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James River to acquire Fort Howard for $3.4 billion in stock

May 5, 1997

MILWAUKEE (AP) _ James River Corp. is acquiring Fort Howard Corp. in a $5.8 billion deal that analysts say will allow the paper towel and tissue company to better compete with industry giants Kimberly-Clark Corp. and Procter & Gamble Co.

The combined company, to be known as Fort James Corp. with headquarters in Richmond, Va., and Chicago, would have more than $7 billion in annual sales.

News of the deal, which includes a $3.4 billion exchange of stock and the assumption of $2.4 billion in debt, sent Fort Howard shares soaring 15.8 percent Monday, while James River rose almost 5 percent.

``It’s truly a merger of co-equals that are better off together than apart,″ said Miles L. Marsh, chairman and chief executive officer of Richmond-based James River, which makes Brawny paper towels, Quilted Northern bathroom tissue, Vanity Fair napkins, and Dixie cups and plates. Marsh would become chairman of Fort James.

``We are still No. 2 in the industry, but a much stronger No. 2,″ said Michael T. Riordan, chairman and chief executive officer of Fort Howard, a commercial supplier of paper products based in Green Bay, Wis. Riordan is to be president of the combined company.

The merger, expected to be completed at the end of summer, is designed to produce annual savings of $150 million to $200 million a year, the companies said. Those savings will include the elimination of jobs, which have yet to be identified, said Richard Elder, a James River spokesman.

Riordan said some employees would be transferred from Richmond to Chicago but that it was too early to say how many people would be affected.

``The manufacturing will be combined, but not at the mill level,″ Riordan said. ``So I don’t think that the vast majority of employees in the manufacturing operation will be exposed to head-count reduction.″

Stephen Keane, an analyst at Robert W. Baird & Co. Inc., said he expected any cuts would come in such areas as marketing and sales.

``Fort Howard has a very lean staff at the time, always had,″ he said. ``It’s been one of the attractive attributes.″

The merger will help the companies take advantage of economies of scale, a bigger international sales base and a more diversified product line, Marsh said in a news conference in New York on Monday.

``I think it’s a really nice fit,″ said Josh Kapp, an analyst with Smith Barney. ``Fort Howard is almost universally acknowledged to be the low-cost producer, so to the extent that they can carry that to James River in terms of technology and low cost that should be a benefit.″

Fort Howard also has papermaking know-how that strengthens the deal.

``James River is acquiring state-of-the art, low-cost technology from Fort Howard,″ Keane said. ``That’s the top benefit.″

Directors of both companies already approved the deal, which requires approval from shareholders of both companies and regulators in the United States and Europe. Morgan Stanley & Co. and certain other shareholders who control a total of about 20 percent of Fort Howard’s stock have agreed to vote for the merger, the companies said.

There could be downsides, analysts say.

With Fort Howard’s plants nonunion and James River’s union, ``that could be a source of confusion,″ Keane said.

Gordon Brehm, a spokesman with United Paperworkers International Union, which represents James River workers, said he hopes Fort James will honor union agreements.

Another possible problem is the debt load James River is taking on just as it was making progress in cleaning up its balance sheet, Kapp said.

But Riordan said the significant cash flow expected from the combined company, equivalent to about $1 billion last year, would help reduce debt.

There will be short-term costs before savings appear, Marsh said. While the companies have not determined how much earnings will be reduced to cover the cost of merging, Marsh said it would have a significant impact on 1997 profit.

James River is the world’s No. 2 maker of tissues behind Kimberly-Clark, with $5.7 billion in sales last year.

Fort Howard has sales of about $1.6 billion of commercial goods sold under the Preference and Envision brands, and household products such as Mardi Gras napkins and paper towels and Green Forest tissues, which are made of recycled paper. It was taken private in 1988 after 18 years as a public company. It went public again in March 1995.

Under the deal, shareholders of Fort Howard will receive 1.375 shares of James River for each of their shares. That valued Fort Howard stock at $42.45 a share, based on Friday’s closing prices, before the deal was announced.

Fort Howard jumped $5.75 by late afternoon to $42.25 a share on the Nasdaq Stock Market, while James River climbed $1.50 to $32.37 1/2 a share on the New York Stock Exchange. That raised the value of its offer to $44.52 a share.

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