Clearwater Paper Corp., the Spokane-based maker of tissue and paperboard products, says it isn't economically feasible to split into two separate entities, as suggested recently by a large shareholder group.
After completing an analysis that looked at the possible benefits of separating its consumer products segment from its pulp and paperboard business, Clearwater is forging ahead with its strategic goals as a producer of private-label tissue and bleached paperboard. That plan, it says, includes fully integrating by the end of this year the operations of Cellu Tissue Holdings Inc. that it acquired in late December 2010.
It also plans to ramp up production at a new tissue manufacturing and converting facility in Shelby, N.C., where a paper machine for making high-end tissue is expected to be online soon and at capacity by 2014. The facility now runs two converting lines, which splits huge tissue rolls into smaller tissue products, and it eventually will have five such lines.
Clearwater Paper's management and board, as well as external financial and legal advisers, considered different options for company growth during a three-month analysis through last month. It also reviewed a recent proposal filed by SAC Capital Advisors LP, a Stamford, Conn.-based investor hedge fund, urging Clearwater to split itself into two parts and to consider selling one or both divisions.
Gordon Jones, Clearwater's retiring chairman and CEO, couldn't be reached immediately for comment. However, at a global industrial conference held in Las Vegas last month, he said a key argument against splitting the firm is the importance of its Lewiston, Idaho-based manufacturing complex and how integrated that 840-acre site is for pulp, paperboard, and tissue production.
SAC Capital Advisors, which says it owns 1.64 million shares, or 7.1 percent, of Clearwater Paper, proposed in an Aug. 17 regulatory filing that Clearwater consider separating the consumer products segment from its pulp and paperboard business, hire an investment bank to explore a sale, and grow its board by two members.
A spokesman for SAC Capital last week declined to comment beyond the filing.
Jones said at the industrial conference that Clearwater considered SAC Capital's option among others in the recent review, but determined it best to stay with its strategic goals that include full Cellu Tissue integration, the Shelby site ramp-up, and a company cost-savings plan.
"In the end, we concluded that the continued execution of our plan will deliver the shareholder value actually significantly in excess of other potential alternatives," Jones said. "We believe in our long-term strategy."
Clearwater operates 15 manufacturing facilities in the U.S. and Canada. It makes private-label tissue for grocery and drug stores, as well as mass merchants and discount retailers. Its bleached paperboard is used to make folding cartons and packaging for products, primarily food items.
Jones said the Lewiston complex accounts for 64 percent of the company's total pulp production, 58 percent of the company's total paperboard production, and 32 percent of its tissue.
"It's one pulp mill that feeds both divisions in a very integrated way," he said. "We looked at the interconnections of pulp and electricity, gas, steam, and we looked at water."
The company also considered services that hold down costs across both divisions in Lewiston, including roads and the rail system, security, fire protection, and medical and administrative functions based at the complex, Jones said.
Jones said Clearwater Paper needs to complete its Cellu Tissue integration and finish its Shelby project goals. With that, he says he expects the company's financial indicators to improve.
Jones noted that in 2011 the company had earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $196 million. Once the company gets Shelby up to full capacity as expected by 2014, adds some lean initiatives for cost reduction, and completes the Cellu Tissue integration, the company expects its EBITDA to be at $300 million or above, he added.
Jones said the Cellu Tissue acquisition gave Clearwater Paper a number of manufacturing and paper-making sites in the Midwest and the East, which also meant that the company doesn't have to ship all of its paper from West Coast facilities to sites across the country.
Clearwater Paper is a spin-off unit that until late 2008 was part of Spokane-based Potlatch Corp., of Spokane, which continues to operate as a timber real estate investment trust and has six manufacturing facilities that produce lumber and panel products.
Jones said that Potlatch, as the previous owner, had looked into the possibility of separating the Lewiston assets, and that Clearwater Paper decided to take another hard look at that option.
"We take shareholders' views and opinions really seriously," he said. In the end, though, he said it was clear how much the Lewiston site produces, and how much the two divisions' operations are integrated. The company future growth plans also are expected to drive up value, he added.
In a filing with the Securities and Exchange Commission last month for presenting at the global industrial conference in Las Vegas, Clearwater Paper produced a detailed document with company description and publicly stated goals.
The document said that of the company's two business segments, its pulp and paperboard segment contributed 43 percent of 2011 net sales, with the consumer products division at 57 percent. It said the tissue market has grown an average of 2 percent annually since 1996.
Clearwater has about 3,900 employees.
The report said the company strategies to create shareholder value include growing the tissue business by leading with private-label high quality products and growing its retail channel penetration. It said the company plans to increase the profitability of its paperboard business by improving the sales mix, reducing costs, and improving quality.
"The board and management conducted an extensive evaluation and analysis of numerous opportunities to enhance shareholder value, including SAC's proposal, over the past three months, with the help of Goldman Sachs, legal, tax, and other outside advisors," the document said.
The analysis considered the company's current growth initiatives, the cost of launching a public merger-and-acquisition process, among other factors.
In July, Clearwater Paper reported second-quarter net income of $21.5 million, or 91 cents a diluted share, up sharply from $13.9 million, or 59 cents a share, in the year-earlier period. The company attributed the upswing partly to strong performance in both the consumer-products and pulp-and-paper sectors.
The company is scheduled to release its third-quarter earnings on Oct. 24.
Early this month, Clearwater Paper announced that Jones will retire as chairman and CEO on Dec. 31, and Linda Massman, who currently serves as the company's president and chief operating officer, will succeed him as CEO.
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