Smurfit-Stone Out as Clearwater Paper Joins Forest Product Index

By Chip Dillon

Clearwater Paper (CLW), the pulp, tissue and bleached board producer spun out from Potlatch Corp. (PCH) in December, is replacing Smurfit-Stone Container (SSCC) in Forestweb’s U.S. Forest Products Stock Index. Clearwater is a $1.1 billion sales company focused on bleached board packaging and private-label consumer tissue with its major facilities located in Arkansas and Idaho. Smurfit-Stone Container, the world’s largest producer of containerboard used in corrugated packaging with 2008 sales of about $7.2 billion, filed for Chapter 11 bankruptcy protection on January 26.

At a February 9 closing price of $11.18, Spokane, Washington-based Clearwater Paper has a recent market capitalization of $125 million (which is less than half its September 2008 book value of $257 million), and an enterprise value of about $275 million. The company has the annual capacity to produce 775,000 tons of bleached board (used mainly in consumer packaging), 210,000 tons of tissue, and about 75,000 metric tons of market pulp. Clearwater also can produce about 205 million board feet of lumber annually. Clearwater was spun out of Potlatch so that Potlatch could focus on its traditionally more stable and higher return on capital timberland business.

Smurfit-Stone’s current equity has become nearly worthless, and thus should no longer be included in the index. With over 7 million tons of containerboard and kraft paper capacity, Smurfit-Stone should re-emerge later this year or in 2010 as a well-capitalized leader in corrugated packaging. Of course, the company’s creditors, holding more than $4 billion in principal debt claims, will end up trading much of this debt for new equity in the company (with the legacy shareholders all but wiped out). Depending upon how much debt is cancelled, we see the “new and improved” Smurfit-Stone with perhaps $2-$4 billion in equity market capitalization when it leaves Chapter 11. At this size, we would expect Smurfit-Stone to rejoin the index.

The Forestweb U.S. Forest Products Stock Index is a comprehensive index containing the stocks of all publicly held forest products-related companies headquartered in the United States that trade on the New York Stock Exchange. The index is calculated using a market capitalization approach similar to the S&P 500 and is updated in real time with a 20-minute delay to reflect the price movement of significant sector participants. The Forestweb Stock Index is available at no charge and e-mailed each day at the close of the market to registered subscribers who sign up via the Web link.

Chip Dillon, an independent forest products and packaging analyst with over 20 years of Wall Street research experience on both the buy-side (J. P. Morgan) and sell-side (Citi Investment Research), contributed the above to Industry Intelligence Inc.