Swede tissue bid justifies breakups without tears

A woman walks past an advertisement of a tissue paper brand of Swedish SCA company on a street in Santiago, Chile, November 10, 2015. REUTERS/Ivan Alvarado

LONDON (Reuters Breakingviews) - A potential swoop on part of Swedish tissue and forestry products manufacturer SCA would be nothing for investors to cry about. A group of buyout firms has bid 200 billion Swedish crowns ($22.3 billion) for the company’s hygiene arm, Essity, which pulps Scandinavian trees into products ranging from baby diapers to bandages, newspaper Dagens Nyheter reported on Wednesday. Even if an offer proves soggy, it’s an example of how a breakup can open up new options for shareholders.

SCA said last year that it would split its trees and forestry products from its paper hanky and sanitary-towel making division. Shareholders can estimate what the former is worth. SCA’s hygiene business made $1.4 billion of operating profit in 2016. Assume that grows by 10 percent this year, and that the company’s depreciation charge stays the same, and it suggests EBITDA for 2017 of $2.1 billion. Put that on a multiple of 10 times – a respectful discount to giant U.S. rival Kimberly-Clark’s 14 times, then deduct the $2.4 billion of net debt the new business will have, and Essity’s equity value would be a little below $19 billion.

Anything north of $22 billion, reflecting a near-20 percent premium, would thus be too good to sniff at. Although SCA’s shares have beaten the market in Sweden over the last five years in terms of total returns, and there are encouraging demographic shifts – Europe’s ageing population will, like it or not, need more incontinence pads – the industry is commoditised and competitive.

SCA hasn’t yet revealed a firm offer. Even if it doesn’t, it could plausibly argue that a bid timed just before the company breaks up is too opportunistic, at least as a way of getting a better price. But by splitting up in the first place, Chief Executive Magnus Groth has shown he has at least one eye on shareholder value. And even a lowball bid gives Essity options. It’s a narrative that could play out in other companies facing calls for breakups, such as miner BHP Billiton and paint maker Akzo Nobel. Breaking up might bring tears, but not necessarily of sadness.


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