Stora Enso Falls as UBS Queries Talk of Industry Merger

Stora Enso Oyj, Europe’s largest papermaker, fell the most in 14 months in Helsinki trading after an analyst at UBS AG said the stock’s recent gain has been fueled by unwarranted speculation of industry asset mergers.

Stora Enso declined as much as 5.4 percent, the steepest intraday drop since July 23, 2012, and was trading down 4.8 percent at 6.31 euros as of 2:14 p.m. Trading volume exceeded the three-month daily average by almost 16 percent.

During the past two months, analysts at ABG Sundal Collier Holding ASA, Svenska Handelsbanken AB, Bank of America Merrill Lynch and Danske Bank A/S have presented views that Helsinki-based Stora Enso and second-ranked European producer UPM-Kymmene Oyj may combine paper-making assets to stabilize pricing in a declining market. Stora peaked at a two-year high on Sept. 18, spurred by the talk of consolidation.

Such a deal would be unlikely to receive antitrust clearance from the Brussels-based European Union, according to David Hallden, an analyst at UBS in Stockholm who reduced his recommendation on Stora Enso to sell from neutral while raising his stock-price estimate to 5.50 euros from 4.90 euros.

“It’s nearly impossible for the two largest paper producers in Europe to join forces in this manner,” Hallden said by phone today. “If we ignore the fact that nobody in Brussels would ever approve such a merger, there’s also a big overlap in newsprint” between Stora Enso and UPM. “It’s magazine and fine paper where you want the consolidation to happen.”

Capacity Use

As capacity cuts have helped bring newsprint plant-operating rates above the estimated profitability threshold of 90 percent, fine paper and magazine paper are still in “desperate need” of further reductions, Hallden said. Sufficient production cuts may return paper prices to stability by 2015 at the earliest, he said.

“It’s a prisoner’s dilemma situation: when you consolidate the market, you’re helping the market as well as your competitors,” Hallden said. Stora’s previous statements against industry consolidation and its “substantial” investments in China, Uruguay and Pakistan speak against acquisitions, the analyst said.

“There are great deals to be done in Europe,” he said. “Maybe within six months we will hear something about that, but it won’t include Stora Enso buying something or merging with someone.”

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