Harvard Business School

9-297-005
Rev. October 18, 1996

D

O

Private Equity Investment in Russia: Alliance
Cellulose Limited

N

In April, 1995, portfolio managers were reassessing the investment climate in Russia. Since the disintegration of Communism and the Soviet Union in 1991, western investors had been intrigued by the potentially huge returns that could be gained by participating in the restructuring of the Russian economy.
Russia’s transformation to a market system, however, had been highlighted by missteps and disappointments.
Foreign investors who had jumped into the market only eight months earlier were burned badly by a general market collapse in October. Furthermore, Russia’s political and economic future were uncertain.

O

Nevertheless, Russia possessed many attractive features that could reward those with the courage to invest at this early stage of market development. Russia’s natural resources accounted for significant portions of the world’s proven oil and gas, timber, coal, and minerals reserves. In addition, the privatization process, lack of internal capital, and country-specific risk resulted in valuations for Russian companies that seemed to be small fractions of their world peers.

T

Russia in 1995 was frequently compared to America’s “Wild West,” when the search for riches and general lawlessness combined to create very volatile conditions. While western money managers were drawn to
Russia by tantalizing asset valuations and high market growth potential, they were quite nervous about committing their capital to these ventures, which usually suffered from poor management, no financial controls, shortages of capital, and uncertain legal status.

CO

Given these concerns, a recent private placement memorandum by Alliance Cellulose Limited was attracting the attention of foreign investors. Alliance, a pulp and paper holding company with assets in Russia, benefited from western management as well as ownership. The firm had been assembled by the investment organization New Century Holdings (“NCH”) from equity stakes it had acquired in three privatized Russian firms in 1994. A 50% interest in Alliance was purchased, in December, 1994, by Bartels Smith Asset
Management (“BSAM”), the asset management subsidiary of Bartels Smith & Co., Inc., a major U.S. investment bank. New Century’s and BSAM’s involvement seemed to indicate a higher margin of safety for investment in the Russian firm.
Alliance was currently offering a 36.4% stake in the company for $40 million. Western investors needed to weigh this purchase price and the other unique risks of the Russian market against the potential rewards for participating in the new Russian economy during its infancy.

PY

James Gray, MBA '96, Roberto Mignone, MBA '96, and Professor André Perold prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Much of this case is based on private conversations with George Rohr and the April,1995 Alliance Cellulose Limited Private Placement
Memorandum prepared by Creditanstalt International Advisers, Inc.

Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business
School.
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Country Overview and Recent Developments

D

The Russian Federation was established in December 1991, following the dissolution of the USSR.
Russia was the largest country in the world, covering 6.6 million square miles (1/9 of the world’s land area); it spanned two continents and eleven time zones.

O

Despite its enormous size, Russia ranked only sixth in total population, with 150 million people. The country was composed of more distinct ethnic groups than any other nation. While some of these groups had established their own governmental administration, tensions between the federal government and these autonomous regions had run high. Russia’s disastrous campaigns to control Chechnya since the fall of 1994 had resulted in reigniting both separatist passions in disparate ethnic groups and nationalist sentiment among
Russia’s military and conservative factions.

N

Russia’s natural resources were the envy of the world. The country possessed one-third of the world’s proven coal reserves, as well as the world’s largest oil and gas reserves. Iron-ore deposits were located throughout the nation, and the country had significant diamond mines, gold, copper, tin, nickel, lead, and zinc deposits. Furthermore, Russia controlled abundant supplies of inputs for chemical manufacturing, such as potassium, magnesium, and phosphate. About one-fifth of the world’s forests were located in Russia, and the country was home to the fourth-largest commercial fishing fleet.

O

Russia’s industrial structure belied its communist, central-planning roots. Mining, heavy-machinery, and metalworking were the prime focus of Soviet industry. And, while the technological capabilities of most
Russian manufacturers were far below western standards, Russian production of agricultural and heavy equipment, military hardware, shipbuilding, and trucks represented significant portions of world output in these sectors. For example, as of 1990, 60% of the world’s agricultural machinery was produced by Russia. See
Exhibit 1 for miscellaneous Russian economic data.

T

Privatization and Development of the Russian Equity Market

CO

Russia’s development of tradable corporate securities began in early 1993, as the Government attempted to give control of major segments of the economy to the private sector. Every Russian citizen was issued a free privatization voucher, which could be sold or exchanged for shares in a state enterprise that would be auctioned for these vouchers. The voucher auction program was concluded in June of 1994. In less than two years, 15,800 firms were transferred to the private sector through the voucher system, creating 40 million new shareholders. Over 70% of the country’s GNP now was being produced by private enterprises. Western investors became actively involved in Russian equities as the supply of securities and market liquidity increased.

Current Market and Economic Conditions

PY

The Russian government retained residual ownership of approximately 30% in most of the privatized companies, and it continued the privatization program by selling these residual stakes to institutional and strategic investors for cash. The Government also divested its interests in privatized companies through
“investment tenders,” in which the winners agreed to commit funds and expertise to the companies for modernization programs. In the case of investment tenders, all of the proceeds would be committed to the company. Alliance Cellulose planned to participate in these tenders to develop its stakes in its three portfolio companies. Russia’s economy had suffered considerably since the end of the Soviet Union, declining by almost
60% in real terms from 1989 to 1995. Nevertheless, signs of economic and political stabilization were beginning to appear. Industrial production, which had declined 21% in 1994, was projected to level off in 1995, and positive year-on-year growth was expected by late 1996. Several major Russian enterprises had already hired western auditors and financial advisors to assist them in tapping the international capital markets; at least ten Russian firms planned to issue American Depository Receipts by mid-1996.

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Russia’s highly-educated population also suffered from the country’s wrenching economic changes.
Unemployment doubled over three years to 8%, and the number of people who worked without wages for insolvent state enterprises was significantly higher. Inflation destroyed the real incomes of the workforce, with an annual CPI rate of 307% for 1994. The government, however, had reduced the inflation rate dramatically from 1992’s rate of 1,354% through tighter controls of industrial credit and money supply.

D

O

Foreign investment in Russia was estimated to have increased 33% to $4 billion, cumulatively, in 1994.
Direct investment accounted for the vast majority of foreign investment, with portfolio investment contributing only minimally. Much foreign investment was clustered in the trade and catering, financial, and energy sectors, and predominantly in Moscow. The United States, Germany, and Switzerland accounted for the majority of foreign investment dollars.
In January, 1995, a Securities and Exchange Commission was established to regulate the Russian securities markets, develop infrastructure, and enforce corporate governance. Several major violations of shareholder rights at a few large enterprises were addressed by the government and reversed.

N

Western Experience in the Russian Securities Market

O

As previously mentioned, successful completion of the voucher auction program resulted in the issuance of tradable securities for over 15,000 companies. However, because all funds from these asset sales went to the government, rather than the cash-starved firms, Russian enterprises desperately needed external funding for continued operations. As a result, western strategic investors had entered the Russian market by providing much needed capital for corporate investment, modernization, and restructuring programs.

