The fear of missing out

After a year of steady consolidation activity in the paper and packaging industry, experts speaking at the Paper & Plastics Recycling Conference in October say the trend likely will continue as mergers and acquisitions (M&A) often spawn additional activity.

This trend, dubbed the “FOMO effect” by Gabe Hajde, senior analyst of paper and packaging equity research at Wells Fargo, sees companies itching to get in on the action for fear of missing out on growth opportunities brought on by market consolidation.

In the session M&A in Paper & Packaging: How Could it Change the Landscape?, Hajde examined the industry’s recent M&A activity and how companies’ business philosophies might change over the next decade. He was joined by Ryan Fox, corrugated packaging market analyst at New York-based Bloomberg LP, and Ron Sasine, principal at Bentonville, Arkansas-based consultancy Hudson Windsor. (For more insights from Sasine, see “The right place at the right time” starting on Page S22.)

A year of M&A activity

This year saw the Smurfit Kappa and WestRock merger completed, with the newly formed company, Smurfit Westrock, debuting on the New York and London stock exchanges in July. The $11 billion move joined Europe’s No. 1 and North America’s No. 2 containerboard producers to become the No. 2 company globally in terms of capacity, according to Hajde.

As far as recovered paper consumption, on Recycling Today’s 2023 list of the largest recovered paper consumers in North America, then-WestRock ranked No. 1, consuming 5.5 million tons in 2023, while then-Smurfit Kappa North America came in at No. 12, consuming an estimated 841,500 tons.

Two other major players announced plans to combine this year, as the pending acquisition of London-based paper and packaging company DS Smith by Memphis, Tennessee-based International Paper (IP) received “overwhelming approval” from IP’s shareholders in October. Similarly, this would combine North America’s No. 1 and Europe’s No. 2 containerboard producers.

“We’ve seen this before in the mid-2000s and expect to see it on a go-forward basis,” Hajde said of this accelerating M&A trend, noting Mondi PLC’s unsuccessful attempt to acquire DS Smith earlier this year.

The two companies reportedly reached an agreement in March before IP entered the picture, after which Mondi, based in Weybridge, England, announced it would not make a counteroffer. However, in October, the company went on to acquire 11 corrugated, converting, solid board and box-making operations from German company Schumacher Packaging.

“Mondi, while not successful in getting DS, is obviously out in the marketplace going after Schumacher,” Hajde said. “We expect to see more, not just in containerboard [but] boxboard as well.”

Hajde highlighted Brazil-based pulp producer Suzano’s recent acquisition of the industrial assets of Lake Forest, Illinois-based Pactiv Evergreen, which includes two mills, one in Pine Bluff, Arkansas, and the other in Waynesville, North Carolina.

“I suspect that’s not the last,” Hajde said. “[Suzano’s] got some ambitions to diversify, geographically speaking, so probably more to come there.”

Differing philosophies

Hajde identified evolving commercial strategies in the containerboard market amid ramped-up M&A activity.

“We hear a lot about volume tradeoffs, value over volume and value-based selling,” he said. “But I think it starts with decentralized command; empowering your local folks because this is containerboard box making or folding cartons. It’s a very localized business, and I think it’s an important differentiator.”

He said Smurfit Westrock and Packaging Corp. of America (PCA) historically have embraced this philosophy, while other companies have done the opposite.

“If you talk to folks within [the] industry, they would tell you some of their downstream converting decisions were dictated by 17 mill managers and it was about pushing volume,” Hajde said. “It was about what the mill managers were choosing to run at a mill, and then … box sellers [would have to] go figure out who wants this. It’s a very difficult way to make money in converted products.”

As companies consolidate, they seek to create synergies and optimize their networks, including eliminating staffing redundancies—for example, many companies do not see value in retaining two CEOs—or closing facilities that lead to excess costs in the system.

“One of the things we’ve seen is land values,” Sasine said, highlighting one of the driving factors behind mill closures. “There was a time when some of these locations were very far away. As population has expanded and grown, we’ve seen those mill sites now become actually quite valuable development properties. Their value as a new housing development or whatever else starts to exceed [what] the mill was generating, and so you start to see those tradeoffs.”

A historic trend in the fiber market has been for businesses to employ a vertical integration model, specifically downward integration, according to Sasine. This keeps production contained within one organization, where mills, box plants and customization facilities become part of a single entity.

“Fiber tends to do well when it travels inside an organization,” he said.

“PCA has always run a 90-plus percent vertical integration,” Hajde added. “It’s perceived as creating value. It’s valuable to the company and it is reflected in stock [and] performance network optimization.”

Through IP’s pending acquisition of DS Smith, it has stressed its commitment to increasing vertical integration by “leveraging the companies’ complementary business models.”

IP CEO Andrew Silvernail said in the company’s second-quarter 2024 earnings report that the company recently made value-over-volume tradeoffs, ramping up commercial talent, capacity and incentives. Hadje noted Silvernail, who assumed the role of CEO in March, seeks to simplify the organization, whereas Tony Smurfit of Smurfit Westrock wants to engineer complexity into the supply chain.

“Two seemingly very different philosophies,” Hadje said. “I suspect the answer is probably somewhere in the middle.”

The author is digital editor of the Recycling Today Media Group and can be reached at tkazdin@gie.net.