Paper and pulp manufacturer Sappi has, through its wholly owned Sappi Papier Holding subsidiary, entered into binding transaction agreements with Finnish materials solutions company UPM-Kymmene Corporation to establish a joint venture (JV) comprising Sappi's graphic paper business in Europe and UPM's communication papers business in Europe, the UK and the US.

The parties in December announced that they had signed nonbinding documents with the aim of potentially merging their European paper businesses, with each party to own 50% of the JV.

Sappi says the proposed transaction will enable it to considerably reduce its exposure to the declining graphic paper industry and enable it to focus on its core growth segments, being packaging and pulp.

"The JV provides a pathway to realise greater value from the combined asset base, with Sappi ultimately gaining an equity interest in a stronger and more resilient combined business. This is a significant step forward in Sappi's strategy of shifting its mix toward higher-growth and higher-margin segments, by reducing its direct graphic paper exposure, while unlocking value from its European graphic paper assets, contributing towards debt reduction and protecting its balance sheet," it states in a notice to shareholders.

It points out that demand for graphic paper has been in structural decline for decades, primarily driven by the accelerating pace of digitalisation. It adds that, despite substantial capacity reductions in recent years, industry utilisation rates remain unsustainably low, while recent trade tensions and tariffs have further disrupted traditional trade flows, leading to increased volumes of Asian exports of graphic paper into Europe.

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, Sappi says.

"The establishment of the JV creates a sustainable standalone business that ultimately preserves strategic optionality for Sappi by providing divestment flexibility in the future," it states.

Sappi will contribute four paper mills to the JV entity – Gratkorn, in Austria; Ehingen, in Germany; Maastricht, in the Netherlands; and Kirkniemi, in Finland.

UPM's contribution will include communication papers business assets positioned at the paper mills located in four countries – Augsburg and Schongau and Nordland Paper Lines 1 and 2, in Germany; Caledonian, in the UK; Rauma and Jamsankoski Paper Line 6, in Finland; and Blandin, in the US.

The enterprise value of Sappi's contributed assets is €320-million, including pension and other liabilities of €53-million, resulting in a net purchase consideration of €267-million.

UPM will transfer its contributed assets to the JV at an enterprise value of €1.1-billion, which includes pension and other liabilities of €360-million, for a net purchase consideration of €740-million.

Sappi and UPM will receive upfront cash payments of €90-million and €475-million, respectively, on the closing date of the transaction. These payments will be funded through third-party bridge debt funding raised by the JV. 

The JV has entered into final agreements regarding a third-party bridge debt funding facility for a principal amount of €600-million and has secured a committed revolving credit facility, for working capital purposes, of €100-million.

Sappi intends to the in cash proceeds from the proposed transaction, comprising the €90-million cash consideration that will be received on closing and an additional €10-million that Sappi will receive on settlement of Sappi's common shareholder loan claim against the JV, to reduce its offshore debt, thereby improving Sappi's balance sheet and lowering net interest expense.

The transaction remains subject to various conditions precedent, including approval by shareholders and by competition authorities in the affected countries.