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Executive Summary

The domestic corrugated container market is a $22 billion segment of the overall packaging industry. In this report, we provide an overview of the corrugated container market, including industry characteristics, end markets and major participants. In addition, we review mergers and acquisitions value drivers, transaction activity and performance and valuation metrics. Selected highlights of the corrugated container market include:

Growth Drivers

The corrugated container market is a slow growth market, with domestic growth projected at approximately 3% annually through 2007. Factors affecting the level of growth include: (i) the state of the economy, (ii) offshore competition and (iii) competing products. Historically, corrugated container demand has moved with changes in GDP; however, more recently corrugated container demand has been more closely associated with nondurable goods production. After three years of declining sales, we expect the corrugated container industry to benefit from the rebound in the economy. Corrugated container demand has been affected both by the movement of manufacturing offshore (e.g., to China) and increased offshore corrugated container capacity. Corrugated containers have experienced some competition from competing products such as stretch and shrink wrap, reusable plastic containers and intermediate bulk containers.

Industry Structure

The corrugated container industry consists of a few large "integrated" producers and many smaller independent companies. The six largest integrated producers have nearly 80% market share in both corrugated container and containerboard. In addition to the integrated companies, there are numerous smaller, independent producers. The integrated companies include: Smurfit-Stone, Weyerhaeuser, Temple-Inland, International Paper, Georgia-Pacific and Packaging Corporation of America. There is also private equity investment in the industry. Private equity firms active in the segment include: Madison Dearborn (Packaging Corporation of America and Jefferson Smurfit), Northwest Capital (Port Townsend Paper), Code Hennessey & Simmons (Tharco Containers) and TransOcean Capital (Stronghaven).

Mergers & Acquisitions Activity

The corrugated container market has experienced significant consolidation in recent years. The market share of the six largest players in the corrugated container industry is approximately 79%, up from under 50% over the last ten years. We expect the consolidation in the corrugated container market to continue, with the large integrated companies remaining the most active acquirers. Acquisitions will continue to be driven by opportunities to expand geographical presence, fill mill capacity and add capabilities and customers. We do not expect to see significant private equity involvement in this sector.

Financial Performance Metrics

Although detailed information on many corrugated container operations is not publicly available, we have compiled a number of data points with which to assess the financial performance of corrugated container companies. The median EBITDA margin for a group of integrated producers is 12.3%. The median capital expenditures to sales of this group is 4.6%. While many of these companies have a significant portion of their business outside of corrugated containers, their financial performance measurements serve as useful benchmarks. In our experience, best-of-class EBITDA margins for corrugated container companies are in the high teens to low twenty percent range. However, the majority of corrugated container companies do not achieve these margins. It is important to recognize that margins of these companies vary with the economic cycle.

Valuation Metrics

In order to establish valuation parameters, comparable public companies and mergers and acquisitions transactions are reviewed. There are few "pure play" public companies, and as a result, our comparable public company group includes the integrated producers and other packaging companies involved in paper and board packaging. EV/EBITDA multiples for the integrated producers and other packaging companies are 11.8x and 8.5x, respectively. While these are useful data points, it is important to realize that many of these are large public companies with a significant portion of their business outside of corrugated containers. Recently completed comparable transactions have median EV/EBITDA multiples of 6.7x (Exhibit XVII). We anticipate that the majority of corrugated container companies will be sold in the 5.0-7.0x EBITDA range; however, companies with certain characteristics will attract higher valuations. Companies that will attract a premium valuation will have many of the characteristics outlined in the Piper Jaffray February 2004 report entitled Mergers & Acquisitions Value Drivers for Companies in the Packaging Industry.

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