- Turnaround involved pivoting Jeonju Paper’s legacy business, adding renewables business
- Jeonju OnePower, which accounts for 72% of overall EBITDA, drew strong M&A interest
- Global Sae-A Group acquired both businesses following COVID-disrupted sale process
Fifteen years after the initial acquisition, Morgan Stanley Private Equity Asia (MSPEA) has completed its exit from South Korea-based Jeonju Paper, securing a reported 1.8x return. The unusually long holding period reflects an unusually complicated tenure, punctuated by repositioning the legacy newsprint operation, creating a standalone renewable energy business, and a protracted exit process.
“It’s the longest we’ve ever held an investment, and we will likely not hold one for this long,” said Michael Chung, a managing director and head of MSPEA in Korea. “Some deals could be suitable for continuation vehicles, but not this particular one. This paper business is better off as part of another paper group.”
The deal, announced last December and closed in May, will see Korean textile and trading conglomerate Global Sae-A Group buy Jeonju Paper and Jeonju OnePower for KRW 650bn (USD 500m). The two assets were on track to be sold separately, with one bidder reportedly offering KRW 500bn for OnePower alone, but then COVID-19 intervened, leading to a reset in M&A markets.
Mindful that investors had waited long enough for distributions from a 2007 vintage fund, MSPEA pulled the trigger when conditions stabilised. While the return is respectable – and might have been stellar in different macro circumstances – the subsequent fortunes of Jeonju Paper’s newsprint peers suggest a suboptimal outcome had the investor not embarked on its long journey of operational heavy lifting.
The company had three main newsprint peers when MSPEA arrived: AbitibiBowater, Paper Corea [KRX:001020], and DaeHan Paper. All suffered from a decline in newspaper demand driven by smart phone-enabled expansion of digital media. Paper Corea has largely pivoted into property development, AbitibiBowater exited the Korean market, and DaeHan is one of few players still standing.
Changing dynamics
Founded in 1965, Jeonju Paper became part of Samsung family spinout Hansol Group in the early 1990s. Hansol agreed to merge its Asian mills with those of Norway’s Norske Skog and Canada’s AbitibiBowater in 1998 in the wake of the Asian financial crisis. By 2006, Norske Skog had taken full ownership.
It regarded the Korean business as a crown jewel and swiftly rebuffed MSPEA’s initial approach in 2007. However, a year later, with Norske Skog under financial stress, the opportunity reemerged. MSPEA teamed up with Shinhan Private Equity and prevailed in an auction process, paying KRW 850bn (then USD 818m). The deal closed in September 2008, with MSPEA taking 58% to Shinhan’s 42%.
Changing industry dynamics around newsprint and the impact of the global financial crisis meant that cost controls became a relatively early priority. Cost competitiveness and purchasing and supply chain management initiatives in 2013-2014 delivered savings of KRW 20.7bn, while another KRW 16.9bn came in 2015 through job cuts and personnel restructuring – a consequence of high legacy fixed costs.
The investors then turned their attention to business diversification. Industry consolidation helped Jeonju Paper increase its market share from 34% to 45% in the two years ended March 2018. The company directly contributed to the consolidation by selling a production plant to Paper Corea, which had already closed a larger facility.
Jeonju Paper’s remaining manufacturing capacity was reoriented towards printing and writing paper and then corrugated mediums. These are an essential component of packaging material; they help form the box and give it strength. The conversion of newsprint production lines to meet the needs of corrugated mediums took place ahead of the pandemic-driven surge in e-commerce in Korea.
“We had seven paper machines and made modifications to two of them. We built up revenues to reach over 40% market share in corrugated mediums, and also did very well during COVID,” said Chung. “Half of the paper business revenues came from packaging, and will likely continue to increase.”
Meanwhile, Jeonju Paper’s renewable energy ambitions were being pursued in earnest. Turning wet pulp into paper involves running it through hot rollers that squeeze out the moisture. The steam used to heat these rollers was produced by burning kerosene oil. Jeonju Paper switched to liquefied natural gas and then biomass, constructing Korea’s first biomass cogeneration plant in 2009.
This helped reduce costs, open up new sources of government funding, and enhance the company’s reputation as a local clean energy pioneer. But it was an eight-year process that featured two bolt-on acquisitions and the creation of a second, more sophisticated biomass cogeneration plant. Jeonju Paper invested approximately KRW 165bn in energy transformation.
It was also something of a step into the unknown. Korea’s lack of existing capabilities in this field – some talent was brought in from overseas – and the untested regulatory frameworks created uncertainty as to how and when the effort would pay off. Getting government sign-off was significant.
“When we got it approved, we knew it would take time to become a reality, but by 2019, I was confident it would be a success,” said Chung. “No one is building biomass boilers today because of the regulatory environment, so it’s a scarce asset. And now, with rising energy prices and ESG awareness, everyone knows about RECs [renewable energy certificates]. Five years ago, they did not.”
Path to exit
The renewable energy business accounts for 18% of overall revenue, which reached KRW 777.5bn in 2022, but it was responsible for 72% of EBITDA. The EBITDA margin was 63% compared to 16% for paper. These contrasting growth trajectories, clearly visible in 2019, prompted the spinout of Jeonju Paper, and bankers were hired to sell the two businesses.
The process was halted in February 2020 as COVID-19 prevented prospective buyers from conducting on-site due diligence. Within two months, global oil prices had collapsed, and this led to a decline in electricity prices, which negatively impacted Jeonju OnePower. The situation wasn’t fully resolved until the end of the pandemic as the crude oil supply-demand mismatch eased.
After a couple more delays, the sale ran its full course in 2023. With several companies that had previously mounted aggressive pushes into renewable energy reluctant to act amid tough financing markets, Global Sae-A picked up both assets. The buyer can capitalise on synergies with its existing paper operations, while Jeonju OnePower has become a crown jewel in its own right.
Chung, for his part, remains bullish about the prospects for renewable energy in Korea. “It is an attractive sector, and we have shown it is possible to build a business with high-quality personnel and engineering capabilities,” he said.
Source: ionanalytics.com
