Newark Group divests European units to private equity group – and you know what that means!

This news caught my eye. To quote the CEO of Newark Group:

“Our European and North American operations benefited from more than a decade of best practices that allowed both regions to grow, prosper and position themselves for the future,” said Frank Papa, President and CEO of The Newark Group. He added, “Now, however, we believe it is the right time to separate the two entities and re-dedicate our energies and resources in the geographic markets in which we have historical strength while providing the means to pursue growth in new products and new markets.”

I believe this statement should be read as: the market for paperboard and solidboard is not going to recover anytime soon, so let’s get rid of the European units. This lack of recovery (until way into 2014) is predicted by the Finnish Forest Research Institute as well, and in general, as the World Paper Markets up to 2025 by Jaakko Pöyry Oy also estimates, growth markets for these products can be likely only found in China and the rest of Asia (excl. Japan). Nonetheless, as packaging material it is probably ending up in the US and Western Europe anyway eventually.

On behalf of Newark, this is perhaps a pre-emptive step to cut losses, as also the expected situation of the North American market is not so rosy. But, what is a private equity group going to do with all these paperboard and solidboard mills? A PE company is not able to change the market dynamics, obviously, so they are probably trying to ‘enhance productivity and profitability.’ Most likely, when the deal is sealed, there is not anymore going to be much public information on the doings of the mills. But I wouldn’t be surprised if they eventually close the mills or before that, reduce the workforce AKA fire people in the name of restructuring.

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4 responses to “Newark Group divests European units to private equity group – and you know what that means!

  1. Pingback: UPM’s cash flow and the simplification of business | Arjen polku

  2. I don`t undertand why the new owners are going to close the mills.

    • Dear reader,

      Maybe the expectation that the private equity firm will close all the mills is too harsh. I was thinking in particular though of the fare of NewPage, which was formed on the basis of MeadWestvaco’s Printing and Writing Paper business. This was sold to Cerberus Capital Management, which completely mismanaged the new firm (because they did not understand the paper industry). Last year, NewPage filed for bankruptcy due to negative cash flow. My expectation for sale or closure of mills derives from this kind of example – private equity firms do not have any special skills that can suddenly make firms more profitable, that firms themselves also can do (cost reduction, process optimization etc.) The idea of a private equity firm is to generate as much profit as possible for equity holders, and in the current paper and board market (in Europe!) this is simply an unrealistic proposal.

      I hope this has answered your question a bit. It is an issue that should be looked in more though.

  3. Pingback: Why private equity take-overs should be seen as a nail in the coffin of healthy companies | Arjen polku

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