaper prices over the year may affect third quarter results in the hygiene segment. But he also believes that if the group secures the most recent price increases it has announced on the packaging side, it will be in good shape to absorb any adverse effects from the increased cost of raw materials.
That point was echoed by the new president of SCA's packaging division, Rob Jan Renders. "We have seen some rapid increases in the second quarter, but we feel the prices have peaked now and we expect a stable wastepaper market, or even a slightly decreasing price," he said. "Wastepaper prices went up by 15%-20%, but it is our intention to get back to those margins we had before."
Clearly, looking after day-to-day operations and achieving organic growth will be crucial to the company's development, but SCA has set itself some tough growth targets. Meeting them will require steady acquisition activity in the months and years to come.
The company's stated target is top line growth of 8%-10% per year. It is reasonable to assume that 3%-4% of that will come from organic growth across the group, but the remainder will almost certainly come from further acquisitions. As both the company and its analysts readily admit, the potential of this second part of the growth forecast does not appear to be priced into the company's share value.
"That's absolutely right," said Lars Kjellberg, analyst at Credit Suisse First Boston. "Our view is that when it [an acquisition] happens, it happens. Our target price is slightly above the current share price, but I don't think I'd say the price reflects that sort of growth."
Analysts cite several reasons to explain their reluctance to price in these arguably aggressive growth targets. Mathias Carlson, analyst at Deutsche Bank, said, "The company's track record is impeccable and I very much agree with the market on that. But there is some risk as well. For example, they are now growing the company from a 50% higher asset base than they were and if they want to keep growing over the next five years they'll have to buy bigger companies. Bigger companies mean higher prices and it also becomes more difficult to integrate them effectively."
Lars Kjellberg at Credit Suisse added, "The whole strategy rests on whether they can grow the top line at 8%-10%. Can they pay the prices required and can they keep making friendly takeovers? Every one of theirs has been a friendly takeover, but can they keep doing it? Another area to look at is European competition. They are big now, so will EU competition law allow them to grow or are they simply running out of options? On the tissue side, they have something like 25% of the European market, so it could be difficult for them to buy someone big and they will have the problem of trying to put together a lot of smaller investments."
For Peter Nyquist, SCA's senior vice president of communications and investor relations, these are problematic issues. Still, Nyquist believes that the company is in a good position to keep delivering on its growth targets for many years.
"I can understand the questions, but I really think you need to look a bit at history here," he explained. "At a meeting we had with the capital markets in 1997, the feedback was that 'yes, you will probably have enough acquisition opportunities to grow at 10% per year, but do you have the financial muscle? At another capital markets meeting earlier this year, they said, 'we can see that you have the financial muscle, but you will have your work cut out in finding the acquisitions.' Back then, we didn't have the U.S. to grow in; also at the end of this period we are slowly working our way into Asia. We have met out targets in the past. In the future, some years we will be a bit above the 10% and some years a bit below."
Nyquist conceded that SCA did indeed face regulatory hurdles because of European Union competition law in some markets, but he pointed out that SCA focuses all its targets with the company's overall business targets in mind. Even with the 10% growth targets, the business units understand that there may be constraints with the EU position and they adjust their plans accordingly.
"All the business areas have their growth targets and they know what they have to reach," Nyquist explained. "As long as people are coming up with targets we will have no problem because we know what we're willing to pay for them. Even in Europe, it's still possible to find some big, interesting packaging acquisitions which would speed our growth."
That point was underlined by Rob Jail Renders, who indicated that SCA's packaging group still has some gaps to fill in Europe. "We're always looking for companies that complement our value-added approach and that help us offer complete packaging solutions, in terms of specific markets, we must strengthen our presence in France, the Iberian peninsula and, to some extent, Germany."
CEO Jan Angstrom also noted, "Tissue in Europe is showing very stable demand and CartoInvest has performed very well on the southern European market. In the away-from-home market, prices are stable and in North America demand has increased."
Meeting the group's growth targets while maintaining margins and keeping the acquisitions flowing is the key to SCA's future growth. At this stage, these are targets that the company feels confident it can deliver. Strong growth, particularly in the protective packaging and incontinence product segments, are likely to help SCA on the organic growth side of the equation; but if the company is to deliver on its 8%-10% top line promise, being perceived as "nice" may turn out to be a key strategic asset. S!
IN THIS ARTICLE YOU WILL LEARN:
* What analysts say about SCA's current performance
* How this major European player plans to achieve continued growth
* The strategy behind SCA's successful string of acquisitions
* The SCA group's home page, which includes links to the websites of each separate business area: www.sca.com
HALF A DECADE OF SCA ACQUISITIONS
Packaging Resources. USA Bertako, Spain V+D Stabernack, Germany AR Fegersheim, France CartoInvest, Italy Mid-Lands Chemical Company Inc., USA Polyfoam Packers Corp., USA
Marko Foam Products, Inc. USA Encore Paper Company Inc, USA Anjou Emballages, France Cartonnages Industriels Mehunois, France Pakkausjaloste Oy, Finland ISC Inc, USA RPA. USA Tuscarora Inn, USA Georgia-Pacific's AFH tissue operations, USA Acquisition of Metsa Tissue net approved by European Commission
Obalex, the Czech Republic (SCA acquires remaining 51%) Metsa Corrugated. Finland Metsa Tissue, Finland (65 %) SCA/Johnson & Johnson
Divestments Neopac A/S, Denmark Mode Paper, Sweden
Joint ventures SCA/Graninge, Sweden
Nisa, Portugal Danisco Pack, Denmark Len-Pak, Ireland Papeler Noya S.A. (Panosa), Spain AM Paper Group Ltd, UK Metsa tissue. Finland (11.17 %) Nicollet, France Forsell Emballage. Sweden Danapak Papemballage. Denmark Central Package Group. Singapore (11 %)
Joint venture SCA/MoDo, Sweden (PDF)
Productos Familia, Colombia (SCA has now 50% holding) Rexam PLC, corrugated packaging division. UK Obalex, the Czech Republic (49 %) Holland Pacific Paper, the Philippines Productos Familia, Colombia (29 %) Melhoramentos Papeis, Brazil Svetogorsk Tissue, Russia Hexadis, Alpan and Enalis companies, France Marpo, Spain
About the author: Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at +32 2 534 4960, or by email at jim.Kenny@dsinow.com
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|Title Annotation:||Company Profile|
|Publication:||Solutions - for People, Processes and Paper|
|Date:||Nov 1, 2002|
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