Svenska Cellulosa Aktiebolaget SCA History

Company Perspectives:

Qualitative growth and international expansion for Hygiene Products and Packaging.

Company History:

Svenska Cellulosa Aktiebolaget SCA (SCA for short) is one of Europe's leading forestry companies, specializing in absorbent hygiene products, corrugated packaging, and graphic papers. The company owns 4.4 million acres of productive forestlands, conducts sawmill operations, and uses equal amounts of recycled and fresh wood fibers in the products it makes--making it the largest collector and user of recycled paper in Europe. Founded in 1929 by the famed Swedish financier Ivar Kreuger, SCA initially served as a marketing organization for pulp producers in northern Sweden. After transforming itself from a holding company into an integrated forestry concern in 1954, SCA gradually expanded into the areas of newsprint and linerboard over the next two decades. In 1975 the company entered the consumer products field with the purchase of Mölnlycke AB, a manufacturer of fiber-based disposable hygiene products. This marked the start of SCA's increasing concentration on value-added products based on wood and its decreasing activity in traditional forestry products, such as pulp and low-grade paper. This development coincided in the 1980s and 1990s with SCA shifting some of its production from its Swedish homeland to the European mainland through a series of corporate acquisitions. In the 1990s SCA was also a major player in the trend toward worldwide forestry industry consolidation.

Formed in Late 1920s to Market Pulp

The roots of the establishment of SCA lie in the economic problems that hit the Swedish forestry industry in the 1920s. Forestry products, such as timber, pulp, and paper, were the country's largest export items, but their competitive position in the European market was damaged during the 1920s by the government's deflationary monetary policy that boosted the value of the krona. This coincided with strong competition from the U.S.S.R., which was dumping cheap timber products in Europe.

Faced with declining prices and profits, Swedish forestry companies were forced to hypothecate (pledge as security) their fixed assets and stocks to commercial banks when seeking loans. By the late 1920s, Svenska Handelsbanken, then Sweden's largest bank, feared that its lending position to the forestry industry was overexposed and sought ways to reduce its liabilities. It proposed that the Swedish financier Ivar Kreuger, who had gained a virtual monopoly over the production of matches worldwide, should take over its forestry industry holdings.

Kreuger was at first reluctant to accept the Handelsbanken's proposal since it would tie up capital, but, having recently bought several sawmill and pulp companies in the Sundsvall region in northern Sweden, he eventually saw possibilities in combining his forestry holdings with those of Svenska Handelsbanken. The merger would prevent cutthroat competition, reduce production costs, and consequently help raise and stabilize export prices. In addition, Kreuger would acquire several hydroelectric power stations as a result of the deal. His control over the power sources for the pulp and paper industry would also improve profitability.

In 1929 SCA was created with Svenska Handelsbanken selling its forestry shares to Kreuger's investment company, Kreuger & Toll, mainly on credit. SCA was designed to be a holding company to sell the pulp produced by its ten subsidiaries in northern Sweden. The companies that made up SCA included Bergvik & Ala, Skönvik, Sund, Trävaru Svartvik, Nyhamns Cellulosa, Torpshammars, Björknäs Nya Sågverks, Salsåkers Ångsågs, and Holmsund & Kramfors. The tenth company, Munksund, was added in 1934. SCA was Europe's largest forestry company, a position that it would maintain until the mid-1980s. At the time of its formation, it accounted for almost a third of Sweden's total pulp exports.

The SCA combine amounted to a loose confederation with each member company having its own president and board of directors as well as administrative control over finance, sales outside of pulp, and forest management. Svenska Handelsbanken retained its role as primary lender to SCA and most of its member companies, and their shares were hypothecated to the bank.

