Case Study

Northern Pulp: A Private Equity Firm Resurrects a Troubled Paper Company

Tuesday, April 26, 2011

Abstract

“What we want is the book that every vice president threw in the trash because he would be embarrassed to show it to a partner.” 

In 2008, this was the investment strategy of Adam Blumenthal, founding partner of Blue Wolf Capital Management in New York. “What we’re looking for is something that has a solid business at its core, but that has enough other extraneous problems that most people at a private equity fund decide it’s not worth doing,” he said. In particular, Blumenthal was looking to invest in companies that were in financial and operational distress and had difficult relationships with labor and government.

In early 2008, as the economy was entering a recession, a colleague at another firm asked Blumenthal to consider investing in a paper mill in Nova Scotia. The mill, Pictou Pulp, manufactured northern bleached softwood kraft, a strong fiber that was used to create high-quality paper products. The mill had been run as a cost center for various public companies, and it had not made money in 40 years. In 2008 it was owned by Neenah Paper, a small spin-off of non-core assets from Kimberly-Clark. Neenah was looking to divest itself of all pulp and timber operations, and it had put the mill up for sale.

Due diligence suggested that the mill had a good core business. The mill also presented some significant problems: financial, environmental, political, labor, and operational.

With the bursting of the housing bubble, the lumber industry had gone into a severe recession. Dozens of mills across Canada had been forced to lay off workers, and some mill towns were facing unemployment rates as high as 70 percent. The Nova Scotia mill had been on the market for a year, but few buyers were interested, and it was slated for closure. But as Blumenthal considered the investment, he asked himself, “Is there a reason for this mill to exist if you fix all of these problems? And the answer to that is yes.” The remaining question, then, was how much to pay.