Mead, Westvaco: Merger of Equals

At the close of August, Mead Paper and Westvaco announced a business combination dubbed a "merger of equals" by their new management team. The combined company, to be called MeadWestvaco Corporation, will report revenue in excess of $8 billion in 2001 drawn from four units: coated and specialty paper, packaging, consumer and office products, and specialty chemicals.

A new corporate office will be opened in Stamford, Conn., with satellite offices for coated paper and office products located in Dayton, Ohio, and packaging and chemicals sited in Richmond, Va.

The merger is expected to shed $325 million as a result of operating synergies, namely material cost reductions and operating and logistics rationalizations. (Indeed, Westvaco announced the closure of its Tyrone, Pa. mill along with some packaging units, while Mead shut office products and packaging locations and slowed production at mills in Ohio and Maine.)

The deal also will likely reduce coated paper production in the U.S. by as much as 300,000 tons, and perhaps provide a more balanced marketplace in terms of prices and inventories. Unfortunately, the business needs a weaker dollar and a growing economy to really achieve stability.

The merger continues the consolidation wave in the paper business, led by International Paper's takeover of Champion and Union Camp, Sappi's buyout of S.D. Warren, Stora Enso's purchase of Consolidated Papers, and UPM-Kymmene's bailout of Repap. (The proposed merger of Weyerhaeuser and Willamette Industries is yet unrealized.)

The top coated paper manufacturers in North America will now occupy over 75% of production. The IP and MeadWestvaco moves have reversed the trend of European-based companies buying North American firms, perhaps resulting from their success in importation and profit evaporation in European and Asian markets.

Very few independent coated producers are left in North America, though two Canadian firms (Domtar and Belgravia) have picked up some smaller mills recently. The remaining independents are struggling terribly, as coated paper prices and production sink along with the general world economy.

The MeadWestvaco venture is a mixing of corporate cultures. Mead relied heavily on merchants and distributors to increase market share and explore new markets. Westvaco is an industry maverick, using a direct sales force to break into markets large and small. Westvaco has global production (Brazil and Czechia), while Mead has exported its packaging technologies through agents and subsidiary companies.

Westvaco has concentrated on U.S. commercial printers with particular emphasis on graphic arts in packaging and board. It bought a white paperboard mill in Texas from Inland Container, complementing its expansive heavyweight board line (produced in Virginia) with the lighter-weight uncoated line known as Tango.

Westvaco's brown grades feed its kraft envelope and saturating paper lines, and its uncoated production supplies the firm's envelope-converting plants and growing digital paper lines. Westvaco, which also has a chemical division and packaging materials division (recently expanded), also is a leader in environmental stewardship.

Mead's paper, packaging, and consumer and office product lines will slide smoothly into the new company's portfolio. In packaging, Mead produces a world-class beverage carrier stock line, complementing the bleached board ("SBS") grades of Westvaco nicely.

Mead has developed packaging systems that have become industry standards (Duodozen, ClusterPak, and BasketWrap). Mead also has a group of corrugating container plants, a business Westvaco got out of two decades ago.

Mead's consumer and office products offerings (everything from school supplies to leather folders) are already distributed to the same retail outlets as Westvaco's retail envelope products. On the wholesale side, Mead and Westvaco both supply facing stock and label base stock for commercial packaging systems to the global giants. Mead also watches the global markets with its pulp sales division, which may help the new company follow prices more tightly.

Mead's coated paper line is likely to be merged into Westvaco's, except in areas where Westvaco does not participate (namely lightweight coated products Dependoweb, Escanaba, and PTO).

The premium and mid-range coated paper products, both sheet and web, will be trimmed to suit either Mead's merchants or Westvaco's sales force, or both. Mead provides Westvaco with a nifty carbonless line, cast-coated grades (Mark V), and digital printing papers in both coated (Signature and Mead) and uncoated (Premium Smooth).

Westvaco's coated lines (Celetra, Sterling) already are serving higher quality applications, including an extensive group of coated paper with recycled content and coated cover stocks (C1S, C2S).