The first few years of SCA's existence were devoted to rationalizing its operations and constructing Europe's largest and most modern cellulose plant at Östrand. The large investment costs meant that the company did not pay a dividend for the years 1930 and 1931. The following year SCA faced its first serious crisis with the suicide of Kreuger, an event that triggered the collapse of Kreuger & Toll. The value of SCA's share capital dropped from SKr 100 million to SKr 4 million and Handelsbanken assumed control of SCA by purchasing its shares from the bankrupt investment company. Lacking experience in managing industrial concerns, Handelsbanken then sold most of its interest in SCA in 1934 to the Swedish industrialist Axel Wenner-Gren, the founder of the household appliance company Electrolux.

But Handelsbanken continued to play a supervisory role as the main creditor to SCA. The company's performance under the chairmanship of Wenner-Gren was lackluster, and Handelsbanken grew concerned about the company's ability to repay its debts. In 1941 the bank forced Wenner-Gren to sign an agreement that reduced the nominal share capital from SKr 30 million to SKr 10 million and converted SKr 40 million of the company's assets to new shares that would be held by Handelsbanken, thus giving it majority control over SCA. The timing of the deal was fortunate since the United States was threatening to place SCA on a trade blacklist and freeze its assets in the United States because of Wenner-Gren's suspected business ties with Nazi Germany. Handelsbanken's assumption of control prevented this from happening.

Handelsbanken used its controlling stake to carry out a reorganization of the company by consolidating the activity of each of its subsidiaries in the river valley where it was most dominant. It then decided to sell some of the subsidiaries to improve the company's financial position, with Bergvik & Ala and Hammarsforsens Kraft, a hydroelectric power company, being divested in 1943. Handelsbanken bought the remainder of Wenner-Gren's shareholding in SCA in 1947 and the company became a subsidiary of the bank.

Public, Integrated Forestry Firm Following World War II

The change in ownership coincided with a buoyant market for the forestry industry in the early postwar period, with prices hitting a peak during the Korean War boom of 1950--51. As a result, SCA finally managed to free itself from debt. In 1950 Handelsbanken decided the time was right to reap profits from its long-term involvement in SCA by introducing most of the company's shares on the Stockholm Stock Exchange. But SCA's ties with Handelsbanken have remained close ever since, with the bank continuing to act as prime lender to SCA and maintaining a representative on the board of directors.

Axel Enström, who became SCA president in 1950, charted a new corporate strategy by promoting closer cooperation among the company's various subsidiaries. This led to a full-scale merger of their activities in 1954, which transformed SCA from a holding company into a single integrated forestry concern.

During the 1950s and 1960s, SCA greatly expanded its activity from its traditional area of pulp and sawn timber into paper production, primarily newsprint and kraft paper, kraft liner, and corrugated board. Between 1959 and 1969, pulp production increased from 690,000 tons to 1.1 million tons, while paper production jumped from 160,000 tons to 600,000 tons, despite a reduction in the number of mills from 11 to eight. Revenues during this period climbed from SKr 375 million to SKr 825 million.

Moved into Value-Added Products in the Mid-1970s

The appointment of Bo Rydin as SCA president in 1972 marked the beginning of a new period for the company. In 1974 Rydin decided to diversify the company into value-added fiber-based products. A year later SCA purchased Mölnlycke, which had been founded in 1849 as a Swedish spinning and weaving business but had been transformed into a manufacturer of disposable hygienic products in the 1950s.

By 1979, when it celebrated its 50th anniversary, SCA's activities covered all segments of the forestry industry, from raw materials to consumer products. It was Europe's largest private forest owner with 1.7 million hectares (4.2 million acres) of forest land, equivalent to half the size of Switzerland, which provided 60 percent of the company's timber needs, a high level of self-sufficiency by international standards. Its six mills, which produced 1.3 million tons of pulp and 1.1 million tons of paper, were powered by the company's own hydroelectric stations run by the Bålforsens Kraft AB (BÅKAB) subsidiary. The mills were equipped with pulp and paper machinery produced by another SCA subsidiary, Sunds Defibrator. Pulp and paper accounted for half of SCA's sales of SKr 5.965 billion in 1979, and Mölnlycke was responsible for 30 percent of sales, with BÅKAB, Sunds Defibrator, and packaging companies making up the rest.

