James River Corporation of Virginia
James River Corporation of Virginia
120 Tredegar Street
Richmond, Virginia 23219
Fax: (804) 649-4415
James River Corporation of Virginia is a papermaking company completing a transition from a small specialty paper business that produced automotive filters to a large consumer products business specializing in such well-known brand names as Northern, Brawny, and Dixie. The company concentrates on consumer towels and tissues, printing papers, and packaging for consumer products. The unrelenting growth through acquisition that characterized the James River Corporation during the 1970s and 1980s has been a big success story in the papermaking industry. In helping to pioneer high-leverage buyouts, the company has set an example in the financial world. It remains to be seen if the company can survive its own success; whether its leaders, chairman Brenton S. Halsey and president and CEO Robert C. Williams, can lead the large corporation as well as they led the underdog.
When Ethyl Corporation of Richmond, Virginia, was selling the Abermarle mill, its original papermaking facilities, in 1969, Halsey and Williams, then two Ethyl engineers, snapped it up. The river that flowed past the paper mill inherited a namesake in the newly formed James River Corporation. Ethyl had decided to concentrate on chemicals. The mill’s 25-ton-a-day paper machine and equipment left over from the 1850s could not produce enough of the commodity grades of paper that were the preferred profit-makers of much of the paper and pulp industry at the time. The operation was losing money badly. Halsey and Williams, independently interested in turning the mill around, ran into each other at a Richmond investment banker’s office and decided to work together. The two, who would soon be known as “Brent #x2018;n#x2019; Bob” raised the capital, and bought the operation for $1.5 million. The two men then jointly designed the company’s logo.
They then followed a pattern that soon would become familiar to them. They determined that the mill was best suited to the production of specialty papers. They recognized that specialty paper requires a more worker-intensive, decentralized operation, with an emphasis on a knowledgeable and well-trained marketing and sales force. Halsey and Williams felt that large corporations were overlooking opportunities in specialty papers. They used their engineering expertise to upgrade the mill’s output to produce automotive air- and oil-filter papers, which had a high profit margin, and developed an in-house trucking system to provide immediate service to clients. By the end of a year they had coaxed earnings of $166,000 out of the aging mill.
In 1971 James River acquired the St. Regis Paper Company’s specialty mill in Pepperell, Massachusetts. It employed many of the practices in the acquisition that would be company hallmarks for the next decade: friendly takeovers of ailing businesses that assure the cooperation of the seller; a decentralized approach that provides each mill with its own general manager, sales manager, production manager, and research-and-development director; and the utilization of middle managers within the acquired company to run it. James River also emphasized employee involvement and good relations with labor unions; in addition, it implemented company-wide profit sharing years before such plans became fashionable. James River’s takeovers also often involve the firing of most executives and the negotiation of wage concessions from workers.
On March 16, 1973, the company went public, selling 165,000 shares of common stock. Staying true to the nature of the company, Halsey and Williams began a company-subsidized employee stock-purchase plan.
In 1975 James River acquired J-Mass from Weyerhaeuser. In 1977 James River bought a failing mill in Jay, Maine, from International Paper. The output was changed from book paper to paper for airline tickets and copying machines. In its first year under James River ownership the Jay mill made $3 million. The same year James River took over Reigel Products Corporation from Southwest Forest Industries. By 1979 it had $96 million in sales. In 1978 Halsey and Williams purchased Scott Graphics from Scott Paper Company, renamed it James River Graphics, and started producing film coatings. By the end of the decade James River had made ten acquisitions, had nearly 4,000 employees, and reached $297.9 million in annual sales.
In 1980 Gulf + Western sold its 80% interest in Brown Company to James River in return for cash and James River stock. Gulf + Western Chairman Charlie Bluhdorn was confident that James River stock would be more profitable than Brown was for Gulf + Western. For James River, the acquisition was crucial. The deal included a Berlin, New Hampshire, pulp mill and its surrounding 170,000 acres of timberland. It was James River’s first in-house source of pulp, providing 40% of the company’s pulp needs. Along with the pulp, the deal included paper towels, folding cartons for food packaging, and a small cup operation. James River intended to divest these product lines; they were, however, unable to find a buyer. As a result, the deal doubled James River’s size and, for the first time, put it in the consumer-paper business; the filter specialists were suddenly makers of tissues, cups, and cereal boxes as well. While this diversification came about almost by accident and broke with the successful pattern of the 1970s, it turned out to be fortuitous. The new decade brought with it a slump in the auto industry, traditionally a big buyer of coated paper and other James River products. James River adjusted. By the end of 1981 industrial products only accounted for one-quarter of James River sales; communication and packaging papers, now a more stable market, made up the remaining 75%.
Once in consumer paper, James River did not shrink from new acquisitions. In 1982, Halsey and Williams once again used a stock-and-cash deal to double the size of the company; they bought the Dixie/Northern division, makers of Dixie cups; Northern toilet paper; Bolt, Brawny, and Gala towels; and folding cartons. The former owner, American Can Company, did not take James River’s offer to buy seriously at first; it could not see how little James River would finance the deal. Finance it James River did, and soon James River was applying its usual success formula to Dixie/Northern. American Can had been cutting corners on quality. James River cut costs by laying off 200 salaried and 120 hourly workers. It improved sales by redesigning products and emphasizing marketing. With American Can’s Alabama pulp mill included in the deal, James River became 70% self-sufficient in pulp. James River’s chief financial officer, David McKittrick told Financial World, June 2, 1987, “When you peeled back the layers of complexity imposed on Dixie/Northern by American Can, you saw that the companies were in fact doing quite well and that business was actually sort of on a roll.”