T

The rise of corporate securities trading in Russia in the summer of 1994, and a corresponding rise in market valuations (Exhibit 2), sparked the entrance into the Russian equity market by western financial investors, especially American and European investment and commercial banks. Their securities purchases provided liquidity for earlier Russian investors, including fledging Moscow brokerage firms and banks, to monetize their portfolio gains. The CS First Boston index of 23 Russian blue chip companies (so called “red chips”) gained 897% from March to October, but then collapsed by 57% after the crash of the ruble/dollar exchange rate on October 11th, 1994. The foreign investors, who had mostly invested near the market peak, found themselves trapped in their positions as liquidity in these issues became almost non-existent.1

CO

Since the 1994 ruble devaluation and market collapse, western financial institutions had been hesitant to invest in Russian corporate securities. The 1995 Mexican peso collapse further destabilized the nascent
Russian market, as investors became increasingly sensitive to the volatility and risks of emerging markets. From
December, 1994 to April, 1995, the Russian stock index fell by an additional 47%.

New Century Holdings

PY

New Century Holdings was founded by George Rohr and Moris Tabacinic. Rohr was an American entrepreneur who first became interested in the Russian markets in 1991. He began his entrepreneurial career in
1977 by founding a specialty men’s boxer shorts company while studying for his MBA at the Harvard Business
School. Upon graduation, Rohr went to work for Newsweek, which he left in 1980 to found a medical publishing company, selling that to CBS in 1984. He went on to acquire and sell several other media and publishing ventures prior to his involvement in the Former Soviet Union. Rohr first went to Russia in 1991 in search of a publishing-related opportunity that failed to materialize, but which, nevertheless, led to his becoming an active investor in the region.

1 Paul Klebnikov, “High Tension Investing,” Forbes, Jan. 30, 1995, pp. 96-97.

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Private Equity Investment in Russia: Alliance Cellulose Limited

D

Between 1993 and the summer of 1995, NCH raised $362 million in six separate funds. By mid-1995,
NCH had placed $48 million in direct investments in 21 companies within Russia, the Ukraine, Latvia and
Lithuania. On ten of these investments, NCH had already realized gains, with a resulting annual IRR of 323.6%.
The remaining $313 million of initial assets of the funds were invested in various publicly-traded securities of
Former Soviet Union companies with realized gains of $113 million and unrealized gains of $32 million.
NCH’s strategy was to establish positions in attractive companies throughout the Former Soviet Union, and to sell the positions to subsequent, more cautious entrants to these emerging markets. For example, NCH sold its stake in St. Petersburg Telekom for 14 times its initial investment of $750,000 during the privatization process, after a holding period of 5 months. George Rohr believed that this transaction (representing 5% of St.
Petersburg Telekom’s shares) was the first Russian securities trade between two western counterparties.

O

NCH believed its principal competitive advantage lay in its experienced investment team located in
Russia. In the four years since the firm’s founding, this team had established an extensive network of Russian brokers and company managers that ensured high-quality deal and information flow. As a result, NCH received information on investment opportunities in remote areas of the country, and participated in many privatization opportunities where there was little competition from other large financial or strategic investors.

N

NCH invested in companies it deemed to be significantly undervalued in comparison to the underlying worth of their assets or products, measured and compared on the basis of international units of value such as dollars per barrel of proven reserves or dollars per megawatt of power generation capacity. These companies were typically in infrastructure, natural resources, and financial services-based businesses. George Rohr believed that these opportunities existed due to Russia’s massive capital shortage, the rapid pace of privatization, and the scarcity of western-style data describing businesses being privatized. Typically, NCH would invest in a company in stages, beginning with a toehold position (usually through the privatization process). Subject to additional due diligence, NCH then would increase its ownership stake through share purchases in the open market, or from company employees, or through direct equity investments. NCH on several occasions successfully established share purchase programs in target companies through which it was able to obtain additional shares from employees at attractive prices.

O

T

CO

NCH favored enterprises that had competent management, and it was particularly interested in investment opportunities in which it could combine with management to achieve a majority ownership position with the company. If this were not possible, the firm liked to have a large minority stake in an enterprise run by management that was receptive to foreign investors. NCH usually worked at developing good relationships with management, sometimes lending money to key company employees to enable them to purchase additional shares in their businesses. Most management teams retained day-to-day control over their enterprises, with NCH playing the role of financial advisor when needed.
NCH focused on exit strategies for an investment from the time of its initial purchase. The timing of exits was a function of the firm’s outlook for the enterprise, the status of its relationship with company management, or the receipt of an attractive offer from another investor. Investments could be realized through sale of the position to other financial or strategic investors, or potentially through a public offering in western markets. PY

George Rohr summed up his philosophy: “We buy companies in an environment that is going from worse to bad...the Russian market might eventually prove to be a fifty-story skyscraper, but we’re currently in the sub, sub-basement looking to ride up to the ground floor.” NCH viewed its portfolio in the aggregate. Some investments would underperform, but given their inexpensive purchase prices and the incredible upside opportunities for other investments, NCH’s strategy would provide its investors with good returns. Rohr believed that very few western firms possessed the commitment, or capabilities, to tackle such opportunities at this early stage of Russian market development.

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Alliance Cellulose Limited

D

NCH formed Alliance Cellulose in late 1994 as a holding company for the equity stakes it had acquired in three distinct Russian pulp and paper companies: Segezhabumprom (“Segezha”), Vyborg Pulp and Paper
Kombinat (“Vyborg”), and the Sakhalinlesprom wood harvesting, processing, and pulp/paper production complex (“Sakhalinlesprom”). NCH had acquired initial positions in these companies through privatization auctions in the spring of 1994. It was able to perform only minimal due diligence on the Vyborg and Segezha plants before investing; the firm merely verified the product lines and design capacities of the mills. Because of
Sakhalinlesprom’s distance from Moscow, NCH knew even less about its condition before submitting its voucher auction bid.

O

N

After conducting due diligence and meeting with the companies’ managements, NCH had increased its stakes in the firms through the extension of working capital facilities, open-market purchases, direct investment in the companies, and on-site share buying programs. In the aggregate, NCH had paid $5 million for 21% of
Segezha, 27% of Vyborg, and 10% of Sakhalinlesprom. These stakes made Alliance Cellulose the single largest shareholder in Segezha and Vyborg. Together, the three enterprises accounted for a substantial portion of
Russian pulp and paper production. While the world pulp and paper market was currently experiencing shortages and rising prices, Russian paper mills were operating significantly below their design capacities.
Given proper management, restructuring, and major cash infusions, Rohr believed that these companies could become dominant players in several niches of the global paper industry.

O

Alliance Cellulose would serve as the vehicle to manage these holdings and to make follow-on investments. As stated in the private placement memorandum, the firm’s strategy was:

T

“to accumulate controlling blocks of shares in selected pulp and paper producing companies and to apply new technology, western management and marketing expertise in order to increase the productivity and competitiveness of these operations. Alliance intends to manage actively its portfolio companies by providing working capital, financial controls, product trading capabilities, access to technology and markets and by maintaining international standards of quality, efficiency and environmental safety.”
Brief descriptions of Alliance’s holdings follow.