The 1980s were characterized by three major developments: a rapid increase in sales, growing internationalization through the purchase of several important European companies, and a reduced dependence on pulp and paper production combined with an emphasis on higher-value products. The company's diversification program during the early 1980s concentrated on increasing the number of its corrugated board operations in Sweden and the rest of Europe. Average annual output by these companies reached 750,000 tons by the mid-1980s, providing a captive market for 40 percent of SCA's production of linerboard, which is used as the outer surface of corrugated containers. SCA became Europe's largest linerboard producer in 1985 when it assumed majority ownership of Obbola Linerboard, a joint venture it had established with the U.S. St. Regis Paper Company in 1973.

Meanwhile, SCA was concentrating its pulp and paper production at four mills, with an average capacity of 300,000 tons, although its largest facility, the Ortviken newsprint plant, had a capacity of 600,000 tons. SCA then accounted for 25 percent of Sweden's total newsprint production. It also curtailed the production of pulp for outside consumers, its original business, with only five percent of its pulp being sold to third parties in the mid-1980s compared with 75 percent in the 1960s. This was designed to reduce its exposure to the sharp fluctuations in the world pulp market.

By the mid-1980s Mölnlycke had become the market leader for disposable consumer hygiene products--such as diapers and female hygiene goods--in Scandinavia and the Benelux countries and was Europe's leading supplier of disposable hygiene products to hospitals and industrial users. Bolstered by a cyclical upturn in the global forestry industry, SCA's sales almost doubled from SKr 6.7 billion in 1980 to SKr 12.6 billion in 1985, while profits before extraordinary items climbed from SKr 688 million to SKr 1.3 billion during the same period, reaching a peak of SKr 1.5 billion in 1984.

In 1987 SCA signaled its determination to expand beyond Scandinavia by raising SKr 1 billion through a new share issue to fund an acquisition spree for hygiene and packaging companies on the European continent. In January 1988 it purchased Peaudouce, France's leading disposable diaper producer, for SKr 2 billion in a move to strengthen Mölnlycke's market position in Europe and build up its consumer products sector, where profits were higher and more stable than in the traditional forestry products area.

Under its new president Sverker Martin-Löf, SCA then turned its attention to the corrugated board sector. It acquired Italcarta, Italy's largest corrugated board manufacturer, in July 1988, followed by a number of other corrugated board manufacturers, among them Bowater Containers, Belgium. With the Italcarta deal, SCA for the first time was consuming more linerboard than it was producing itself, thereby no longer having to sell linerboard on the open market. Its position as a net consumer of linerboard also would protect the company against a drop in demand.

While SCA was limiting its production of pulp and linerboard to in-house needs, it also decided to reduce its production of newsprint at the Ortviken facility in favor of lightweight coated paper. This move toward the production of high-quality printing paper was confirmed with the purchase of a majority shareholding in Laakirchen, an Austrian producer of magazine paper, in October 1988. The deal extended SCA's range to cover all grades of printing paper. Control of Laakirchen also made SCA a leading producer of tissue paper in Europe.

1990s Marked by Additional Acquisitions

The desire to broaden its international production base led to SCA's £1.05 billion purchase of the U.K. firm Reedpack in June 1990. The deal not only bolstered SCA's position as a leading European producer of corrugated boxes, but also made it a major producer of newsprint using recycled wastepaper. SCA's gradual shift from manufacturing newsprint from virgin fiber in Sweden to using recycled wastepaper gathered from Europe's cities reflected the increasing importance played by recycling in papermaking. The need to have access to wastepaper and to site manufacturing facilities close to consumers was one reason that SCA moved its operations near major population centers in Europe.

