Norske Skog and Union Group Begin Merger Negotiations

The Norwegian-based pulp and paper companies Norske Skogindustrier ASA and A/S Union (Union Co) have begun merger negotiations. Norske Skog already owns 48.1% of Union's vote-entitled capital and 57.6% of its total share capital. Union owns 838,546 A shares in Norske Skog, which represent 2.91% of the total number of A shares.

Norske Skog is a major market pulp, newsprint, magazine papers, and building products producer with operations throughout Europe and, most recently, in Asia through a joint venture newsprint company known as Pan Asian Paper Co. (PAPCO). The company's operations and performance in 1998 are summarized below.

Union's principal activity is the production of publication paper at Union Bruk, in Skien in eastern Norway. Its strategy for the future is to switch capacity from standard newsprint to include a larger share of special products, primarily high quality newsprint and book paper. "To foster this strategy in the future, it is crucial to coordinate resources, to a greater extent, with Norske Skog," said Union's managing director Bjorn Arnestad.

The turnover of the Union group is around NOK 1.2 billion ($157 million). Its operating profit last year was about NOK 160 million ($21 million). Today, A/S Union (Union Co.) consists of its principal activity, Union Bruk, at Skien, and its energy business. The company has two subsidiaries, Union Geithus and Union Eiendomsutvikling (Union Property Development).

Union Bruk, Skien, produces newsprint and book paper, and has 460 employees. The energy business is comprised of three power plants producing a total of 280 GWH annually, and has eight employees. Union Geithus AS, at Modum (also eastern Norway) makes greaseproof papers and has 120 employees. Union Eiendomsutvikling AS, with 21 employees, manages and develops a substantial amount of property in Drammen. Tentative plans are to dispose of the property business in Drammen.

The companies have tentatively agreed to base their negotiations on an exchange ratio under which each Union share, regardless of share class, would be exchangeable for 7.5 Norske Skog B-shares. This tentative agreement is conditional on a more thorough analysis of certain aspects of the businesses, and the approval of the respective boards.

"Today, we already cooperate extensively with Union in sales, procurement, research and logistics. A merger between the two companies will provide further opportunities for coordination in production of wood-containing publication papers," said Norske Skog's CEO Jan Reinas. The merger will be discussed by the boards on March 3 and later by the corporate assemblies of both companies, and at their shareholders' general meetings on May 5.

Norske Skog developments
Norske Skog reported that it achieved a good result in 1998. The Group's profit before tax and after financial and structural costs reached NOK 1,407 million ($184 million), against NOK 652 million ($85 million) in 1997. Operating profit rose 64%, from NOK 1,083 million ($142 million) to NOK 1,780 million ($234 million) in 1998, after some allocations to restructuring.

The Group's hedging strategy resulted in high financial costs in 1998, but is said that will be offset by higher operating income during the coming months. The marked advance reflects price increases and high output of newsprint and magazine paper. Market pulp and building materials performed poorly. The board proposes that a dividend of NOK 8.50 ($1.11)/share be paid for 1998, against NOK 7.00 ($0.92)/share for 1997.

Norske Skog said that it has never previously produced as much paper, sawn timber and board as in 1998. Total paper output, including that by the group's affiliated activities, exceeded 2.4 million m.t., 12% higher than in 1997. The increase was due both to new mills and high production. All of Norske Skog's newsprint mills in Europe set new production records. Output of market pulp was high - up by 9%. Production of sawn timber and board reached new record levels, rising by 5% and 9%, respectively.

The company reported that it took a major step forward during 1998 in implementing its strategy, and it is now one of the world's leading suppliers of publication papers. In the first quarter of 1999, its publication paper capacity stands at 3.2 million m.t., including shares of part-owned activities. This is 36% more than at the same time in 1998. Its newsprint capacity has increased by 50%.

Norske Skog's operating revenue reached NOK 14,908 million ($1.9 billion) in 1998, compared with NOK 13,312 million ($1.7 billion) in 1997. The increase reflects the purchase of new activities, higher prices for publication paper, and high production.

The company invested NOK 3,983 million ($522 million) in new plant and equipment at its mills during 1998. The largest project, the new paper machine at Norske Skog Golbey, is now being run-in. With a capacity of nearly 600,000 m.t., the plant is one of the world's most efficient newsprint mills. Other large investments were for the rebuild of a paper machine at Norske Skog Saugbrugs, and the installation of a new wood handling plant at Norske Skog Follum.

Norske Skog's equity capital increased during 1998 from NOK 9,064 million ($1.2 billion) to NOK 9,849 million ($1.3 billion). Even so, major investments, without injections of new equity capital, led to a fall in equity to assets ratio from 52% to 41%. This figure is affected by high liquidity held at the end of 1998, ahead of payments relating to Golbey's PM 2 and the final settlement in connection with the PAPCO agreement in the first quarter of 1999.

After the expansion of Norske Skog Golbey, and the creation of the joint venture PAPCO in Asia, Norske Skog has more than 50% of its newsprint capacity outside of Norway.

The company said there was a generally good balance between supply and demand on the world's newsprint markets in 1998. Operating profit for area newsprint reached NOK 1,192 million ($156 million), against NOK 761 million ($100 million) in 1997. The satisfactory earnings reflect continuing increased demand on the main Western markets, where market balance is expected to continue good during the coming period.

The company's magazine paper mills increased their operating profit from NOK 373 million ($49 million) in 1997 to NOK 754 million ($99 million)in 1998. Markets for magazine paper were steady throughout the whole of 1998, with good demand in western Europe and north America, it reported.

The two newsprint mills in Asia that Norske Skog took over during the second half of 1998 achieved an operating profit of NOK 61 million ($8 million). The market for newsprint in Asia weakened in 1998. Countries such as China and Japan, however, generally maintained volumes.

Record-low prices for market pulp meant very poor results, in 1998, for the company's mills producing that commodity. Operating profit was minus NOK 28 million (-$4 million), against NOK 49 million ($6 million) in 1997. Throughout the whole year, the market was affected by over-capacity, Norske Skog reported. Stocks were on average well above the level that provides a reasonable balance between supply and demand, it said.

During 1998, the company gave high priority to further reducing the amount of organic waste going to waste tip, and good results were achieved, it said. Norske Skog's goal is to use all organic waste from its mills for heat recovery. This provides both environmental gains, and improved energy economy. Environmental related investments at the company's mills in 1998 totaled NOK 426 million ($56 million).

At the start of 1999, publication paper prices fell, but there is still good balance in the markets, Norske Skog reported. It added that developments during the current year will depend on the general level of economic activity in the western industrial countries. In 1999, also, there will be limited capacity growth in the world's publication paper industry. There is still over-capacity for market pulp and a weak market for building materials, the company stated.