CO

Segezha

The Segezha pulp and paper company, founded in 1936, was located approximately 500 miles north of
St. Petersburg, and 140 miles from the Finnish border. The firm employed almost six thousand people, and had design capacity to produce several products, including pulp, kraft paper for paper bags, paper bags (1.3 billion tons capacity, equal to 60% of the local market), resin, and linerboard (Exhibit 5a). Segezha reportedly was the world’s largest manufacturer of paper bags. Low capacity utilization in recent years had forced the company to increase its focus on the export market. Segezha’s low wood and energy costs allowed the company to sell its products at discounts to prevailing western prices. The company planned to increase the percentage of its export unit sales from 10% in 1993 to over 50% of production by 1996.

PY

Segezha’s plants were retrofitted with some western equipment from 1965 to 1989; some equipment, however, was inoperable because of poor maintenance and parts shortages. The local management, in consultation with Alliance Cellulose’s investors, had recently devised plans for a modernization program involving an initial expenditure of $60 million over three years. The program would increase pulp production by 117,000 tons, and paper bag capacity by 40%. See Exhibit 10a.
Segezha was privatized in April of 1994 through the voucher auction process. Management and employees owned 51%; the government owned 20% that would be offered in a future investment tender in exchange for the $60 million needed for modernization. Exhibit 5a highlights Segezha management’s financial projections for the coming two years.

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Private Equity Investment in Russia: Alliance Cellulose Limited

Vyborg

D

Vyborg Pulp and Paper, founded in 1959, was located 95 miles from St. Petersburg and 31 miles from the Finnish border. The company completed a $350 million modernization program in 1989, installing advanced Finnish and German manufacturing equipment. Vyborg continued to be the most modern pulp and paper mill in the Former Soviet Union, and was expected to operate at 100% of design capacity by 1995.

O

Vyborg’s fully integrated plant employed 2,500 people, had a design capacity of 62,000 tons of unbleached sulfite pulp and 60,000 tons of wall-paper and wood-free paper. Furthermore, the company could convert 30,000 tons of its paper production into high-end products such as laminated papers, printed wall paper, wrapping paper and consumer product labels (Exhibit 5b). Vyborg was currently the only label manufacturer/printer and one of only three two-ply wall paper manufacturers in Russia. The company had also used some of its excess capacity for contract printing for printed paper producers. Additionally, Vyborg produced 50,000 tons of the by-product lignosulfonate, which was used in petroleum drilling emollients.

N

Vyborg currently sold half of its pulp production in western Europe, while most of its converted paper production was sold domestically—for cash upfront. Domestic demand for converted paper products had increased strongly, due to higher consumer spending and the rise of mass packaging/labeling of consumer products in Russia. Vyborg had also been successful in exporting its paper products to western European markets, and the company sold all of its lignosulfonate production to a Scandinavian oil services company.

O

Vyborg’s management had identified $36 million in necessary capital investments in order to improve the company’s production capabilities and to reduce its reliance upon external suppliers. The largest expenditure (Exhibit 10b) would be $11 million on pulp bleaching equipment to eliminate the firm’s need to purchase additional bleached pulp for its production process. Exhibit 5b highlights Vyborg management’s production and financial forecasts for 1995 and 1996; no reliable historical information was available.

Sakhalinlesprom

T

Vyborg was privatized in June of 1994. Employees owned 17% of the company while the government’s 21% interest was to be sold in an investment tender by the summer of 1995.

CO

Sakhalinlesprom, located on disputed Sakhalin Island in Russia’s Far East, was founded by the Oji
Paper Company of Japan in 1933. The island, which is 62 miles from Japan, contained the closest sources of long-fiber timber raw materials for Asian paper and pulp producers. Sakhalin Island also had several trading ports and a well-developed railway transportation system.

PY

Sakhalinlesprom was a fully-integrated wood processing complex, one of the largest producers of pulp and paper in the Russian Far East, and the only long fiber pulp mill in all of Asia. The mill produced newsprint, linerboard, and cardboard. In addition, the company had exclusive rights for twenty years to harvest an area containing over 300 million cubic meters of timber reserves. Sakhalinlesprom’s major operations included: 11 logging enterprises (current annual production of 1.9 million cubic meters); five pulp and paper mills (current annual production of 200,000 tons of sulfite pulp, 70,000 tons of sulfate pulp, and 54,000 tons of paper, mostly newsprint); four saw mills (current annual production of 400,000 cubic meters); and a corrugated carton plant
(current annual production of 60 million square meters).
The complex currently operated at 40% of capacity because of working capital deficiencies. Ninetyfive percent of the enterprise’s production was exported, mostly to Japan, China, Korea, Thailand, and
Indonesia. Half of the company’s export production was paid for in advance.
Sakhalinlesprom was privatized in March, 1994, and the company’s employees and managers owned
56% of the outstanding equity. The government’s 15% residual stake in the firm was to be offered in an investment tender during late 1995, and was expected to be sold for a $57 million commitment to modernize the company. No operating data was available for Sakhalinlesprom at the time of the private placement offering.

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NCH’s involvement with the three companies

D

After acquiring its stake in Vyborg, NCH devoted a considerable amount of time with the company’s management in order to develop a working relationship. It lent money to Vyborg’s General Director, whom it considered a bright young manager, to help him buy more of the firm’s stock. NCH also lent Vyborg $450,000 in a working capital facility, which was critical for the firm to increase production. These funds also allowed
Vyborg to pay fewer of its suppliers through barter arrangements, a system that destroyed operating margins.

O

Alliance currently owned 27% of the firm, and planned to purchase the government’s interest through the tender. However, the government would retain for two years a “golden share” giving it the right of veto over certain corporate decisions such the issuance of new stock, the assumption of significant debt or the disposition of major assets. Alliance had also signed an agreement with a Russian trading firm which had accumulated shares in the voucher auction to purchase an additional 25% stake in Vyborg for $8 million, contingent upon winning the government tender. Upon successful completion of the tender and the additional stock purchase,
Alliance would own 73% of Vyborg’s outstanding shares.

N

NCH’s relationship with Segezha’s General Director was not as comfortable. He was reputed to be the archetypal old-style Soviet manager. NCH opted to seek a neutral relationship with him, while establishing stronger ties with the mill’s second tier management. NCH’s efforts to increase their equity position through employee share purchases were foiled, however, until a replacement-parts shortage threatened to cripple the mill. The General Director then agreed to allow plant workers to sell their shares to NCH. NCH in turn financed the purchase of the needed parts.

O

NCH had been only minimally involved with Sakhalinlesprom. The firm had little contact with the enterprise’s management, and had not performed the same analyses of modernization requirements as it had at
Vyborg and Segezha. However, it had recently retained western industry consultants for advice on operational improvements at the company.