In late 1990 SCA turned its attention back to Sweden. It became the dominant shareholder in the country's third largest forestry concern, Mo och Domsjö (MoDo). The strategic alliance was forged to promote collaboration in printing, paper production, and joint investments in paper mills. Although SCA controlled slightly more than half of MoDo, there were no immediate plans to merge the two companies to form a concern that would rival Sweden's Stora, Europe's largest pulp and paper company, in size.

SCA's acquisition spree in Europe and the transformation of its product mix toward higher-value-added consumer products forced the company to divest some subsidiaries that were once considered central to its traditional activities in pulp and newsprint. In 1990 it completed the sale of its pulp machinery company Sunds Defibrator to Rauma-Repola in Finland. SCA also mortgaged half of its BÅKAB hydroelectric assets to the Swedish government-affiliated National Pension Funds to raise SKr 5 billion for new investments. In early 1991 it sold the tissue operations acquired from Laakirchen, as well as several units of Reedpack. SCA in 1992 exited from the energy sector entirely through the divestment of BÅKAB. These and other, smaller divestitures helped to ease the company's debt burden, which had increased substantially with the Reedpack acquisition. SCA's debt had reached 154 percent of equity in the wake of that purchase but by 1994 had been cut to 52 percent.

In late 1993 SCA entered into a joint venture with the South African Minorco and Mondi Paper groups to construct a massive £250 million (US$370 million) plant in Aylesford, England (just south of London), to make newsprint using recycled paper as the raw material. In 1994 the company entered into a preliminary agreement to acquire nearly 90 percent of Otor Holding, a leading French packaging company, but the sides were not able to reach a final agreement on terms. In late 1994 SCA took full control of a joint venture, Scott Health Care, it had set up with Scott Paper Co. of the United States in 1992. Philadelphia-based Scott Health Care specialized in adult incontinence and wound care products.

The worldwide paper industry began an era of intense consolidation in the mid-1990s. The trend was fueled by extreme downswings and upswings--extreme even for a typically volatile industry. During 1993--94 paper companies suffered through a severe downturn, with SCA's operating profit falling to SKr 2.17 billion in 1993 and to SKr 1.81 billion in 1994. During the next year the industry enjoyed one of its best years since World War II, and SCA saw its profits skyrocket to SKr 7.35 billion, while net sales nearly doubled from SKr 33.68 billion to SKr 65.32 billion. A significant portion of these increases, however, stemmed from the company's purchase of a 75 percent controlling stake in PWA, which had been the largest publicly traded pulp and paper company in Germany. SCA spent about SKr 7.5 billion (US$1.02 billion) in early 1995 through two separate transactions to gain the stake. This deal temporarily vaulted SCA past Stora into first place among European forest industries groups (later in 1995 Finland's two biggest forestry groups merged to form UPM-Kymmene Corp., a combination even larger than SCA-PWA). By late 1997 SCA had taken over PWA entirely. The acquisition of PWA significantly bolstered SCA's position in both packaging and tissues, while it also expanded SCA's activities into two new sectors: graphic and specialty decorative papers. The purchase, which was in large part debt financed, also increased SCA's debt load to about 70 percent of equity. The reason this ratio was not increased even more was that nearly simultaneous with its buyout of PWA, SCA sold its stake in MoDo since the alliance between the two Swedish firms was largely unsuccessful.

By mid-1996 the forestry industry had entered into another downturn, with pulp prices having fallen by nearly half from the level of late 1995. More consolidations and asset swaps followed. In late 1996 SCA swapped its French diaper brand Peaudouce for Kimberly-Clark's tissue plant in Prudhoe, England, and a ten-year license to use the Kleenex brand on tissue sold in the United Kingdom and Ireland. SCA also made a number of moves to beef up its packaging operations, aiming for a 20 percent share of the European corrugated board market. In 1996 the company acquired three Italian board producers. In August 1997 it spent SKr 970 million (US$122.6 million) to purchase the Italian packaging group Cochis. SCA in early 1999 paid SKr 2.6 billion (US$329.5 million) for the corrugated board business of the U.K. company Rexam and SKr 636 million (US$80.6 million) for Danapak Papemballage, the third largest corrugated board firm in Denmark. SCA also expanded aggressively in central and eastern Europe, spending about SKr 300 million (US$36.5 million) to open 14 packaging plants in the region. In early 1999 the company announced that it would double that investment over the next five years. At the end of 1998, SCA held 14 percent of the European corrugated board market.

