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Suzano-Fibria Deal Creates BEK Giant

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Brazil is set to have a titan in the bleached eucalyptus kraft (BEK) pulp market. In mid-March, Suzano and Fibria agreed to combine their assets within the next 18 months. By structuring a financial operation with four banks, offering $9.2 billion and the issue of 255 million new shares, Suzano ousted competitors that wanted Fibria, including Netherland-based Paper Excellence (PE), which offered $12.1 billion, but needed time to show all guarantees for the transaction.

Combined, the Suzano-Fibria conglomerate will have an 11-million metric tpy BEK output and over 14% of the global market pulp. Considering only bleached hardwood (BHK) pulp, the firm's share will potentially hit 30% of the global market. The deal, however, puts on hold expansion projects that both Fibria and Suzano had previously announced.

Suzano was advancing fast with a new 1.5-million metric tpy BEK mill in São Paulo state, in a competitive region closer to ports and with good infrastructure. One month ago, the firm acquired 9,500 ha of rural areas in the state of São Paulo from the panel producer Duratex, in a deal estimated at $95 million, involving the option of an additional purchase of approximately 20,000 ha by July 2 for a further $228 million.

Suzano said it would have 90,000 ha of eucalyptus in the area, which would be enough to get the final approval for the project from its board before the second half of this year. The new mill could kick off by mid-2020 and take advantage of the lack of new BHK capacity expansions planned for the coming years.

Fibria has just completed the construction of a new 1.95-million metric tpy BEK line in Três Lagoas city, Midwest Brazil, and was deleveraging fast as pulp prices boomed. The firm was expecting its debt profile to improve in order to build a third line at the same facility.

According to RISI's VP for fiber, David Fortin, the Suzano-Fibria combined company's market share in total pulp and BHK, more specifically, will not likely be large enough for pricing power in a commodity market like pulp, but it does change future expansion plans. "As the separate companies would each have their own plans independent of each other, this could temper expansion plans to some extent as the combined company likely only takes on one project at a time," Fortin commented.

Suzano's CEO Walter Schalka confirmed that with the acquisition of Fibria, all expansion projects are now on hold, as the deal raises the company's leverage to 3.5x. "Respecting Suzano's financial policy, we will seek the total deleveraging of the company in the next few years, keeping our focus on the investment grade and a leverage level target of 2.5x-3x."

Suzano has detailed three scenarios of deleveraging for the next 2-3 years, varying according to pulp prices. In the most turbulent forecast, with BEK prices at a $600/tonne, the company's net debt/EBITDA ratio would be at 3.1x in 2020, still idling expansion projects. If pulp prices stay at $650/tonne or $700/tonne, leverage levels would be, respectively, 3x and 2.5x, enabling the company to resume plans for new pulp projects as soon as 2019.

The negotiation between Suzano and Fibria included a Real 750 million ($228 million) breakup fee in case the transaction fails within 18 months. One of the main obstacles is the complete approval of anti-trust authorities in Brazil, North America, Europe and China, which will now analyze the concentration of the newly formed company in the pulp market.

In the deal, Suzano has agreed to pursue the sale of assets of up to 1.1 million metric tpy of capacity in case of any restrictions, but if the demanded obligation is higher than that it will be exempted from the fee.

Schalka stated that the new firm wouldn't control BEK prices, as this is a "commodity business" subject to the global demand and supply balance. "Pulp prices have a historical volatility of around 10% and the market dynamics should remain unchanged as our share will be not be that high, considering the overall market," he commented.

The executive also said he doesn't expect the acquisition to face any restrictions. "We have to look into this [pulp] market with a broad view. Even considering only hardwood pulp, we have several other sources of fiber, besides softwood and recovered paper, companies that are integrated and other non-integrated. (...) We don't see that we will, or even intend to cause any negative effect to our clients. In our view, the deal is very positive for them, as we will be able to provide better services, improve our product mix and logistics."

According to RISI's statistics, in 2017 Fibria was the largest market pulp producer in the world, with 6.4 million tonnes and an 8.8% share, followed by Chilean Arauco (6.4%), and North-American International Paper (5.5%). Suzano came in the fifth place, with 3.5 million tonnes and a 4.9% share last year. Fibria's figures are set to grow in 2018 due to the ramp up of its new line in Três Lagoas.

Considering only bleached hardwood pulp, Suzano and Fibria occupied the first two places in 2017's ranking and led this market by far, with a combined 27.6% market share. Chilean CMPC came in the third place with 3.1 million tonnes and a participation of 8.6%.

The enterprise value of the new Suzano-Fibria group is $25.3 billion, meaning it is expected to become the largest Brazilian company in the agribusiness sector and the fifth largest company in Brazil.

The new firm will cover sales to more than 90 countries, with 34% of exports going to Asia, 27% to Europe, 16% to North America. The remaining amount will be traded in Latin America, including Brazil.

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