T

Investment by Bartels Smith Asset Management

CO

At the time of Alliance’s founding by NCH, Bartels Smith Asset Management became an equal partner in the holding company. BSAM managed over $50 billion in worldwide assets, with $7 billion in emerging markets investments. The firm had made several other direct investments in the Former Soviet Union, and had targeted the region for additional commitments.
NCH had invited BSAM to take an equity position in the Alliance project in part because Bartels Smith
& Co. had considerable experience in the global pulp and paper industry. Its merchant banking division had made investments in several large pulp and paper producers, such as Fort Howard and Jefferson Smurfit. NCH believed that the investment bank’s experience and close ties to the industry would be particularly valuable in identifying and structuring exit strategies.

PY

BSAM paid $25 million for its 50% interest in Alliance. It had initially balked at this purchase price being so high in comparison to NCH’s low cost basis. However, the Bartels Smith pulp and paper analyst assuaged these concerns, saying, “NCH paid nothing, we’re paying next to nothing.” Of the $25 million proceeds, $4.8 million was retained by Alliance as working capital, and the remaining $20.2 million was distributed to NCH.

BSAM designees held two seats on Alliance’s four-person board, along with George Rohr and one other NCH executive. The board was actively searching for a CEO and other senior executives for Alliance who could provide western management, marketing, and industry expertise to the portfolio companies. Until then,
NCH’s staff would remain involved in the firm. Day-to-day control of the underlying companies would lie with the management of these firms.

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The Pulp and Paper Industry in Russia

D

The wood processing and pulp and paper industries accounted for 6% of Russia’s GDP, employing over 200,000 people. Fifty-two percent of the world’s coniferous forests and 36% of the world’s softwood forests were located in the Former Soviet Union. Russia’s pulp and paper industry produced 800 different products, ranging from high-volume printing paper to low-volume industrial materials. The country possessed over 500 paper and board machines, including many modern, western-quality machines. The country’s factories accounted for 6% of total world pulp and paper production capacity.

O

The global pulp and paper industry was highly cyclical. While paper product demand had increased by
3% annually, pulp and paper companies were characterized by high fixed costs and large capital investment.
High capacity utilization, therefore, was necessary to take advantage of significant economies of scale. In the last few years, the global economic upswing resulted in high industry production levels, with world pulp, paper, and board production at 89% of capacity. The industry was expected to grow moderately in the coming years; emerging markets development was expected to increase world paper consumption from 250 million tons to more than 350 million tons by the year 2010.

N

O

Although Russia’s pulp and paper industry had experienced the same downturn that the rest of the country suffered, the sector had also gained several attractive growth opportunities from the new open economy.
The domestic paper market was expected to increase dramatically with the rise in economic development. The industry was also a net exporter of pulp and paper materials and their international market was expected to grow with increased western demand. Furthermore, given the recent explosion in paper prices and global shortage of paper inventories, export margins for Russian producers were currently near all-time highs. Russian paper producers’ competitive position versus western manufacturers was substantially improved by low wood and energy costs, the two primary industry cost drivers. For example, wood reserves in Russia sold for 30% of world market prices, and pulp production cost $100 less per ton than in nearby European countries.2 While
Russian production quality was inferior to western output, it was sufficient for successful competition in the export market.

T

CO

Most of Russia’s paper mills had been privatized in the last few years, and had struggled to adapt to global competition and the loss of government subsidies. Although Russian producers used high-quality equipment, the machinery had been poorly maintained. The enterprises’ severe capital shortages had resulted in parts shortages that kept equipment off-line. As a result, the Russian pulp and paper industry had been severely weakened (Exhibit 3b). Russian capacity utilization had fallen below 50% in recent years (Exhibit 4) due to the impact of restructuring on the country’s economy. Many firms needed capital and industry expertise in order to improve operational procedures and logistics, and to develop both the internal and export markets.
Nevertheless, because the asset valuation multiples of Russian pulp and paper producers were 1/5 the average of comparable American companies, the sector presented an interesting business opportunity for western investors.
Exhibits 7 and 9 provide information on comparable global pulp and paper company valuations.

The Alliance Cellulose Private Placement Offering

PY

In April, 1995, NCH and its investment partners wanted to raise additional capital for several purposes: to finance Alliance’s commitments in the three upcoming government investment tenders which, if successful, would significantly increase its equity stakes in these mills; to provide working capital to the mills; to enable
Alliance to acquire shares in other pulp and paper operations; to possibly acquire licenses to develop timber reserves in the region; and to fund the general corporate purposes of the company.

2 Betsy McKay, “Volga Paper Mill Beats Russian Pitfalls; Germans Hope to Capitalize on Western Demand,” Wall Street

Journal, June 30, 1995.
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D

Alliance retained Creditanstalt International Advisers to conduct a $40 million private placement for the company. Under the terms of the Private Placement Memorandum, up to 1,440,916 voting common shares were being offered at $27.76/share, with a minimum commitment of $2 million per investor (Exhibit 6).
Presently, there were 2,522,000 shares issued and outstanding. Alliance would provide shareholders with audited annual financial reports (“GAAP” or “IAS”) within 120 days at the end of each fiscal year and unaudited quarterly financial statements within 75 days of the end of each fiscal quarter. Expenses related to the offering, including a 6.5% placement fee to Creditanstalt, and legal expenses anticipated not to exceed $100,000, would be paid by Alliance.

O

Challenges and Risk Factors

NCH and its co-investors believed that the best way to maximize shareholder value was through the integration of its three discrete plants under Alliance’s centralized management structure. A wide variety of challenges—and associated opportunities—accompanied Alliance’s strategy.

N

Alliance currently had no centralized management team to oversee its investments in the pulp and paper mills. In early 1995, the Alliance board appeared to be close to hiring an experienced Hungarian paper industry manager for the position of chief executive. The new CEO would have to train local supervisors in western management techniques. No one on the current local management teams had any significant experience with a market-driven economy.

O

While the current Russian plant managers were expected to retain operational control of their mills, the quality of these General Directors varied considerably. Typically, General Directors of formerly state-owned
Russian enterprises possessed tyrannical control over their companies; in one well publicized case, the British firm Transworld had purchased a 20% stake in Krasnoyarsk Aluminum Factory (“KAF”) for $200 million between 1992 and 1994. When Transworld’s relationship with the factory’s management turned sour in
November of 1994, KAF’s president erased their name from the register, effectively invalidating their equity stake.3 Having only recently gained their independence, Russian managers were usually reluctant to cede authority to a new outside influence, such as shareholders. Alliance attempted to mitigate such agency costs by helping management buy more equity in the firm.

T

CO

In order to promote change most effectively, Alliance would seek to attain a control position—or a
25% blocking minority position—in each of the three mills. However, even if Alliance were successful with each of the three investment tenders, it would have only a 45% ownership in Segezha and 25% in
Sakhalinlesprom. In Russia, minority shareholder rights were still not defined; consequently, Alliance would need to depend on continued cooperation of local management for mill operations.

