Six or so years ago, the paper industry made some headway to defrag itself through a series of mergers and acquisitions. Many deals, big and small, have taken place since then. A few of the bigger newsmakers in the U.S. were Stora Enso's acquisition of Consolidated Papers (2000), Weyerhaeuser's takeover of Willamette Industries (2001), and Mead merging with Westvaco (2002).

But during all of this, something else has been steadily gaining popularity across all industries—private equity investment. According to Thompson Financial, private equity firms struck global deals worth $396 billion in 2005, a third straight record year and a 51 percent increase over 2004. This compares with a 39 percent rise in overall mergers and acquisitions business.

And the financial experts say there is more money than ever moving into private equity funds.

In the paper industry, last year's biggest public-to-private deal was a corporate takeover. Kansas-based conglomerate Koch Industries Inc., agreed to pay $12.6 billion for Georgia-Pacific Corp., earning GP the distinction as the largest privately held U.S. company.

International Paper's mills in Bucksport and Jay, Maine, Quinnesec, Michigan and Sartell, Minnesota, are now the property of CMP Holdings L.L.C., an affiliate of Apollo Management L.P., following the sale of IP's coated and super-calendered business to Apollo Management.

New Page Corp., which was formed by the acquisition of MeadWestvaco's Coated Paper segment, was bought by New York City-based Cerberus Capital Management.

It's also worth mentioning that one of the largest containerboard manufacturers in the world is Chicago-based Madison Dearborn Partners. MDP's portfolio includes: Packaging Corp. of America, Graphic Packaging, and Smurfit Kappa Group in Europe. MDP's holdings also include: Buckeye Cellulose and Boise Cascades Holding, LLC.

Most recently, Plainfield Asset Management, based in Greenwich, Conn., agreed to assume control over Smart Papers and its debt, and pursue its Chapter 11 reorganization.

There are a number of other deals that have taken place, but I don't have the space to list them here.

So where is private equity headed? Well right now it's firmly entrenched here in the U.S. In fact, the U.S. is the world's largest private equity market, says Apex Partners.

“The arrival of the first $20 billion fund is likely over the next five years ...and it is only a matter of time before private equity-backed takeovers of S&P500 and FTSE 100 firms are commonplace,” predicts Apex.

Considering the paper industry is a cyclical business that relies heavily on capital spending and product development, private equity, in some instances, could relieve the “quarter-to-quarter” performance demands that too many times lead to short-term measures which slowly erode a company's ability to remain competitive into the future.

Private equity funds could also provide for investment in substantially pared-down areas like research, development and technology, which are the keys to innovation—something the industry can't survive without.

Private equity, like M&As, isn't the answer to the all of the challenges facing the industry. But it may serve as a good ingredient to a mix that has been getting a little smoother of late.

Have a comment on private equity? Good or bad for the industry? Send me an email. I'd like to know what you think.

PaperAge. Copyright © O'Brien Publications, Inc. All rights reserved.