European Union regulators have formally raised competition concerns over a planned €1.42 billion ($1.66 billion) combination of paper operations belonging to South Africa’s Sappi and Finland’s UPM, putting a significant industry consolidation under greater regulatory scrutiny.
The European Commission issued a Statement of Objections to the companies on Aug. 25, according to Business Insider Africa, which reported that regulators are concerned the proposed joint venture could weaken competition in the European Economic Area and establish the region’s dominant supplier of communication paper.
The Commission’s action represents a preliminary finding rather than a prohibition of the transaction. Sappi and UPM have an opportunity to respond to the regulator’s concerns, review evidence in the case and seek an oral hearing, according to Business Insider Africa.
The regulatory challenge centers on a proposed independently operated company that would be owned equally by Sappi and UPM. Business Insider Africa reported that the companies signed definitive agreements for the venture in May, with Sappi contributing its European graphic-paper operations and UPM adding communication-paper assets in Europe, Britain and the United States.
European regulators are particularly focused on coated mechanical and coated wood-free paper, products used in magazines, books and other printed material. The Commission considers Sappi and UPM the two largest communication-paper producers in the EEA and is concerned that combining their operations could reduce the alternatives available to customers, according to the publication.
The Commission has said the venture could give the combined business enough market power to raise prices and reduce quality. The regulator has also identified the potential for lower production and diminished customer choice, Business Insider Africa reported.
The proposed transaction comes as traditional graphic-paper manufacturers confront a prolonged decline in demand as advertising, publishing, business communications and other activities continue shifting toward digital formats. Producers have responded by cutting capacity, closing equipment and increasing their focus on packaging, specialty paper and wood-fiber products, according to Business Insider Africa.
Related: EU Pauses Review of UPM-Sappi’s €1.42 Billion Paper Venture
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For Sappi, the joint venture would reduce its direct exposure to the shrinking European graphic-paper market while allowing the Johannesburg-listed company to retain a 50% interest in the new business. The arrangement would also divide the financial burden of future maintenance, restructuring and potential plant closures between Sappi and UPM, Business Insider Africa reported.
The companies have argued that consolidation would make their paper operations more resilient and help preserve dependable supplies for customers. Sappi and UPM expect the combination to generate about €100 million in annual savings through efficiencies in areas including manufacturing, logistics, purchasing and product management, according to Business Insider Africa.
The Commission, however, has indicated that it is not yet persuaded that projected cost savings, environmental gains and supply-security benefits would outweigh the potential damage to competition, the publication reported.
Sappi has separately described receipt of the Statement of Objections as a procedural stage of the Commission’s Phase 2 merger investigation and said the step does not determine the final result. The company said it intends to work with UPM in responding to the Commission and remains confident of a favorable outcome by year-end.
The venture has an estimated enterprise value of about €1.42 billion, and financing had been secured when definitive agreements were announced, according to Business Insider Africa. Completion remains dependent on regulatory and other approvals.
Sappi and UPM could seek to resolve the Commission’s concerns during the review. Business Insider Africa noted that remedies in major industrial transactions can include asset sales, capacity commitments, supply guarantees or changes to customer agreements, though neither company had announced concessions at the time of the report.
The Commission will ultimately determine whether the transaction can proceed as proposed, requires conditions or should be blocked. The outcome could shape both Sappi’s restructuring strategy and the competitive landscape of a European paper industry already adapting to a sustained contraction in demand.
Source: Business Insider Africa
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