by Maureen Flanagan
From its early years as a small paper conversion plant in New Jersey, Marcal Paper Mills, Inc. has become a leader in the northeastern U.S. tissue market and the eighth largest tissue producer in North America. The company remained profitable and prospered through four generations of family ownership, producing a well-respected brand name product with a loyal customer following. Long before recycling became popular, the company pioneered the tissue recycling process, making Marcal synonymous with environmental protection and industry innovation.
In a December 17 transaction, Marcal established a solid financial base to increase its market penetration and expand into other geographic areas. American Capital Strategies, Ltd. (Nasdaq: ACAS) invested $38.5 million in the form of a senior term loan, senior subordinated debt with warrants and a first mortgage loan facility.
"American Capital's timely financing enables Marcal to carry on its long-standing commitment to manufacturing quality tissue products in an environmentally friendly way. This allows us to affirm the family tradition that has made Marcal a leader in its markets," said Nicholas Marcalus, President and CEO, the grandson of the founder.
Marcal sells more than 140,000 tons of finished tissue products a year, including facial and bath tissue, napkins and paper towels. Its products are produced for the consumer and commercial markets and sold to grocery retailers and distributors in the Eastern United States as well as other parts of the country. In addition to its well-known branded products, Marcal supplies private label tissue and towel products and also has a significant regional business through commercial distribution channels. Employing more than 1,200 workers, the company maintains its headquarters and main converting facility in Elmwood Park, NJ. A second facility in Chicago, IL produces a full line of wax paper products customized for the food service and retail industries.
Marcal was founded in 1932 by Nicholas Marcalus Sr., a self-taught engineer and mechanical designer from Italy. The company purchased paper from mills to produce waxed paper and tissue products for consumer and commercial customers.
Always an industry leader, in the late 1940s, Marcal took the first steps toward recycling, developing technology to de-ink wastepaper so it could be recycled into pulp and used to manufacture tissue paper. By 1951, the company had installed a pulping and de-inking mill to supply pulp, enabling Marcal to produce tissue products at a reduced cost and to compete effectively with paper companies using virgin pulp.
Marcal continued to expand with the market, introducing new technology and upgrading its processes. In 1978, the company invested in a world-class paper machine, the 10PM, which reduced costs, increased production, enhanced its products and expanded sales. In 1991, the company upgraded its de-inking process, enabling Marcal to use less expensive grades of wastepaper such as curbside and office paper. The company also established its own network of municipal recovered paper suppliers.
During the 1990s, Marcal continued to upgrade facilities and efficiency, adding a new state-of-the-art paper machine, the 11PM, and the pulping capacity to supply the machine. It also invented and constructed the Kaofin� process, a patented and widely acknowledged industry innovation that transforms pulp mill residual into products used in cat litter, animal bedding, and workplace absorbents. This process saves Marcal $5 million to $10 million a year by virtually eliminating landfilling expenses.
Marcal has made major inroads in the consumer and commercial value-priced market segment. The value segment is a notch below the nationally advertised premium brands, but more expensive than private labels. Since 1995, Marcal has more than doubled its market share in the northeastern grocery region and is currently among the top suppliers of facial and bath tissues as well as napkins and towels. Growth has been particularly strong in the New York metropolitan area where the company has focused its expansion efforts. Marcal also has established a profitable business selling to office superstores including Staples, OfficeMax, and Office Depot. In 2000, Marcal was the top supplier to this market.
The company has continually reaffirmed its commitment to recycling, a core philosophy of its founder, and uses the highest possible percentage of recycled content. In turn, this helps communities manage their waste disposal expenses as well as helping to preserve natural resources.
"Marcal honors a heritage and manufacturing tradition that respects the environment while continuing to make major strides in the market," said Ken Jones, American Capital Principal. "American Capital is proud to be associated with this forward looking company."
Marcal joins the American Capital portfolio of more than 50 companies representing a wide range of industries. Since 1997, American Capital has invested more than $800 million in middle-market companies in need of financing for growth, acquisitions, employee and management buyouts, liquidity and restructuring. This is ACAS' first investment in the tissue paper industry.
Paper products are vital to American life. Each year North Americans use some seven million tons of tissue products alone. Over the past decade, the industry has grown steadily, tracking population and household increases which have ranged from 1.7% to 2.3%. Industry analysts forecast growth of 1.2% for the next five years. The tissue industry is relatively recession-proof and more stable than the rest of the paper industry. In fact, recent production increases have been balanced by growth in consumption and the shutdown of out-of-date capacity, resulting in favorable market conditions.
Marcal's position within the industry is strong. Since 1990, Marcal's growth has consistently outperformed the rest of the industry. During the 1991 recession when industry growth declined, Marcal continued to prosper, increasing tons sold despite an industry decline. Operating in the value segment of the market and concentrated in the Northeast, Marcal is off the radar screen of the "Big 3" producers that account for 68% of the market. While these major companies focus on the premium tissue segment at the national level, Marcal continues to grow its profitable niche market.
Within its chosen area of the market, Marcel is extremely competitive. By increasing product lines and selling to more stores, Marcal has more than doubled its market share in the northeastern grocery store channel. Its brand is well-known and has a loyal following, particularly among urban ethnic families and mid-to-upscale families with children. Marcal customers provide a diverse loyal base that holds up well through changing economic conditions. In part, this reflects the company's innovative packaging, advertising and promotional strategies, its ability to recognize consumer preferences and its responsiveness to its customers.
Marcal is now focused on increasing market share in metropolitan areas such as Boston and Philadelphia, using its successful strategy in New York as a template. It also is looking toward continued penetration of product lines and customizing products to meet customer needs. Its business plan calls for increased regional penetration of smaller northeastern markets as well as continued growth of the office superstore channel in the commercial sector.
Marcal's pioneering attitude continues to drive operations. The company's use of significantly enhanced recycling technologies and ability to capitalize on market opportunities will take Marcal to the next level - and supply yet another generation with recycled tissue products that have made Marcal a valued brand.
