By Debora Tidwell (TMF Debit)
UNION CITY, CA (May 6, 1997)/FOOLWIRE/ --- James River Corporation and Fort Howard Corporation announced yesterday morning that they will merge to create a company that, in their estimation, is even stronger than the two individual companies and a company that will be a real leader in the packaged goods industry. Together they will create a $7.3 billion worldwide consumer products company. It is truly a merger of equals that are better off together than apart, in their opinion. The new company will be called Fort James and, pending various regulatory and shareholder approvals, the merger should be completed at the end of the Summer. The new name retains some elements from the old. That is no accident. They are very proud of the accomplishments of both James River and Fort Howard.
PROGRESS AS SINGLE ENTITIES. James River has restructured its portfolio of assets and reduced debt and costs. It has also moved to reduce the cyclicality inherent in the paper-based consumer goods industry. For its part, Fort Howard has also reduced debt and increased both growth and profitability.
BENEFITS TO THE COMBINED FORT JAMES ENTITY. Their new entity, Fort James, pushes forward the grand opportunities that lie ahead of them for worldwide growth. These two companies are ready to emerge as a powerful single force. Fort James can capitalize on many synergies, among them economies of scale, significant potential for international growth, and a more diversified earnings base resulting from the companies' complementary strengths. Those strengths include many product offerings in the away-from-home and retail markets and with little overlap among them. In addition, Fort Howard and James River are contributing particular expertise in the areas of technology and marketing through the merger.
STRONG BRANDS AND BROADER PRICE POINTS. This merger did more, in their opinion, than simply place Fort James in the Fortune 200. It united two companies with superb brands in Europe and the United States. Some of them include the well-known North American brands of Brawny, Vanity Fair, Quilted Northern, and Dixie. In Europe, consumers will reach for the Fort James brands of Lotus, Nouvelle, Tenderly, and Kitten Soft. In addition to great brands, the price points of their products now range from value-priced to premium, another example of synergies.
TECHNICAL ADVANTAGES. On the more technical side, they are now uniquely balanced among paper producers with respect to raw material sources. Fort James has more nearly equal distribution between recycled products and virgin paper products. With all this, the company can compete more effectively with rivals. They are still #2 in the industry, but a much stronger #2. Among consumer goods industry companies, they are among the top ten, ahead of many well-known companies.
STRATEGY. Their platform for strategic growth is to leverage those strong brands that already enjoy important market position. At the same time they will use Fort Howard's technology gained through the merger to develop new products. They will pursue promising growth opportunities abroad and will expand into new markets.
MANAGEMENT TEAMS WORKING TOGETHER. Already a strong team spirit has emerged for Fort James. Many of their managers have been involved in the business combination and they already enjoy great mutual respect. There is an awareness of the potential of complementary strengths, but more important, there is the desire and enthusiasm to move quickly to gain from the synergies. Looking at it on paper, it seems like Fort James is the sort of merger that was just waiting to happen. Now it's happening and neither management team is waiting. They are ready to lead the packaged goods industry.
EXPECTED COST SAVINGS. The merger is expected to generate cost savings estimated to total at least $150 million in 1998, increasing to more than $200 million per year over time. Probably the first category where they would see benefits would be the sourcing area where they believe in putting their joint sourcing activities together to leverage rate differences, scale, etc. In the longer term there are going to be very strong benefits from bringing the technology areas of the two companies together -- the way paper is made in Fort Howard and James River, how they run their machines, and taking best practices out of that. They think that will be enormously beneficial. There will be a certain amount of reloading of products between plants that will be beneficial. All of that adds up to quite a lot in terms of expense reduction, in their estimation. Finally, there will be areas where they will have pure corporate efficiency come out in terms of overlaps between the two companies.
IMPACT ON JAMES RIVER HQ IN VIRGINIA. The impact on the James River corporate operations in Richmond will be some movement out of the structure in Richmond, mainly in the treasury area and one or two other stock related areas. The bulk of the activities they have in Richmond today will continue as they are. The company will continue to be a Virginia-based company and will continue to keep its corporate headquarters in Virginia. The executive headquarters of the company, where the senior management will in fact conduct activities on a day-to-day basis will be in Chicago.
MOST WORKERS UNAFFECTED. The vast majority of workers in both former organizations are in the manufacturing operations and they think they will realize some synergies there but, by and large, they are going to run the manufacturing organizations the way they have been run and they think the greater balance they will have by combining their asset base will be more of an opportunity for them to grow in a meaningful way and achieve topline growth. The management/organization chart that they envision has the current Fort Howard manufacturing organization running the way it has and the James River manufacturing organization staying intact and coming together at the top line at an officer level of the company. So, the manufacturing will be combined but not at the mill level. They don't think the vast majority of employees in either organization will be exposed to headcount reduction. The headcount synergy issues will flow more from overhead areas and as they look to rationalize how they go to market in the field sales organizations they will have to come to grips with the most appropriate way of doing that.
IMPACT ON FORT HOWARD HQ IN WISCONSIN. Fort Howard has a corporate headquarters in Green Bay and there will be some people and functions that will move from Green Bay to Chicago, especially at the top layer. They will have to get into that to see where they have redundancies and will do their best to minimize that. But, most of the people will continue to make the strong products and brands and continue to sell them as they currently do in both former organizations.
RATING AGENCIES. They haven't had the opportunity to discuss things at length with the rating agencies. Obviously they communicated with the agencies regarding the merger and the agencies have certain information related to the merger. But, the actual detailed discussions will take place later.
REORGANIZATION CHARGES. At this time they don't have a good calculation of the reorganization charges. Obviously it will have a significant impact on 1997 earnings when announced, but they haven't gone through enough of the steps yet in terms of the pre-planning of the merger to be able to quantify at this point the reorganization charges.
DISTRIBUTION EFFICIENCIES. They think the product offerings of both organizations are extremely complementary because they end up operating at different parts of the market. They think that will come together very smoothly and they will have very few bumps in the road from a market standpoint. There will be little if any cannibalization of existing products and that is a key reason they expect the transition to go well. They think the economies they will enjoy from combining will also spread to the distribution side of the business. They think they will be able to put themselves together in a much more sensible way logistically in terms of getting their products from the point of manufacture to the point of usage much more cost effectively.
ANTITRUST ISSUES. In putting together a merger like this within an industry there are always antitrust issues. They have had what they think is outstanding advice on the antitrust issue. They believe the antitrust issues are manageable and that they have a very good case. Primarily they believe that in an industry like tissue which is a very competitive industry, that the kinds of cost reductions they are able to make and the kinds of product benefits that will flow from the technologies they will bring together make a very strong case as to why this merger should take place and why it is very good for the consumer. Obviously the Justice Department will look at it and make their determination, but the companies are very hopeful that they will be able to conclude this merger without any asset sales.
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