May 18, 2009 / 8:09 AM / 10 years ago

UPDATE 3-Stora Enso buys Uruguay paper assets from Ence

* $344 million deal includes major pulp mill project

* Ence to use funds to cut debt, focus on renewables

* Analysts welcome low-cost addition to output capacity

* Stora Enso shares inch higher; Ence falls

(Recasts, adds analyst comment, background)

By Tracy Rucinski and Eva Lamppu

HELSINKI/MADRID, May 18 (Reuters) - Debt-laden Spanish pulp and energy firm Ence (ENC.MC) sold a share in a Uruguayan mill project to Stora Enso (STERV.HE), in a deal that will provide the Finnish papermaker with a sought-after low-cost production base.

The $344 million transaction sees Stora take a 50 percent share in Ence’s Punta Pereira project along with land and plantations in central and western Uruguay, with Chile’s Arauco buying the other half.

European papermakers have long looked to emerging markets to cut costs and offset wood supply constraints at home, and Stora Enso had been considered a likely candidate to buy the Uruguayan assets from Ence, which is straddled by debt.

Analysts said the acquisition looked like a good move for Stora and removed uncertainty hanging over Ence since it announced the search for a partner in Uruguay in January. [ID:nLK397282]

“The costs of producing pulp are significantly lower in Latin America than in the northern hemisphere,” Pohjola analyst Henri Parkkinen said.

“Such opportunities do not come often, so I consider it positive for Stora Enso to seize on it.”

Stora Enso shares were up 0.9 percent at 4.42 euros at 1353 MT, compared with a 1.6 pct rise in the Dow Jones Stoxx Basic Resources index .SXPP. Ence shares dropped 3.11 percent to to 2.49 euros.

“This transaction will secure the strategic raw material supply for a world class pulp mill in Uruguay that we are planning jointly with Arauco,” Stora Enso Chief Executive Jouko Karvinen said in a statement.

“Strategically it sounds like a very good move ... and will certainly be a good pay-off for Stora Enso in the long term,” said Timo Jaakkola, analyst at Ohman Fondkommission.

DEBT PILE

For Ence the sale, which closes the chapter on its ambitious plans in Uruguay, will help cut its 519 million euro debt pile and finance a recent shift in strategy towards renewable energy production.

The Punta Pereira mill was conceived to produce 1 million tonnes of pulp a year and 140 megawatts of renewable energy capacity, but the 1 billion euro project stumbled under the global financial crisis and environmental setbacks.

“The deal brings an end to uncertainty (in Uruguay), cuts the company’s debt position and prevents the capital hike that would have been needed to carry out the project,” Banesto Bolsa analyst Marta Gomez said in a note.

Ence said it would use the funds from the sale to restore its balance sheet and help finance its production of renewable energy from biomass sources in Spain.

The company will keep 30,000 hectares of eucalyptus plantations in Uruguay, as well as its Penarol mill, to ensure wood supply for its paper factories in Spain.

In a separate statement, Ence said it posted a first-quarter net loss of 93.8 million euros after making a writedown against asset deterioration in Uruguay, and a 32 percent decline in sales to 112 million euros. (Additional reporting by Jose Rodriguez and Yegor Paanukoski; Editing by John Stonestreet and Hans Peters)

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