Finnish paper firms optimistic of obtaining permission to merge

Date: 26/10/1995

THE European Commission will decide next week whether to clear the creation of Europe's largest forestry products group or begin a four-month investigation into its possible anti-competitive effects.

Officials at Finland's pulp and paper companies, Repola and Kymmene, are hopeful that the Commission's initial examination of their merger has not raised the “serious doubts” needed to trigger a further inquiry. The deadline for a decision expires on Monday (30 October).

The merger, announced in early September, will combine Repola's United Paper Mills and Kymmene, allowing it to surpass Sweden's Svenska Cellulosa (SCA) as Europe's leading producer of pulp and paper products and fifth world-wide. It will head the list in Europe in the production of light-weight coated magazine paper, come third in newsprint and fifth in fine paper.

The combined group will boast annual sales of 9.7 billion ecu and employ 45,000 staff, of which pulp and paper activities alone will account for 8 billion ecu and 32,000 employees. With 900,000 hectares of forest land, it will be Finland's biggest owner.

Analysts estimate UPM-Kymmene will account for as much as 34&percent; of Europe's uncoated magazine paper market, 27&percent; of the coated market and 20&percent; of newsprint.

This is only the latest in a spate of mergers in the industry. In 1991-92, Finnish paper producers decided to expand aggressively and borrowed heavily to finance an increase in capacity of 10&percent; a year at a time when demand was decreasing.

Not wanting to repeat this mistake, the industry has been consolidating. Enso-Gutzeit and Veitsiluoto decided to merge last year and will begin trading as a combined group at the same time as UPM-Kymmene, in May next year.

A persistent motive in these mergers has been the desire of firms to diversify from excessive exposure to one or two products, where erratic swings in prices can leave them high and dry.

UPM-Kymmene will unite Kymmene's emphasis on pulp and fine paper with UPM's strength in newsprint and magazine papers.

During the initial phase of the inquiry, the Commission focused on the possible threat to competition in Finland, rather than in other European countries as some industry analysts had predicted.

One such inquiry was into the supply of paper sacks in Finland, where the combined group has a very large share of the market. The companies admitted this, but countered that this failed to take account of plastic sacks as a substitute for paper products.

“The problem is that it is a local market and it is not yet profitable to import paper sacks,” one company official said.

In the production and sale of magazine paper, the companies defended themselves by pointing out that the situation in Finland was similar to that in any large paper-producing country like Norway, Sweden or Canada.

“It is not profitable to export to us,” a company official said, “but that is the same for any country where very large magazine production capacity is concentrated on its own territory.”