Momentum behind forest, paper and packaging deals set to continue driven by sustainability trends: PwC

Total forest, paper and packaging (FPP) deal values increased to $27.6 billion in 2007, up $1.9billion on 2006, according to the PricewaterhouseCoopers Branching Out report.

Deal values reached $11.8 billion in the first quarter of 2008, although the outlook for the rest of this year is more uncertain. Private equity has continued to play a key role in deals particularly in North America. New dealmakers have also emerged on the scene, such as New Zealand's Rank Group. Yet the main deal story is the lack of significant – and urgently needed – consolidation deals in Europe.

The FPP industry is at the heart of the drive towards sustainable development and we are seeing new investment trends reflecting this.

FPP companies continue to operate in a challenging, and rapidly shifting, sector. Macro-economic factors have affected the industry, particularly increased fibre and transportation costs, soaring energy prices, lacklustre demand at best in North America and Europe and the impact of emerging markets on global competition. The weakness of the US dollar versus other key currencies such as the euro, the Brazilian real and the Canadian dollar have also had a substantial impact on the industry – Canadian players have been particularly hard hit, due to their dependence on the US market.

The shift in currency ratios globally has played havoc with many FPP companies' planning and supply chain configurations – and is likely to have a noticeable influence on deal making going forward.

Many of the largest FPP companies have radically altered their business models, moving from vertically-integrated conglomerates to more product-focused models, with International Paper as the most prominent example. While this trend continues to play out to some extent in deals in North America, a second strategy has also become apparent. Some companies, particularly those based in Scandinavia, have retained vertically-integrated supply chains.