The turnaround included the conversion of Jeonju Paper's existing business and the addition of a renewable energy business, Jeonju One Power, which accounts for 72% of total EBITDA, and attracted strong M&A interest. Global Saeed Group acquired both businesses after the sale process was halted due to COVID-19.
Morgan Stanley Private Equity Asia (MSPEA) has completed its exit from South Korea's Jeonju Paper 15 years after its initial acquisition, securing a reported 1.8x return. The unusually long holding period reflects an unusually complex holding period marked by the restructuring of a legacy newsprint business, the creation of a standalone renewable energy business, and a lengthy exit process.
“This is the longest we've ever held an investment and we probably won't hold it for this long,” said Michael Cheong, managing director and head of MSPEA in Korea. “Some transactions may be suitable for a going concern, but this particular transaction is not. This paper business would be better off being part of a separate paper group.”
The deal, announced last December and closed in May, would see South Korean textile and trading conglomerate Global Sae Group acquire Jeonju Paper and Jeonju One Power for 650 billion won ($500 million). The two assets were to be sold separately, with one bidder reportedly offering 500 billion won for One Power alone, but then COVID-19 reset the M&A market.
Mindful that investors had been waiting a long time for distributions from a fund established in 2007, MSPEA invested when conditions had stabilized. While the returns were decent and could have been excellent in a different macroeconomic climate, the subsequent performance of Jeonju Paper's newsprint affiliates suggests that outcomes would have been suboptimal unless investors were to embark on a long and hard-earned journey.
When MSPEA entered the market, there were three major newsprint companies in the company: Abitivivo Water, Paper Korea (KRX:001020) and Daehan Paper. All of them suffered from the decline in demand for newspapers due to the expansion of digital media through smartphones. Paper Korea has shifted its focus primarily to real estate development, Abitivivo Water has exited the Korean market, and Daehan is one of the few remaining companies.
Changing dynamics
Founded in 1965, Jeonju Paper became part of the Samsung family spin-out Hansol Group in the early 1990s. In the wake of the Asian financial crisis, Hansol agreed to merge its Asian mills with those of Norske Skog in Norway and Abitibiboiter in Canada in 1998. By 2006, Norske Skog had acquired full ownership.
The company considered its Korean operations to be its most important business and quickly rejected MSPEA's initial approach in 2007. However, a year later, the opportunity arose again when Norske Skog ran into financial difficulties. MSPEA partnered with Shinhan Private Equity and won the auction, paying 850 billion won (US$818 million at the time). The deal was completed in September 2008, with MSPEA acquiring a 58% stake and Shinhan acquiring a 42% stake.
Due to changing industry trends surrounding newsprint and the impact of the global financial crisis, cost management became a priority relatively early on. Cost competitiveness, purchasing, and supply chain management initiatives in 2013-2014 generated savings of 20.7 billion won, while workforce reductions and restructuring resulted in savings of 16.9 billion won in 2015. This was due to traditionally high fixed costs.
Investors then turned to diversification. Industry consolidation helped Jeonju Paper expand its market share from 34% to 45% in the two years to March 2018. The company contributed directly to the consolidation by selling production plants to Paper Korea, which had already closed its larger facilities.
Jeonju Paper's remaining manufacturing capacity was reallocated to printing and writing paper and corrugated board, the essential components of packaging that give boxes their shape and strength. The conversion of newsprint production lines to meet the corrugated board need came before the pandemic caused a surge in e-commerce in South Korea.
“We have seven papermaking machines, two of which we have rebuilt. Our market share in corrugated medium has grown to over 40% and has performed very well even during the COVID-19 pandemic,” Chong said. “Half of our revenue from the papermaking business comes from packaging and will continue to grow.”
Jeonju Paper, meanwhile, has been getting serious about renewable energy. To turn wet pulp into paper, it needs to be passed through hot rollers that squeeze out the water. The steam to heat those rollers was generated by burning kerosene. Jeonju Paper switched to liquefied natural gas, then biomass, building South Korea's first biomass cogeneration plant in 2009.
This reduced costs, opened up new sources of government funding and improved the company's reputation as a local clean energy pioneer. But it was an eight-year process that included two additional acquisitions and the construction of a second, more advanced biomass cogeneration plant. Jeonju Paper invested about 165 billion won in the energy conversion.
It was also, in some ways, a step into the unknown: South Korea lacked existing capabilities in the field (some talent was imported from overseas) and an untested regulatory framework created uncertainty about how and when the effort would bear fruit. Getting government approval was key.
“When it was approved, we knew it would take time to materialize, but we were confident that by 2019 we would be successful,” Chong said. “No one is currently manufacturing biomass boilers because of the regulatory environment, so they are a scarce asset. And now, with rising energy prices and increased ESG awareness, everyone knows about RECs (Renewable Energy Certificates). Five years ago, no one knew about them.”
The way to the exit
The renewable energy business accounts for 18% of total revenue, which reached 777.5 billion won in 2022, but 72% of EBITDA. EBITDA margin is higher at 63%, compared with 16% for paper. These contrasting growth trajectories, which were clearly evident in 2019, prompted the spin-off of Jeonju Paper, with bankers hired to sell the two businesses.
The process was halted in February 2020 after the impact of COVID-19 prevented potential buyers from conducting on-site due diligence. Within two months, global crude oil prices collapsed, leading to a drop in electricity tariffs that adversely affected Jeonju One Power. The situation was not fully resolved until the end of the pandemic, when the crude oil supply-demand mismatch eased.
After several postponements, the sale was completed in 2023. Global Saair acquired both assets at a time when several previously active renewable energy players were hesitant to act in a tough financing market. The buyer was able to leverage synergies with its existing paper business, while Jeonju OnePower became a valuable asset in its own right.
Chung, meanwhile, remains bullish on South Korea's renewable energy prospects: “It's an attractive sector and we have proven that with quality talent and engineering capabilities you can build a business,” he said.