PY

The development of beneficial relationships with the mills’ employees and managers, and particularly with a plant’s General Director would also be essential if Alliance was to solidify its ownership position through the purchase of employee-owned shares. Many employees were fearful of selling their company shares because there were numerous situations where General Directors had terminated employees who were found to be
“illegally” selling their shares to outside investors. At the time of the private placement, employees controlled
51% of Segezha and 56% of Sakhalinlesprom. Currently, Alliance was in the process of buying back shares from employees at Segezha and estimated that they would accumulate 1% every two weeks. Alliance believed it would be able to buy between 10% and 20% from employees for a total of less than $2 to $3 million. A similar strategy was being planned for Sakhalinlesprom.
Alliance also wanted to establish a strong rapport with local government officials. Investment tenders could be arbitrarily rejected by local property committees which were concerned only with the preservation of local jobs and their own vested economic and political interests.

3 Anne Bernard, “British Firm Wonders Where Its Shares Went,” Moscow Times, December 7, 1994.

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D

As already mentioned, the three mills had outlined staged modernization programs of their plant and equipment in order to expand production volumes, improve product quality, boost operating margins and improve the environmental impact of their production processes. The capital investment for the first stage was estimated at $153 million over a three-year period: $60 million for Segezha, $36 million for Vyborg, and $57 million for Sakhalinlesprom. Segezha and Vyborg had developed detailed modernization programs (Exhibits
10a and 10b) while Sakhalinlesprom had not structured a detailed plan. The mills expected to fund the programs from the sale of blocks of shares still owned by the state in investment tenders conducted in accordance with Russian privatization rules. The winner of each tender would commit to fund the investment programs. Twenty percent of the total investment would have to be deposited within one month of the conclusion of the investment tenders. Due to its existing stakes and ongoing investment in the mills, Alliance was confident that it would face limited competition and that it could win the investment tenders. However, the
$40 million private placement would only provide a portion of the funds necessary to restructure the plants.
Currently, Russian commercial banks were not willing to make long-term debt commitments, domestic sources of equity capital were nonexistent, and the firms would not be ready for international debt or public equity offerings for some time.

O

N

One of the most daunting tasks Alliance’s investors faced was the complete lack of control systems at any of the pulp and paper companies. The enterprises had no knowledge of western cost accounting, and needed to implement a system of financial controls before any proper audit could be completed. Once an accurate system of financial statements was established, Alliance hoped to understand each of the plants’ cost structures better and determine the appropriate level of working capital for each of the mills. However, before any analysis by a western auditor could be completed, Alliance’s portfolio companies needed an immediate capital infusion for automated order processing, method invoicing, order production tracking systems, and logistics support. O

T

Ironically, a significant potential challenge for Alliance lay in the potential disappearance of many of the inefficiencies of the Soviet economy. The cost advantage of the mills relative to their western competitors came largely from the use of government-subsidized energy and wood resources. The liberalization of energy and transportation prices to world market levels thus could threaten any long-term advantage that Alliance might enjoy. Finally, in the case of Sakhalinlesprom, the exact legal status of its timber cutting rights was ambiguous. Because of Russia’s lack of precedent, or even modern concept, concerning property rights,
Sakhalinlesprom’s exact ownership interest in these vast timber reserves was tenuous.

CO

Opportunities

Despite the challenges that Alliance faced, both NCH and BSAM believed that the opportunities were enormous. By applying western management practices, expanding international distribution channels, developing joint cooperation programs and improving forest management techniques, Alliance anticipated improving the competitive position of its mills to international standards, thus creating substantial value for its shareholders. PY

In addition to believing that the Russian pulp and paper industry itself had attractive characteristics,
NCH and BSAM believed that Alliance’s mills were appealing. First, the mills were within close proximity to export markets which helped to reduce significant transportation costs and provided for easier access to hard currency. Alliance’s mills also operated in regions with developed transportation infrastructure which minimized inland freight costs. Alliance hoped to further reduce costs through its modernization programs at each of the plants.

Lastly, Alliance had formulated an expansion strategy involving the acquisition of additional pulp and paper plants, and the purchase of licenses to develop timber reserves. Alliance would apply the same investment criteria to these acquisitions as NCH had applied historically.

10

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exit Strategies

D

As a foreign investor in a volatile and illiquid market, the identification of investment exit strategies was particularly important. Several Russian companies were considering international stock offerings, once they could meet rigorous listing requirements which included disclosure of audited financial statements. Considering the current apprehension of western money managers concerning Russian equities, prospects for an equity offering in the near term were slim. Sale of the assets to strategic investors was another possibility, although there were few indications of what such a market player might by willing to pay. Furthermore, the timing of any exit was highly dependent upon the macroeconomic and political environment of the region; the “window” for any offering or asset sale possibly might not come for a long time. Any “long-term hold” strategy, however, needed to consider the pulp and paper mills’ needs for significant capital expenditures and managerial attention on a continual basis.

O

N
O
T
CO
PY
11

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exhibit 1
Russian Macroeconomic Data

D

1991
1,300
-5.0%
93%
148.5
67.5
22.0

O

GDP (at current prices)
Real GDP Growth %
Consumer Price Inflation %
Population (million)
Gross Debt (billion $)
Average Exchange Rate (Rb/$)

N

Foreign Investment, 1994
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

1992
19,000
-14.5%
1354%
148.7
78.7
220.0

1993
171,500
-8.7%
896%
148.4
83.1
932.0

1994
611,000
-12.4%
307%
148.3
92.9
2,204.0

$ millions
383.1
168.9
187.0
314.4

O
T
% of total
70.0%
6.5%
6.0%
4.2%
4.0%
9.3%
100.0%

12

% of total
34.0%
22.2%
16.5%
7.3%
6.2%
13.8%
100.0%

Origin of imports by region, Jan-Jun. 1994
Western countries
67.4%
Developing countries
14.1%
Former Communist Block
9.0%
Other
9.5%
Total:
100.0%

PY

Destination of exports by region, Jan-Jun. 1994
Western countries
65.2%
Former Communist Block
14.4%
Developing countries
11.9%
Other
8.5%
Total:
100.0%

Principal Imports, 1993
Machinery and equipment
Food products
Textiles and leather
Fuels, raw materials and metals
Chemicals and rubber
Other
Total:

CO

Principal exports, 1993
Fuels, raw materials and metals
Machinery and equipment
Chemicals and rubber
Timber and paper
Food Products
Other
Total:

297-005

Private Equity Investment in Russia: Alliance Cellulose Limited

Exhibit 2
Foreign Portfolio Investment and the Russian Equity Market

D

250

1600

O

1400

1000

150

800

100

600

O

ROS Index

200

0
Dec-94

Nov-94

Oct-94

Sep-94

Aug-94

Jul-94

Jun-94

Apr-94

Mar-94

Feb-94

Jan-94

Foreign Inv

400

T

0

May-94

50

CSFB ROS Index

1200

N

Foreign Porfolio Investment ($mm)

200

CO

Exhibit 3a
Foreign Investment in the Wood Processing, Paper and Cellulose Industry in Russia
Investment ($m)
Foreign Investment in Pulp and Paper
Total Foreign Investment in Russia

