My previous column dealt with the declining demand for freesheet and the consequences of that decline, particularly for the USA and Australia. Freesheet grades are symptomatic of the malaise across almost the entire printed communications sector. It was inevitable that more bad news would follow - and it has. Again, it involves another company with Australian origins.
Recently PaperlinX Limited announced that PaperlinX UK had been placed into administration. The administrators (Deloites) immediately closed 14 of the 19 operational sites and dismissed 700 of the 1200 employees. PaperlinX is (or was) the biggest paper merchant in the UK, with an estimated 30% market share. The UK operation was the first of the dominos to fall. The large Benelux group (Netherlands and Belgium) soon followed the UK operations into administration and closure. Subsequently the Austrian PaperlinX operations were also placed into administration. PaperlinX still has businesses in Spain, Czech Republic, Poland, Scandinavia, Ireland and Germany, which it is trying to divest.
Other companies are picking over the carcasses of the failed businesses. Some specialized business units are finding buyers but it seems unlikely that the balance will be sold as ongoing businesses. A series of auctions are scheduled to sell off significant equipment assets to realize some value from the failed business units.
In many ways PaperlinX is a metaphor for the industry as a whole but it also provides a salutary lesson for companies that embark on a transformation strategy that requires very deep pockets and a compelling business model. With the benefit of hindsight, the PaperlinX expansion was always going to be challenging, but a rigorous assessment at the time should have flagged the need for some discipline. Other companies such as Norske Skog and Resolute who fought out on the global stage to be number one in the newsprint business now essentially focus internally on managing the process of progressively turning out the lights, as demand for their products declines at a frightening rate.
At the dawn of the second millennium in 2000, PaperlinX was spun out of Amcor, the Australian paper and packaging company, which then focused on its transition to plastics packaging and now is indisputably the global leader in that area. It took another 13 years for Amcor to complete the transition entirely out of paper and paper packaging with the spinning off of those assets into Orora, which essentially operates in Australasia and the USA. The year 2000 is also symbolic in that it is the date that marked the peak in the demand for freesheet papers--in the USA at least.
Spinning off PaperlinX is now seen as an inspired decision for Amcor, which may well have had a realistic vision of the future. But it was a disaster for investors who held onto their investment in PaperlinX or bought into the company subsequently. As an independent entity PaperlinX determined that Australia was simply not big enough to realize the ambitions of its management team. PaperlinX had a strong position in the paper merchant business in Australia and assumed this situation could be replicated internationally. And so PaperlinX commenced its strategy of becoming the largest paper merchant business in the world. Its vision in 2007 "to be recognized as the leading international paper company" should have made investors seriously question what PaperlinX was doing. The merchant and paper distribution business is one that has wafer thin margins. By then it was clear that printers and paper manufacturers were consolidating and the concept of a paper merchant was under challenge. Paper manufacturers were increasingly looking to cut out the "middle man." PaperlinX did indeed achieve its goal of being "Number One" in Europe and significantly so. But its success in doing so arguably destroyed the company. PaperlinX went on an orgy of takeovers and acquisitions and in its quest for growth, clearly made some very questionable decisions. The program of acquisitions, focussed on Europe, was aggressive and largely debt funded. Europe was the most mature of global markets, with high levels of competition between merchants and little prospect of organic growth. It is not clear how PaperlinX assumed it could prosper, unless the assumption was that their size would encourage others to leave the market.
PaperlinX was so focussed on expansion that it failed to integrate its new businesses to achieve the economies of scale. Efforts to do so in the last few years proved to be too little too late, as were efforts to diversify into wide format and litho consumables businesses. In the UK it seems also that PaperlinX did not adequately make provision for legacy costs associated with some of its acquisitions. It is reported, for example, that the pension scheme of the Robert Horne Company acquisition, a legacy of more affluent times, had a deficit of £76.5 million. At the same time the increasingly desperate situation at PaperlinX squeezed its available cash. Some supplier mills were said to be demanding upfront payments, following the withdrawal of trade credit insurance by one of the industry's major insurers. Concurrently two of its largest suppliers, Sappi and Stora Enso withdrew from supplying PaperlinX --due to difficult relationships with Sappi and Stora's supplying through its own subsidiary company.
At its peak PaperlinX had 30 operating companies in 16 European countries, in many cases competing with each other, and 7 companies in North America, operating out of 29 cities. In 2007 87% of revenue was coming from merchant operations, with two thirds of that coming from Europe.
The onset of the "GFC" accelerated the decline of the PaperlinX business. As things started to go backwards PaperlinX had to start divesting its better assets to meet the terms of its loan covenants. The first to go was Australian Paper, its papermaking business in Australia, which was acquired at a very low price by Nippon Paper in 2009. Print Business, a UK publication, reports that more than 25% of the UK merchant trade has vanished since 2008. The downfall has been due to a combination of recessionary effects, of a substitution of digital channels for print marketing and of the impact of new press technology.
Then came the exit from various regions (southern Europe, South Africa, the USA) and then finally the sale of the Canadian business, which was actually profitable but part of the bale-out process.
The journey to the present has been punctuated by numerous personnel changes at the top and at subsidiary levels. Ultimately none of this has changed what has been fundamentally an unsustainable business.
The end point has not been reached but will see PaperlinX back essentially where it started in Australasia, with most remaining management functions repatriated. But it will have no paper manufacturing capability. It is not now even the largest merchant and distribution business in Australia--it comes in at number 3, although the top 3 have market shares that are not significantly different. PaperlinX also has an apparently viable Asian business but what remains has little net worth and investors have seen their stock decline 99.5% in value from its peak about 10 years ago. At least it seems that the Australasian business structure was financially quarantined from the European business, so there is some opportunity for it to survive.
The PaperlinX implosion took with it one of its suppliers. Tullis Russell in Scotland has also gone into administration with the loss of 325 jobs, blaming the demise of PaperlinX as the final straw that saw the appointment of administrators. PaperlinX was their third largest customer and most profitable, according to press releases. Tullis Russell Papermakers were manufacturers of very high quality graphic papers and paperboard and noted for their innovative manufacturing processes and their quality for more than 200 years.
Business school case studies are probably already being written about the PaperlinX experiment. They will probably focus on the challenges of bringing different companies together and managing in a declining market. But they should also look at the wisdom of trying to grow a business 12,000 miles away from its senior management group and its board of directors, very few of whom had a strong understanding of the business environment, especially in such diverse and competitive markets. These case studies will make for interesting reading.