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Sappi, whose margins have come under pressure, has opted to enter into a joint venture with UPM-Kymmene Corporation for its graphic paper business, in a deal worth R27bn.The deal, announced on Thursday, will lead to the formation of a non-listed, independent 50/50 joint venture for graphic paper.Under the terms of the agreement, the mooted joint venture will bring together Sappi’s European graphic paper business with UPM’s communication papers business in Europe, the UK, and the US.Multinational paper and pulp producer Sappi, whose share price has plunged nearly 50% this year, got a reprieve after the announcement of the deal that establishes an outfit with €1.42bn (R27bn) in assets via 12 mills in Europe, the US, and the UK.Sappi’s shares rallied more than 5% after the news of the agreement. Sappi CEO Steve Binnie said the parties expect final resolutions by the end of this year and that the joint venture would become operational upon the closure of the deal, which is still subject to regulatory approvals.“Sappi is very excited by the potential that this joint venture, if approved, will bring. We have been searching for a solution to secure a long-term profitable future for our European business,” Binnie said. “This innovative partnership with UPM will deliver a focused business, bringing the best assets and people together to create a strong future, which can ensure sustained support for our customers and can also ensure that the European manufacturing base is protected.”Reuters reported last month that EU antitrust regulators had raised that the proposed joint venture may reduce competition and lead to price increases.Graphic paper demand in Europe has come under severe pressure over the past two decades, with demand plunging by more than 60%, newsprint by close to 80%, and magazines and catalogues by about 70%.The steep demand erosion has been accelerated by the shift toward digital media, declining print advertising revenues, and falling newspaper and magazine circulations.However, Sappi and UPM believe they can optimise production across a broader asset base, resulting in cost savings and emission reductions.The joint venture said it had secured €600m in external financing, supplemented by a €100m revolving credit line to cover the future structure’s cash requirements.“To remain competitive and sustainable in the long term, consolidation is needed and will contribute to a more robust and resilient European graphic paper industry, thereby safeguarding security of domestic supply for the printing sector,” Sappi said.“The consolidation of Sappi and UPM’s graphic paper assets is expected to enhance operational performance and support more sustainable capacity utilisation through the strategic reallocation of production volumes to the most efficient paper machines, while maintaining a broad portfolio of European graphic paper products.”Earlier this month, Sappi reported after a poor second quarter, in which it noted bigger losses and increasing debt, warning investors of more pain.The group reported a loss of $413m in the quarter ended March, a staggering acceleration from a loss of $20m reported in the comparative quarter.In response, the group continued to scale back its capital expenditure plan, slashing the budget by a further $10m and adopting a cautious outlook as market dynamics weigh on performance.Business Day