1994
$42
$1370

1995E
$135
$2,000

PY

Source: Economist Intelligence Unit Country Report - Russia - 2nd Quarter, 1995

13

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exhibit 3b
Production of Pulp, Paper and Board in Russia (1000 tons)

D

Product
Chemical Pulp
Mechanical Pulp
Paper
Board

1950
1,078
426
991
217

1960
2,234
911
1,961
635

1970
5,008
1,573
3,515
1,857

1980
6,981
1,877
4,442
2,446

1988
8,349
2,073
5,334
3,249

1990
7,525
2,132
5,240
3,085

1991
6,451
1,923
4,765
2,619

1992
5,672
1,383
3,605
2,150

1993
4,406
1,080
2,882
1,576

19941
3,824
N. A.
2,394
1,193

O

Source: Pulp and Paper International, May 1995.
N. A. = not available

N

Exhibit 3c
Key Russian Pulp and Paper Facilities

Company

1992 Production
Pulp (market)
Paper & Board

O

European Russia
Arkhangelsk Pulp and
Paper
Kondopoga
Kotlas Pulp and Paper

Ownership

JS = Joint Stock Ownership.
Alliance Holdings in Italics.

JS
JS

127
785 (300)

685
385

JS
JS
STATE
JS

370 (18)
195 (181)
279 (64)
50 (30)

JS
JS
NA

289 (147)
362 (293)
197 (12)

JS
STATE

149 (12)
0 (542)

STATE
JS

207 (53)
-

306
9
184
13

printings/writings, containerboard newsprint bag paper, case materials, linerboard bag paper wrapping paper printings/writings wall paper, wrapping paper, labels

10
147
181
116
-

wrapping paper containerboard case materials, newsprint case materials
-

461
-

containerboard corrugated cartons

PY

Russian Far East
Amurskbumprom
Sakhalinlesprom

363

CO

Siberia
Baikal Pulp and Paper
Bratsk Forest Complex
Krasnoyarsk Pulp and
Paper
Selenginsk
Ust-Ilimsk

670 (263)

T

Segezha
Solombal Pulp and Paper
Svetogorsk
Vyborg

JS

Principal paper & board grades

Source: Pulp and Paper International, May 1995. Alliance Cellulose Limited Memorandum.

1

Estimate

14

297-005

Private Equity Investment in Russia: Alliance Cellulose Limited

D

Exhibit 4
Comparison of Capacity Utilization in Paper & Board Production

100%

O
90%
80%
70%
60%
50%

30%
20%
10%

O

0%

N

40%

Western Europe

North America

Russia

World

T
CO
PY
15

550,000
1,300,000

620,000
40,000
660,000
300,000
600,000

330,000
30,000
360,000
201,862
389,000

215,000
2,248
217,248
115,507
225,000

125,400
3,183
128,583

1994
Production

38.5%
37.5%

38.0%
10.6%
35.7%

1994
Capacity
Utilization

1996
$490
$500
$215

150,000
300,000

300,000
25,000
325,000

1996 Est
Production

25%

$10.4

$22.8

$37.9

25%

$12.3
$25.0
$32.3
$69.5

$17.4

$12.3
$75.0
$64.5
$151.8

1995
$490
$500
$215

50,000
150,000

125,000
25,000
150,000

1995 Est
Production

297-005

16

Revenues exclude sales of marketable byproducts, such as resins, oils, sulphate soaps, etc. Pretax income margin reflects the average costs of Russian paper producers, and Segezha General
Director's estimates. The tax rate is difficult to predict; 40% is the statutory rate as understood by the case writers.

1

Projected Net Income @ 40 est tax rate:

Projected Pre-tax Income:

PY

Estimated Pretax Margin

Net Revenues ($ millions)
Market Pulp
Sack Kraft Paper/Linerboard
Sack Kraft Paper Bags
Total Revenues

Projected Average Unit Prices
Market Pulp (per ton)
Sack Kraft Paper/Linerboard (per ton)
Sack Kraft Paper Bags (per thousand)

Sack Kraft Paper/ Linerboard (tons)
Sack Kraft Paper Bags (thousands)

Sulphate Pulp (tons)
Market Pulp (tons)
Total:

Segezha Production Volumes

Product

1993
Production

T

CO

Current
Operating
Capacity

O

Design
Capacity

N

Exhibit 5a
Segezha Production Schedule and Financial Projections1

O

Private Equity Investment in Russia: Alliance Cellulose Limited

D

297-005

Private Equity Investment in Russia: Alliance Cellulose Limited

Exhibit 5b
Vyborg Production Schedule and Financial Projections1

D

Product

Design
Capacity

Current
Operating
1994
Capacity Production

1994
Capacity
Utilization

1995 Est
Production

1996 Est
Production

Vyborg Production Volumes (tons)

O
Unbleached Market Pulp
Woodfree and Wall Paper
Total Unbleached

31,000
31,000
62,000

31,000
31,000
62,000

Labeling Paper
Printed Wall Paper
Total Paper Conversion

15,000
15,000
30,000

N

Lignosulfonates

57,000

30,000
29,000
59,000

96.8%
93.5%
95.2%

30,000
30,000
60,000

30,000
30,000
60,000

15,000
15,000
30,000

18,000

_____
60.0%

15,000
15,000
30,000

15,000
15,000
30,000

57,000

1,989

3.5%

57,000

57,000

1995
$450
$1,100
$1,500
$1,250
$27

1996
$450
$1,100
$1,500
$1,250
$27

$13.5
$33.0
$22.5
$18.8
$1.5
$89.3

$13.5
$33.0
$22.5
$18.8
$1.5
$89.3

40%

40%

$35.7

$35.7

$21.4

$21.4

O

Projected Average Unit Prices ($/ton)
Unbleached Market Pulp
Woodfree and Wall Paper
Labeling Paper
Printed Wall Paper
Lignosulfonates

T

Estimated Pretax Margin
Projected Pre-tax Income
Projected Net Income @ 40% tax rate

CO

Net Revenues ($ millions)
Unbleached Market Pulp
Woodfree and Wall Paper
Labeling Paper
Printed Wall Paper
Lignosulfonates
Total Revenues

PY

1

Pretax Income margin reflects the average costs of Russian paper producers, and Vyborg General Director's estimates. The tax rate is difficult to predict; 40% is the statutory rate as understood by the case writers.
17

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exhibit 6
Summary of the Proposed Alliance Cellulose Private Placement

