POWR.L Regulatory News (POWR)

5 Nov 2008 07:00



5 November 2008

POWERFLUTE OYJ

INTERIM DIVIDEND AND POTENTIAL ACQUISITION

Powerflute Oyj ("Powerflute"), which operates a paper mill in Kuopio, Finland where it manufactures premium grade Nordic semi-chemical fluting, announces today that it is to delay payment of its interim dividend of 1.681 Euro cents per share.

In the Company's interim results announcement released on 6 August 2008, the Board stated that it was its intention to pay the interim dividend by the end of October 2008. However, the Company announced on 1 October that it had entered into a conditional agreement to acquire the assets of Papierfabrik Scheufelen GmbH & Co KG ("Scheufelen"), a manufacturer of coated woodfree ("CWF") papers based in Oberlenningen, Germany. The Board believes the acquisition of Scheufelen will be materially earnings enhancing for Powerflute and in view of the recent turmoil in financial markets, has decided to delay the payment of the interim dividend until such time as financing for the acquisition has been secured. 

Update on the transaction

The Company is pleased to announce that it has now received the formal approval of the secured lenders of Papierfabrik Scheufelen GmbH & Co KG for its acquisition of the assets and business operations of Scheufelen. The acquisition of Scheufelen remains subject to final approval by the Board of Directors of Powerflute and to the successful conclusion of a financing exercise. 

Rationale for the transaction

The Board of Powerflute believes that recent announcements of restructuring activity in the CWF sector will lead to a substantial improvement in the balance between supply and demand and will create an environment in which CWF producers can improve their margins to acceptable levels. Although the current economic uncertainty may result in some short-term decline in demand, the CWF sector would appear to be poised for cyclical recovery and the Board is confident that market conditions will improve in the medium term.

Scheufelen is a well equipped and highly regarded participant in the CWF sector with a strong position in certain robust, niche markets. As such, it is well positioned to withstand any short-term reduction in demand and to take advantage of any medium-term cyclical recovery. Powerflute's management team is expected to contribute significantly to improving Scheufelen's operating performance and margins.

Notwithstanding any change in market conditions, the Board of Powerflute is confident that the performance of Scheufelen can be significantly improved as a result of the restructuring outlined above and other measures to be implemented once the business is under Powerflute ownership. Accordingly, the Board is confident that the proposed acquisition will be materially earnings enhancing for Powerflute in 2009.

Structure of proposed transaction, financing and impact on Powerflute

Scheufelen filed for insolvency protection on 17 July 2008 and since then has been operating under the management of Dr. Jobst Wellensiek, who was initially appointed as preliminary insolvency administrator ("Administrator") and then upon the opening of the formal insolvency proceedings on 1 October 2008 was confirmed as Administrator by the Esslingen Local Court.

Under the terms of the proposed transaction, Powerflute will acquire all of the goodwill, intellectual property, tangible fixed assets, inventories and business operations of Scheufelen from the Administrator of the Scheufelen estate. Powerflute will not acquire trade or other receivables and will not assume any of the trade, financial or other liabilities.

Immediately prior to the commencement of insolvency proceedings, the net book value of the tangible fixed assets to be acquired was approximately EUR 58 million. Powerflute will undertake a fair value accounting exercise in accordance with the requirements of IFRS following completion of the acquisition. Approximately 500 employees will transfer to a new company established specifically for the purposes of the acquisition. The business will continue to trade under the name "Papierfabrik Scheufelen" and will continue as a producer of CWF papers.

The purchase consideration consists of an initial cash payment of EUR 25 million due to the insolvency estate on completion. Powerflute will then invest up to a further EUR 20 million in working capital and capital projects during 2009. On the basis that the acquisition is financed entirely from debt, Powerflute's net debt following completion of the transaction would be approximately EUR 70 million.

Scheufelen

Scheufelen operates a single paper mill with total annual production capacity of some 300,000 tonnes located in Oberlenningen, approximately 50 kilometres from Stuttgart in Southern Germany.

Scheufelen's business is concentrated within a 500 kilometre radius of its Oberlenningen base, in markets where it is able to achieve a competitive advantage due to geographical proximity and responsiveness to customer requirements. The majority of Scheufelen's output is sold to commercial printers and paper merchants in Germany, Switzerland, Austria, France and Italy. The principal CWF paper products of Scheufelen are marketed under the BVS brand and represent more than 80% of sales. In addition, Scheufelen manufactures and distributes a range of premium grade CWF papers. For the year ended 31 December 2007, Scheufelen delivered 285,000 tonnes and achieved net sales of EUR 211 million (unaudited).

Scheufelen's raw material and other manufacturing costs include expenditure on hardwood and softwood pulp, chemicals and pigments (which are used in the manufacture of paper and coatings) and energy. Wood pulp is an internationally traded commodity whose prices are generally quoted in US Dollars and are linked to quoted indices. The chemicals and pigments used by Scheufelen are also internationally traded commodities. Scheufelen does not have any power generation capabilities and all of its electricity and gas requirements are purchased from external suppliers.

  In recent years, Scheufelen's margins have been under pressure due to the general oversupply of CWF papers in Europe and the impact of rising raw materials, energy and other input costs. In the year ended 31 December 2007, Scheufelen reported EBITDA of EUR 3.1 million (unaudited) and in the six months immediately prior to filing for insolvency in July 2008, Scheufelen was loss making at the EBITDA level.

The market

CWF papers are used in the production of high quality printed advertising and promotional material. Production of CWF papers in Europe is dominated by six major producers who between them represented approximately 85% of the total annual production of more than 10 million tonnes before the capacity reductions outlined below.

Demand for CWF papers in Europe is currently estimated to be approximately 7.7 million tonnes and is forecast to grow by approximately 1.4% per year, reaching 8.6 million tonnes by 2015 (source: Poyry Forest Industry Consulting GmbH). The majority of the growth is forecast to occur in Eastern Europe.

During 2007 and 2008, several of the larger producers of CWF papers announced rationalisation of their CWF capacity. On 29 September 2008, the market leader Sappi announced that it would acquire the CWF businesses of M-Real and outlined plans for further mill closures. Together, the announced capacity reductions suggest the removal of approximately 1.2 million tonnes from the market before the end of 2010.

Future prospects

The business and operations of Scheufelen will be substantially restructured by the Administrator prior to completion of the acquisition by Powerflute. Amongst other things, this will result in a reduction in the workforce to approximately 500 employees. The savings arising from the workforce restructuring and the other improvement projects already underway are expected to be in excess of EUR 10 million per annum.

The performance of Scheufelen is also expected to benefit from the CWF capacity reductions outlined above, from price increases in the CWF market announced in October 2008 and from anticipated reductions in pulp and energy prices. However, there can be no certainty regarding the eventual benefits, if any, that may accrue from these items.

- Ends - 

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