Business: Paper Progress

Two brief stockholders meetings were held in San Francisco last month to solemnize, after a nine-year engagement, the wedding of two big West Coast corporations. One was Crown Willamette Paper Co., the other Crown Zellerbach Corp. Crown Zellerbach has had stock control of Crown Willamette since 1928 but for nine years both retained their corporate identities. The shares of both were listed on the New York Stock Exchange. The $100,000,000 union left Crown Zellerbach (the married name) the No. 2 U. S. paper company.

Meantime the No. 1 U. S. papermaker, colossal International Paper & Power, has also been putting its corporate house in order, and for the same reason: a paper boom. After dragging bottom at $41 per ton, newsprint prices were increased slightly for 1937 contracts but the first real boost did not come until a fortnight ago when International announced a new price of $50 for 1938. A score of U. S. and Canadian newsprint makers promptly followed suit, while London’s Lord Rothermere, a papermaking publisher, dispatched this cryptic cable to the Toronto Financial Post:

“For the second six months of 1938 I anticipate a price of something like $57 a short ton, which is preparatory to $65 for 1939. A price of $65 is not unusual or excessive. In 1925 the price in Canada was $75, although then there was nothing like the demand for pulp for other than news print purposes that there is today. Demand has definitely overtaken supply, and if there is no major international disturb ance, there is nothing can avert an acute shortage in five years’ time.”

Already the newsprint industry was close to its effective capacity at the old price. North American newsprint capacity is theoretically about 5,500,000 tons per year, only 1,200,000 tons of which are in the U. S., but effective capacity depends upon price, high-cost mills closing down when newsprint drops much below $50 per ton. At $40 per ton no mill can make money.

What money has been made in paper in the past few years has been largely made in other types than newsprint, notably kraft and paperboard. Paperboard (boxes) accounts for nearly one-half the total U. S. paper production. So great is the current demand for paperboard containers that prices have jumped about 50% in the past four months, another boost last week carrying quotations to the highest level in ten years.

Appearing before the Securities & Exchange Commission last week for hearings on a recapitalization plan, International Paper & Power’s treasurer revealed that 1936 earnings were about $5,000,000. He estimated that the 1937 figure “would run in excess of $9,000,000.” For I. P. & P. these unaccustomed profits made recapitalization almost a necessity. At the year end the company had an accumulated deficit of some $20,000,000, precluding payment of dividends until the deficit is in some way made up. Yet if the company pays no dividends it will suffer the full penalty of the undistributed profits tax.

So I. P. & P. President Richard J. Cullen and his directors worked out a plan which would not only cure the deficit with a stock write-down but at the same time clean up a whopping accumulation of back preferred dividends and simplify the company’s extraordinarily confused capital structure, now consisting of bonds, two issues of preferred and no less than three classes of common stock, designated A, B and C.

Before the plan was put up to the stock holders, President Cullen submitted it to SEC for approval. There are unusual complications, for I. P. & P. is deep in the power business as well as the paper business. Whether I. P. & P. falls within the scope of the Public Utility Act as a holding company is still an undecided question.

In 1935 it washed its hands of its principal U. S. power subsidiary by the neat de vice of putting it in trust, renouncing the voting rights but retaining the property rights. After executing that legal strata gem, I. P. & P. then applied for exemption from the holding company law. SEC has not yet passed on the exemption application, which leaves I. P. & P. up in the air.

When the I. P. & P. officials appeared in Washington last week SECommissioner Robert E. Healy was forced to admit: “We have great difficulty in seeing how this Commission has any statutory authority to pass on this plan.” Whether or not they had the authority to pass on it, the commissioners heard the plan through, presumably having no de sire to snub such a startling gesture of corporate cooperation. Complex in detail, simple in purpose, the plan calls for a series of exchanges which will leave I. P. & P. with a small capital surplus, one issue of convertible preferred stock, one issue of common and some warrants to buy more common within the next five years. The warrants are a sop to the present holders of A, B and C common, who will have their equity trimmed considerably. When & if the warrants are exercised and the preferred converted, I. P. & P.’s only stock will be common.

Like I. P. & P., big Crown Zellerbach was in need of recapitalization to make the best of better business. Aside from the fact that under present tax laws one corporation can live cheaper than two, Crown Zellerbach had good reason to unite with its subsidiary, Crown Willamette. Willamette had preferred dividend accumulation which had to be erased before the parent company could get any return on its own investments. One day last week after the union was consummated, Crown Zellerbach was the third most active stock on the New York Stock Exchange.

Founded in 1888 by William Pierce Johnson, who had learned his trade making paper from wheat straw, Crown Willamette was itself the result of a long series of northwest paper mergers. The Crown in Crown Willamette was a company founded on the banks of Oregon’s Willamette River cheek by jowl with old Willamette Pulp & Paper. When Zellerbach and Crown Willamette joined hands in 1928, through a common holding company called Crown Zellerbach, Crown Willamette’s leonine, 62-year-old Louis Bloch became chairman of the new company.

With more than one-half of the West Coast’s paper business in its pocket, with ten billion feet of reserve pulpwood, with annual capacity of 485,000 tons of paper and vast amounts of boxboard, realigned Crown Zellerbach, like International Paper & Power, is ready-set to cash in on the Boom.