D

Offering Price per Share
Number of Shares Offered
Total Private Placement Value

$

27.76
1,440,922
$ 40,000,000

O

Minimum commitment
Minimum number of shares

$2,000,000
72,046

N

Number of
Shares

Alliance Shareholders

1,261,000
1,261,000
1,440,922
3,962,922

Existing
Ownership
Percentage

$ 5,000,000
$25,000,000
$40,000,000

50.0%
50.0%
0.0%
100.0%

O

New Century Holdings
BSAM
Pro Forma Private Placement
Pro Forma Total

Original Cost
Basis1

Pro Forma
Ownership
Percentage
31.8%
31.8%
36.4%
100.0%

Date Position
Established
Spring 1994
Dec. 1994
Apr. 1995

T
Current Ownership

Segezha
Vyborg
Sakhalinlesprom

Alliance

Employees and
Management

Government

Alliance Ownership,
Assuming Win in
InvestmentTender

21.4%
27.0%
10.0%

51.0%
17.0%
56.0%

20.0%
21.0%
15.0%

41.4%
73.0%2
25.0%

CO

Alliance Portfolio
Investments

PY

1

Does not reflect the $22.2 million distribution to New Century Holdings when BSAM bought 50% of the Company.
Alliance had contracted with a large holder of 25% of Vyborg's outstanding shares to purchase this stake for $8 million upon winning the government investment tender.
2

18

37.7
10.5
NM
39.0
21.7
27.2

NM
NA
NM
NM

586
2,147
1,978
764
1,872

110
657
403

NA
NA
NA

0.2
0.2
0.3

66.0
1.4
3.7
23.7

2.5
1.1
1.2
0.6
1.0
1.3

1.2
1.1
1.8
1.4
1.1
1.3

NA
NA
NA

253.5
1.4
33.1
96.0

17.5
11.0
24.0
5.7
8.3
13.3

7.8
8.4
9.0
7.6
7.2
8.0

NA
NA
NA

NM
1.4
125.7
63.6

31.8
19.9
29.8
21.3
17.5
24.1

16.2
16.8
18.3
13.8
10.6
15.1

Firm
Value/
EBIT

NA
NA
NA

11.3%
16.6%
3.0%
10.3%

7.8%
5.4%
4.0%
2.8%
5.8%
5.2%

7.3%
6.3%
9.7%
10.4%
10.6%
8.9%

EBIT
Margin

NA
NA
NA

NM
NA
NA
NM

51.4
16.7
15.9
11.2
15.0
22.1

17.2
17.8
15.9
11.5
11.8
14.8

NA
NA
NA

2,706
NA
825
1,765

2,446
733
1,059
631
1,637
1,301

1,166
1,985
1,749
1,534
1,972
1,681

106
110
117

2,614
NA
562
1,588

2,079
649
863
557
1,435
1,117

951
1,766
1,325
1,439
1,804
1,457

1.5
2.1
2.3

NA
NA
NA
NM

9.0
NA
7.4
8.5
11.0
9.0

9.6
9.7
12.3
10.5
8.5
10.1

NA
NA
NA

0.99
NA
0.66
0.82

2.04
3.50
2.65
6.45
2.85
3.50

0.93
7.64
0.75
2.43
5.82
3.51

0.52
0.50
0.52

1.03
NA
0.96
1.00

2.40
3.95
3.25
7.30
3.25
4.03

1.14
8.59
0.99
2.59
6.36
3.93

NA
NA
NA

96%
NA
68%
82%

85%
89%
82%
88%
88%
86%

82%
89%
76%
94%
92%
86%

Firm Val/ Firm Val/ Firm Val/ Mkt Val/
Millions of tons
Normal
Annual
Annual
1995E
Annual
Annual Capacity
EBIT4 Production Capacity Net Inc5 Production Capacity Utilization

2

19

Source: Bloomberg, Creditanstalt International Advisers Inc.
Market Value = number of shares outstanding times market price (3/7/95) plus liquidation value of preferred stock; Net Income excludes all extraordinary charges. International Paper: excludes $25 million charge for changes to accounting standards during the fiscal year 1993. Westvaco: excludes special charge of $43.4 million during fiscal 1993 Weyerhaeuser: excludes $52.1 million of extraordinary gains during the first three quarter of fiscal 1993.
3
Firm Value = market value plus total debt minus cash
4
Normalized EBIT = average annual EBIT during the five year business cycle (1989-1993).
5
Source: IBES as of 3/7/95.

1

Other Comparable Russian Companies
Syktivkarsky LPK
Volga Newsprint
Brastsky LPK

PY

Emerging Market Companies
Aracrux Cellulose S.A.
2,530
Cellulose Aranco
NA
Darango Industrial
148
Average

European Pulp and Paper Companies
Assidoman AB
4,526
Jefferson Smurfit
1,741
Mo Och Domsjo AB
1,374
Stora Kopparberg's
3,476
Svenska
3,160
Average

23.8
22.8
29.5
24.4
17.6
23.6

Firm
Value/
EBITDA

CO

3,667
6,418
483
1,276
3,604

Firm
Value/
Sales3

T

Market
Value/
Net Inc2

O

Total
Debt
($ mil)

Exhibit 7
Selected Pulp and Paper Companies - Comparable Company Trading Analysis1

N

Mkt Val of Equity
($ mil)
U.S. Pulp and Paper Companies
Chesapeake Corp
732
International Paper
8,954
Longview Fibre
901
Westvaco Corp
2,528
Weyerhaeuser
7,891
Average

Private Equity Investment in Russia: Alliance Cellulose Limited

O

297-005

D

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exhibit 8
Description of Comparable Pulp and Paper Companies
United States Paper and Pulp Companies

D

Chesapeake Corp: Primary businesses are kraft products (including paperboard, corrugated kraft paper and bleached hardwood pulp); tissue products (for residential and commercial use); packaging division specializes in corrugated boxes and specialty packaging materials.

O

International Paper: Largest producer of printing paper worldwide. Specializes in uncoated papers, heavyweight coated papers and pulp; active in industrial and consumer packaging products, kraft packaging and specialty packaging products. Distributes paper and office products; owns a specialty chemical division.
Longview Fibre: Owns and operates tree farms which produce logs for sale. Produces pulp which is manufactured into kraft paper and containerized. 14 converting plants in 30 states produce shipping containers and merchandise and grocery bags.

N

Westvaco: Fully integrated manufacturer of paper and pulp products. Production facilities in the U.S. and
Brazil produce corrugated containers, ovenware cartons, premium quality printing papers, various building materials and selected chemical by-products.

O

Weyerhaeuser: Grows and harvests timber; manufactures, sells and distributes forest products such as wood products, pulp, paper and corrugated boxes. Is one of the largest manufacturers of recycled products in the packaging and paper segment.
European Pulp and Paper Companies

Assidoman AB: Businesses include packaging, especially kraftlines, forest and sawmills, kraft products, carton, and barrier coating. Also produces concrete and related products.

T

Jefferson Smurfit: Irish holding company for various pulp and paper-related operating companies located in
Europe, the U.S. and Latin America. Manufactures a wide variety of pulp and paper products but specializes in kraft paper and recycled printing papers. Industry leader in manufacturing recycled paper products.

CO

Mo Och Domsjo AB: Produces and sells fine paper, wood-containing printing papers, paperboard, pulp, timber, packaging papers and sacks. One of Sweden’s largest exporters; 85% of its production is sold abroad.
Stora Kopparberg’s: Europe’s largest forest products company and one of the world’s leading manufacturers.
Sweden and Germany account for most production resources and 40% of sales. Products include paper pulp, fluff pulp, newsprint, SC, LWC, packaging paper, board, fine papers and technical office papers.
Svenska: Consumer oriented product portfolio (hygiene products, consumer packaging); is in the process of further investments in the traditional forest product segments: newsprint, linerboard and LWC.
Emerging Markets Pulp and Paper Companies

PY

Aracruz Cellulose S.A. (Brazil): World’s largest producer of bleached eucalyptus kraft pulp which serves as the basis for a wide range of products such as premium tissues, printing and writing papers and liquid packaging board. Among the lowest cost producers of bleached market pulp.

