UPDATE 4-UPM buys Myllykoski, sparking paper sector rally

By Terhi Kinnunen and Jussi Rosendahl

HELSINKI, Dec 21 (Reuters) - Finnish forestry group UPM-Kymmene is buying debt-laden rival Myllykoski, bringing much needed consolidation to a European paper industry struggling with overcapacity and weak demand.

UPM said on Tuesday the deal was valued at around 900 million euros ($1.2 billion), with Myllykoski owners getting 5 million new UPM shares, and more than 800 million being accounted for by UPM taking on Myllykoski's debt.

The takeover, flagged in September, provided a lift for a sector struggling to emerge from a near decade-long slump.

UPM shares were up 7.5 percent at 1248 GMT, while rival Stora Enso was up 8.3 percent with Norske Skog 6.3 percent higher.

'This is very positive transaction for UPM and the whole industry,' Evli analyst Markku Jarvinen said, adding the value of the deal was in line with expectations.

Europe's paper industry has suffered from poor profitability for almost a decade with problems exacerbated by the global downturn which hammered advertising spending and decreased paper prices even further. Paper companies reacted by closing mills and cutting thousands of jobs in Europe to boost profitability.

Analysts said the Myllykoski deal would improve papermakers' pricing power. Also, 'this might be the starting gun's blast for the sector's wider consolidation or, at least, the market's expectation for that will rise, ' Pohjola Bank analyst Henri Parkkinen said.









UPM chief executive Jussi Pesonen said more closures could be expected. 'Combining forces and rationalising production is necessary for the future of the whole industry in Europe. This means both closing unprofitable production capacity and investments in order to increase cost efficiency.'

Pesonen told a conference call the industry needed further consolidation in Europe, and UPM could be part of that.

'Let us hope there will be other consolidation events happening as well,' he said.

UPM said the transaction would be financed through an issue of 5 million UPM shares, with a current market value of approximately 60 million euros, and long-term debt arrangements amounting to 800 million euros.

It announced a new financing deal that includes the 800 million euros in bank loans.

The transaction was expected to have a positive impact on UPM's cash flow from the second half of 2011 and on earnings per share in 2012.

UPM estimated the merger would bring synergy benefits of more than 100 million euros, mainly from 2012.

Myllykoski has one paper mill in Finland, one in the United States and three in Germany, while Rhein Papier, also part of the deal, runs two mills in Germany. The total annual paper production capacity is 2.8 million tonnes.

Sampo Timonen, a director at forestry analysis company Risi, said UPM needed to close some of Myllykoski's capacity in Germany otherwise its regional market share might be too high in some paper grades.

'One of the two older machines in Plattling is a probable target, as well as the mill in Albbruck,' he said.

(Additional reporting by Tarmo Virki; Editing by Jane Merriman and Dan Lalor)

($1 = 0.7599 euro) Keywords: MYLLYKOSKI UPMKYMMENE/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.