SCA's results for 1998 were strong, with net sales of SKr 61.27 billion (US$7.45 billion) and operating profits of SKr 6.43 billion (US$781.8 million). At the time SCA touted itself as an integrated paper company with three key areas of activity: absorbent hygiene products, corrugated packaging, and graphic papers. In April 1999, however, SCA announced that it had entered into an agreement with MoDo to consolidate their fine paper operations into a new company that would initially be 50--50 jointly owned by the two companies but within two years be listed on the Stockholm Stock Exchange. Fine papers comprised a portion of SCA's graphic papers unit and consisted of three plants--in Stockstadt, Germany; Hallein, Austria; and Wifsta, Sweden--that produced coated and uncoated grades of fine paper for use in magazines and other materials requiring high printing quality, as well as uncoated fine paper for office applications. These assets would be combined with several MoDo plants to form the new MoDo Paper AB (MoDo itself would change its name prior to the exchange listing). MoDo Paper would be the third largest fine paper company in Europe with a market share of about 12 percent. This agreement was yet another step in the consolidation of the global forest products industry. SCA was likely to remain at the center of this continuing trend and participate in additional consolidating activities.

Principal Subsidiaries: SCA Forest and Timber AB; SCA Hygiene Products AB; SCA Hygiene Products AG (Germany); SCA Graphic Paper AB; SCA Fine Paper GmbH (Germany); SCA Packaging Holding BV (Netherlands); SCA Raw Materials and Logistics Europe N.V. (Belgium); AB SCA Finans; SCA Research AB; SCA Försäkrings-Aktiebolag.

Further Reading:

• Brown-Humes, Christopher, "SCA Tightens Grip on PWA," Financial Times, March 4, 1995, p. 11.
• ----, "Swedes Pull Out of Deal with French Packager," Financial Times, April 7, 1994, pp. 1, 18.
• ----, "Swedish Group's Deal Reinforces Its Paper Empire," Financial Times, January 6, 1995, p. 15.
• Carnegy, Hugh, "SCA Buys Out Share of US Joint Venture," Financial Times, December 29, 1994, p. 14.
• Marsh, Peter, "SCA to Boost Investment in Eastern Europe Packaging," Financial Times, March 9, 1999, p. 8.
• McIvor, Greg, "SCA Offers DM550m for Remainder of PWA," Financial Times, August 15, 1997, p. 21.
• McIvor, Greg, and Jonathan Ford, "Rexam Sells Corrugated Board Unit for £195m," Financial Times, December 22, 1998, p. 21.
• Moore, Stephen D., "Cellulosa's Profit Fell 81% in Early 1992: Investors Are Undaunted by Swedish Pulp Firm's Setback," Wall Street Journal, June 12, 1992, p. A9B.
• ----, "Scandinavian Paper Firms Wrestle with Price Declines," Wall Street Journal, September 5, 1996, p. B8.
• ----, "Swedish Mills Seek Alliances Amid Recovery: SCA Joins Offering Blitz to Build Cash for Plan to Retool Paper Plants," Wall Street Journal, August 30, 1993, p. A5C.
• Reier, Sharon, "Virgin No More: Why Sweden's Svenska Cellulosa Is Betting on Recycled Paper," Financial World, March 1, 1994, pp. 34+.
• "SCA Focuses on Growth Through Acquisitions," Paperboard Packaging, November 1997, pp. 18+.
• Utterström, Gustaf, SCA 50 år: Studier kring ett storforetag och dess foregångare, Sundsvall: SCA, 1979.

Source: International Directory of Company Histories, Vol. 28. St. James Press, 1999.