Cellulose Aranco (Chile): Acquisition, planting, cultivation and management of land and eucalyptus forests as well as the production of bleached and unbleached pulp and forestry products such as sawlogs and lumber.
Durango Industrial (Mexico): A leading integrated paper packaging and forest product company; produces corrugated containers, containerboard and industrial paper (consisting of linerboard, corrugating medium and kraft paper). Operates three mills and 11 corrugated container plants.

20

1stQ92

2ndQ91
4thQ92

Finland

Austria
Austria

4thQ94

4thQ92

Austria

3rdQ92

3rdQ92

Austria
Austria
Spain

Prinzhorn
Group
DuropackWellpappe
Sarro

4thQ93
1992

1992

USA

Sweden
Germany

Poland

International
Paper

Trebuk
Kronospan
GmbH
Syntezza
CMC

3rdQ92

3rdQ90

Germany

2ndQ91
3rdQ92

Finland
Switzerland

Herlitz

Prinzhorn
Group
Prinzhorn
Group

ENSOGutzeit

Tampella
Model Holding
Duropak

PY

Russia
Volga/Dzerzninsky
Slovenia
Paprnica Vevce
Paper Factory
TES/Towama
Embalaze
Paprnica Kolicevo
Poland
Zaklady
CelulozowoPapierni
Kostrzynskie
Fabryka Paperu
Malta
Cieszynskie

Szolnok Paper

Hungary
Halaspack Pkg

Czech Republic
(Greenfield)
Model Obaly
Opava
Bupak
East Germany
(Greenfield)
na
447

40
100

47

400
7

100%
100

80

51
80

80

76

66

51

0.3

56
1.2

120

62

na

20

12

51

33

25

50

Value
($m)

Acquisition
%

CO

Date

T

Acquiror
Country

200,000 na Annual
Capacity
(tons)

na

84,000 na 300,000

120,000

30,000

na

530,000

100,000

25,000

280,000

60,000

O

Acquiror
Annual
Production
(tons)

na

$1,307 na $500

$675

na

na

$69

$484

$3,736

$1,602

na

67,000 na 125,000

100,000

na

80,000

300,000

50,000

na

na

50,000

$2,000 na na

na na Value/
Capacity
($)

Exhibit 9
Selected Pulp and Paper and Comparable Emerging Market Transactions

N

Target

na

$1,639 na $1,200

$810

na

$490

$122

$969

na

na

na

na na Value /
Production
($)

21

General paper
Poster paper and paper for mock-wood furniture
Carton board

Coated/ Uncoated board, newsprint Stucco cardboard

Corrugated board

General paper

Newsprint

Coated paper/ In liquidation Cardboard products

Newsprint from recycled paper General paper/ greenfield
Corrugated paperboard/ packaging Corrugated box

Products

Private Equity Investment in Russia: Alliance Cellulose Limited

O

297-005

D

Private Equity Investment in Russia: Alliance Cellulose Limited

297-005

Exhibit 10a
Segezha Modernization Plans

Equipment

Investment1
($ millions)

Results

D

Increase annual capacity from 43,500 to 80,000 tons of 70-78 g/m2 paper for bags and enable production of 120-150 g/m2 linerboard.

$29.6

Recovery soda boiler

Reconstruction of electric filters and installation of black liquor concentrators to increase daily pulp capacity form 725 tons to 1,100 tons, reduce sulfurous dust emissions by 0.2 g/m3 and stabilize the supply of cellulose produced with alkaline solutions. This modernization will also improve the quality of the mill’s pulp and paper and decrease reliance on outside fuel sources.

7.0 (Finnish govt. will subsidize by
3.0 million )

Installation of Clupak device to strengthen paper which will result in a reduction of paper layers
(from 5 ply to 3 ply) required for certain paper bags. Increases annual production of paper bags by 24.6 million (40%).

3.7

Replace the bag production lines with two modern lines to accommodate the anticipated increase in paper production. This will maintain the level of annual paper bag production at 1.3 billion. 30.0

O

PM-1 Replacement Equipment

N

PM-10 Installation of modern equipment

O

Replace four bag production lines

T

Installation of equipment for covering paper with polytene

Increase annual production of water resistant bags to 200 million.

CO

Increase annual production of paperbags by 75 million. 15.0

Installation of machine for production of consumer paper bags with handles

Provides for annual production of this product of
25 million.

3.0

Install modern boiler - one cleaning and sorting system for different types of pulp

Allow for sorting of hard and softwood pulp.
This will enable the mill to utilize more hard wood pulp, reduce consumption of water and chemicals for washing cellulose and reduce the loss of fiber in the washing process

6.5

Install three modern boilers

Reduce SO2 emissions by 30% and improve air quality in the region

55.8

1

$60 million of these capital expenditures would be required for first phase.

22

PY

Installation of two additional paper bag production lines

297-005

Private Equity Investment in Russia: Alliance Cellulose Limited

Exhibit 10b
Vyborg Modernization Plans

Equipment

Investment
($ millions)

Results

D

Make possible production of 30,000 tons of bleached sulphite pulp thereby reducing the mill’s market pulp purchasing requirements.

$11.0 (includes installation) Modernize steam plant, gas turbines, two turbo generators and ancillary gas lines for cogeneration facility

Allows the mill to produce 70% of its energy requirements thereby reducing exposure to local energy suppliers. Gas lines allow the mill to utilize either gas or oil for boiler fuel.

9.3

Modernize electrical facilities and train wagons Improve the mill’s internal logistics including unloading of wood from the rail yard.

0.8

Improves paper quality and allows for production of heavier gram weight paper utilizing less pulp

3.0

O

Acid bleach pulp equipment

N

Reconstruct paper machine

0.5

O

Installation of lubrication equipment
(already initiated)
Install used pulp packing line

2.6

Complete construction of seawall to allow port to receive ships, build terminal and collection facility for Russian lignosulfonate producers.

N.A.

T

Port modernization

Allows the mill to transport its market pulp by sea and by truck, thereby reducing transportation costs and allowing the mill to receive approximately $50-$100 in incremental profit/ton shipped.

CO

Reduce effluents resulting from the production process and decrease the mill’s effect on the local environment.

4.5

Purchase reconditioned pulp dryer

Reduce bottlenecks in the pulp production process (installation of a pulp packing line would overload for the existing pulp dryer).

Internally generated cash flow. Purchase drying plant for lignosulfonates

Currently selling this by-product in liquid form.
This equipment would allow the plant to ship in solid form and reduce transportation costs.

PY

Installation of environmental equipment effluent treatment, water supply system.

23