German Herlitz to Sell Stake in Volga Paper

German paper trading company Herlitz International Trade has announced it will sell its 30 percent stake in the Volga Paper Mill in a move company officials expect will open up the Nizhny Novgorod-based company to new outside investors.

One analyst placed the Norwegian paper manufacturing group Norske Skogin as a prime candidate to snap up the stake.

Herlitz's investment in the mill two years ago marked the first major infusion of cash from a foreign company into Russian manufacturing. But rising production costs, a fall in world pulp and paper prices and an export squeeze brought on by the ruble corridor took their toll on the company, a Herlitz director said Wednesday.

Klaus-J--rgen Leipold, an Herlitz director who was president of Volga until last summer, said his company would like to see the stake go to another foreign investor who would buy the shares over a period of time.

"We are looking for a partner who will buy some shares from us now and then buy more shares from us in the medium term," Leipold said. "In all, the sale may last two to five years."

One company that has shown interest in the Herlitz stake is Norway's Norske Skogin, according to Michael Sassarini, an analyst with United City Bank.

The firm, Norway's largest paper company, has integrated operations that cover the harvesting of timber to the production of quality paper. Given the depressed world paper market, Norske likely will favor buying existing facilities over building new ones, Sassarini said.

Sassarini said Herlitz's pull-out was not totally unexpected, given that the company is a paper trader, not a manufacturer. Likewise, its parent company, Herlitz Paper, produces office and advertising paper rather than newsprint, which is Volga's main product.

"On the face of it, this divestment looks bad because the Volga deal was supposed to be the best example of foreign investment turning Russian industry round," Sassarini said. "But Herlitz have added value to Volga, and got it into good shape. They can walk away with a sizable profit."

Since Herlitz bought its stake, about $200 million has been invested into Volga, of which the German firm has contributed $33 million and other outside investors $31 million. Another $86 million of that came from the International Finance Corp. and $60 million was raised through a new share issue last fall.Dart Containers, an investment fund run out of the Cayman Islands, is now believed to have a 30 percent stake at Volga, Sassarini said.

The fatal blow to Herlitz's operations at Volga likely came with the collapse of international pulp prices, which in turn drove down newsprint prices. On average, newsprint prices fell to $610 a ton in June from $750 a ton in the last quarter of 1995.

While foreign competitors were cutting costs, Leipold said Volga faced rising costs from Russian rail and power utilities.

Volga was the first of three Russian pulp and paper plants to be taken over by foreign investors. Since then, the European packager Tetra Laval has acquired a plant at Tsvetogorsk and Sweden's AssiDomaen has taken a majority stake in Segezha Bumprom. Both plants are located near the Finnish border.