Now is the right time to buy a pulp mill

By PAULA OLIVER forestry writer

Carter Holt Harvey yesterday dipped further into its sizeable war chest to buy the pulp part of Kawerau's Tasman Mill from Norske Skog for $US130 million ($311 million).

The forestry giant had been sitting on most of the $2.5 billion proceeds from the sale of its Chilean assets since late 1999, waiting for the right opportunity.

Chief executive Chris Liddell yesterday said the purchase represented excellent timing.

"While we expect the economic environment to be relatively tough this year, we also see it as wonderful timing in terms of the opportunities it throws up - and some of the asset prices are clearly lower than they have been a year or two ago," Mr Liddell said.

Carter Holt could pay another $US10 million ($24 million) for the mill if pulp prices pick over the next two years.

The buyout makes Carter Holt the only supplier of kraft pulp in New Zealand, and owner of two of the cheapest six pulp producing mills in the world. It received Commerce Commission approval last week.

Carter Holt's revamped Kinleith mill has a production capacity of around 275,000 tonnes, and the Tasman pulp mill will produce around 285,000 tonnes.

Kinleith took its first hit of downtime this year, as weak pulp markets forced cuts in production. Markets have not yet picked up.

Mr Liddell told a media briefing he expected a 20 per cent cashflow return on the investment, well in excess of Carter Holt's target. Even on modest assumptions, he expected returns over the next one or two years higher than the cost of capital.

The advantage of owning both mills would be felt when full synergies were gained, Carter Holt chiefs said.

Among those is the opportunity to produce one set of products at one mill, and a different set at the other - saving downtime.

Supplies of wood fibre could also be improved, and customers could benefit from better service.

"Right now we've got log trucks passing each other in the night, and we can eliminate that," Kent Blumberg, chief executive of Pulp and Paper said.

"It will be two years, max, before we achieve full synergies."

When this is achieved, Mr Liddell said, it would be worth $20 million a year.

Analysts had speculated that the sale of the pulp mill would fetch between $330 and $550 million - higher than the eventual deal price.

JP Morgan's Arthur Lim said the move made a lot of sense from a strategic point of view, but many people were trying to pinpoint whether it had been a good purchase price.

"There is such a thing as economies of scale with the kind of business they are in," he said. "If you look worldwide, the pulp and paper sector has been going through a period of consolidation for the better part of 18 months now, with a lot of mergers, acquisitions and activity. That's been a response to the lack of profitability in the industry, which is a direct result of the overcapacity sometimes seen in the industry."

He said it might take a couple of days talking to the company to get a good opinion on the price paid, but he hoped it reflected that the sector was likely to come under pressure as the global economy slowed.

ABN Amro's Dennis Lee said that if Carter Holt was expecting a 20 per cent return on the investment, then it must have been made at a good price.

"If they can earn 20 per cent they will leap up the earnings of the company," he said.

"They have good management now, but the problem is their rate of return. To some extent that's inherited, but this is a way of lifting it. It's a good time to be buying."

Carter Holt has now spent up to a billion dollars of its war chest - $432 million on assets in Australia, $132 million on a new LVL plant, and an undisclosed sum on a quarter share of a Chinese distribution firm.