705474 Arauco (A): Forward Integration or Horizontal Expansion?

forest management, and pulp. Two years later in 1979, COPEC purchased Celulosa ConstituciOn,
merging the two entities to create Celulosa Arauco y Constitucion SA (referred to as Arauco).
Arauco began its expansion plan in the 1980s, which involved purchasing land and plantations
and installing new technology equipment to improve efficiencies to compete effectively in the world
market pulp arena. The expansion plan paid off as the company's total holdings in hectares 2 grew
from 170,000 in 1980 to 1,200,000 hectares in 2003.3

Throughout the 1990s, the company increased -its production capacity by constructing a second
line at the Arauco mill, introducing new bleaching systems, entering new product lines, and
expanding energy generation at its plants. By 1996; Arauco moved across the border to Argentina to
purchase the company Alto Parana, expanding the company's overall product offerings, land
holdings, and production capacity.
In 2000, Arauco aggressively increased its capacity yet again by purchasing its third mill in Chile,
increasing production in Argentina, and entering into the MDF (medium-density fiberboard) and HI3
(hardboard) markets through stakes in sawmill PANELS plants such as Cholgudn and Trupan. In late
2001, the company commenced a three-year construction project of its new mill, the Valdivia mill, at
-an estimated cost of US$600 million. The Valdivia plant had opened in January 2004 with a total
construction cost of US$1.2 billion; US$900 million was apportioned to the purchase of the plant's
assets (a pulp plant and other assets), and US$300 million was for the creation of a 100,000 hectare
forest.4 The plant was the world's fifth-largest bleached kraft pulp plant and the largest in Chile.

By 2004, Arauco was one of the world's premier forestry enterprises in terms of plantation areas
and yields. It was also involved in the production of market kraft wood pulp, saw timber, and wood
panels with forest plantations throughout Chile, Argentina and Uruguay. Arauco had sales offices in
Argentina, Brazil, Mexico, Holland, Japan, and the U.S., and distributorships in Peru, Columbia,
Venezuela, Korea, Taiwan, Thailand, Malaysia, and India. (Exhibit 1 shows Arauco's corporate
structure.) COPEC was the majority shareholder with 99.98% ownership of Arauco's shares.
COPEC: This company was founded after the stock market crash in 1929 with the intention of
-

guaranteeing fuel supplies in Chiles As of the end of 2003, the market capitalization of COPEC was
approximately US$9.3 billion, which represented 12% of the market capitalization of all publicly
traded companies in Chile. COPEC was publicly traded with the majority of shares being indirectly
held by the Angelini Group (via another company, AntarChile). Anacleto Angelini, part owner of the
Angelini Group, was deemed to be one of the 10 richest men in Latin America by Forbes magazine.6

COPEC's consolidated sales were US$2.7 billion, with operating income at $375 million. Although
35% of COPEC's sales? came from forestry, -COPEC's profits were tied closely to pulp prices, since
78% of the company's EBITDA originated from Arauco.g Other sales were derived from fuels (60.4%),
fishing (1.4%), and other investments (3.2%).

Arauco's Strategy
Arauco explained its central strategy in a letter to shareholders:
The central idea behind our global strategy is to strengthen our position as one of the most
important forestry companies in Latin America, employing [the company's] size to achieve the
necessary economies of scale for positioning [ourselves] as a company that provides a
reasonable return to its shareholders while properly meeting its responsibilities to its
employees, the country and the communities where it develops its activities. In the forestry
area, Arauco's strategy is to increase the value of it forest resources, consisting of radiata and

Purchased by Handoko Sasmito (sasmito@indosat.net.id) on September 27, 2011