Many analysts thought that the debt created by all these acquisitions would slow the company down. In 1983 Halsey and Williams purchased the H.P. Smith Paper Company, a subsidiary of Phillips Petroleum; a Canadian pulp mill from American Can; and Diamond International’s pulp and papermaking operations, including mills in New Hampshire, New York, and Massachusetts. The latter added the Vanity Fair brand of tissues and towels, giving James River a ready-made market in the Northeast.
The following year, James River moved its Northern bathroom paper and Brawny towels into the Northeast as well. In a campaign they called Operation Yankee, the company used a price-slashing policy and $20 million in advertising to take on Procter & Gamble and Scott Paper, the leaders in the field. Halsey said the new emphasis on expanding markets for its existing products reflected an industry slump, the lack of potential acquisitions, and the desire to direct capital toward internal improvements.
The acquisitions, however, did not cease. In April 1984 James River broke onto the international scene with the purchase of GB Papers in Scotland. In 1985 and 1986 the additions of the Arkon Corporation and the Cerex division of Monsanto were made, pushing James River further into the nonwovens market. These were relatively small purchases, however, leading up to the May 1986 acquisition of most of the interests of Crown Zellerbach Corporation, which once again doubled the size of James River. The company was now the number-two tissue-maker in the country, with a potential of $4.5 billion in total sales, and more than 35,000 employees. The new company, however, would take longer to consolidate than Halsey and Williams anticipated.
The deal had not been an easy one. Halsey had stepped into the middle of a hostile takeover bid by Sir James Goldsmith, who had been angling for control of Crown in a raid replete with poison pill defenses and greenmail. Because of James River’s intervention, Crown shareholders saw their stock skyrocket, and had the option of buying into James River. James River got all the Crown papermaking operations. Goldsmith, however, might have gotten the best of the deal: property worth more than $1 billion, including Crown’s 1.6 million acres of timber. Goldsmith sold the timberland to Hanson PLC for $1.3 billion in 1990.
Smaller acquisitions continued to make headlines, as well: Canada Cup, Specialty Papers Company, and Amarin Plastics were bought in 1987; and Dunn Paper Company; the U.K. photo and drawing papers business of Wiggins Teape Group; and Armstrong Rees Ederer Inc. were bought in 1988. Acquiring half of France’s Kaysersberg, S.A., went a long way towards satisfying Halsey’s desire to challenge Scott Paper’s supremacy in the European tissue market. Overseas acquisitions were also made in Sweden, Spain, Turkey, and the United Kingdom. By 1988 the company was so big that the Federal Trade Commission blocked a proposed purchase of a South African-owned flexible packaging operation, with fears of reducing competition in that field.
The huge size of the company was affecting profits as well. From 1984 to 1988, the return on shareholders’ equity fell from 26% to 10.7%. The high price of pulp, combined with James River’s skyrocketing need for pulp, was the biggest culprit in this downturn. In fiscal 1989 James River was forced to buy 470,000 tons of market pulp domestically, with its new needs in Europe adding to the pulp deficit. This led to strategies to increase the internal supply of pulp: a Marathon, Ontario, pulp mill was tapped for a $280 million expansion in 1989. Williams also considered the use of recycled paper as a fiber source to be a major trend in the industry. James River was among the first producers to express interest in the use of recycled fiber for printing and writing paper production. The need for more fiber coincided with pending legislation that would require the use of some recycled fiber. By the end of 1989, there was some additional relief in sight for James River in the form of a major dip in pulp prices.
There were indications, however, that James River’s woes went deeper than pulp supply; after 20 years of endless acquisitions, it seemed possible that Halsey and Williams had bitten off more than they could chew. Many plants needed upgrading, but the company did not have the capital to make all major overhauls that were necessary. In April 1990 the company announced a 13.1% decrease in income from the previous year. Capital expenditures were down 16%. In May James River sold its nonwovens group for a much-needed infusion of cash. In August Halsey announced a major restructuring: the company would sell or shut down operations with annual sales of $1.3 billion. James River was lopping off the arm that had started the company: specialty papers. Williams declared that the company’s emphasis was now consumer products. James River would be made up of three businesses: consumer products, communications paper, and packaging. In the midst of this metamorphosis, in October 1990, Halsey, while retaining his mantle as chairman, stepped down as chief executive officer in favor of Williams. The move was part of a long-considered management transition plan. The switch from the more acquisitionally minded Halsey to the managerially inclined Williams seemed appropriate to the newly retrenched company.
Profits, however, continued to fall in fiscal 1990, with second quarter net income down 7% from the previous year. It remains to be seen whether the engineering background and acumen that propelled both men forward in specialty papers can lead to success in a consumer’s market dependent chiefly on marketing flair. It remains to be seen, also, with both men nearing retirement, whether the company can survive as a major corporation without its founders.
JA/Mont Holdings (50%).
Cox, Jacqueline, “James River chief cited for paper industry efforts,” Paper Trade Journal, December 15, 1981; Smith, Kenneth E., “P&P Interview: James River leaders plan for continued strong growth,” Pulp & Paper, January 1984; Carpenter, Kimberley, and John P. Tarpey, “A Southern Papermaker’s Yankee Campaign, “Business Week, October 14, 1985; James River Corporation: Two Decades of Growth, Richmond, Virginia, James River Corporation, .