The nondescript industrial buildings at the end of Tredegar Street are squeezed between a set of railroad tracks and the James River.
They could easily be just a few more of the thousands of old mill structures left from the days when water was both transportation and power. There is nothing to indicate they are at once the headquarters and the beginnings of a $2.3 billion paper company whose growth is the marvel of the industry.
But then James River Corp. of Virginia is not a showy outfit, except in its financial statements. Its sales and income have grown, on average, more than 50 percent a year over the last 10 years, rising from only $34 million in 1974 to $2.301 billion last year. The growth in earnings per share topped 25 percent a year during the same period.
This phenomenal profitable expansion -- which has made James River the nation's fifth-largest paper company -- has been based primarily on acquisitions at bargain prices of paper and pulp mills that the previous owners were anxious to unload.
Surprisingly, in this turbulent era of unsought tender offers, white knights and greenmail, all of the purchases have been friendly, and virtually all of the executives chosen to run the newly acquired operations have come from the ranks of managers already there. In some cases, the same top managers remain in charge.
James River Chairman Brenton S. Halsey is still on the prowl for some small acquisitions to fill niches in his chosen parts of the paper business. But he is no longer looking for a major buy, such as the $455 million Dixie/Northern division of American Can Co. in 1982. American Can thought it needed to shed some part of its capital-intensive business, and, after all, it was not basically a paper company.
That purchase, already the company's most successful in Halsey's view, made James River a corporation with truly national scope and greatly strengthened its position in consumer paper products. Altogether, it has operating locations in 22 states, mostly in the East, and in Canada and Scotland.
"We still have a very active acquisition program," Halsey said in an interview in his office overlooking the James, "but a very focused program. We want to stay a paper company and a certain kind of paper company."
Being that certain kind of paper company puts a lid on James River's future growth. Halsey and his president Robert C. Williams, who together started the company in 1969, decided from the beginning that they would concentrate on high-value-added products, such as paper for printing, automotive filters, tissue and towels, and similar lines.
They want no part of the "commodity" end of the industry, such as the components of ordinary cardboard cartons, which sell for around $300 a ton compared with James River's average of close to $1,000 a ton. Moreover, the commodity products are also far more sensitive to swings in the business cycle than are the sales of toilet paper, paper cups for McDonald's or paperboard packages for food products.
While concentrating on the high-value-added products, James River has also successfully integrated itself backwards so that it now produces about 80 percent of the pulp volume that it needs to make finished paper. However, it has also shunned becoming a major owner of timberland, the returns on which Halsey said are "miserable."
In the future, James River will concentrate on expanding production at some existing facilities and making others more efficient. To that end, about $1.2 billion has been earmarked for capital investments over the next five years, money that will come entirely from internally generated funds, Halsey said.
Currently, the chairman is just a bit troubled that in the first half of this fiscal year, James River's operating results fell shy of his goals, the most prominent of which is a 15 percent annual increase in earnings per share over the coming five years.
"I think we can achieve that goal primarily because of the opportunities we have to expand internally without much market risk," Halsey said. "It will only require a 3 percent to 4 percent real increase in sales and about a 6 percent increase in earnings."
In the six months ended Oct. 28, sales rose 18 percent to $1.26 billion and income was up 16 percent to $52.5 million. However, fully diluted earnings per share were $1.51, up only 6 percent from $1.43 last year.
Part of the problem, Halsey said, was the introduction of the company's Northern brand toilet tissue and Brawny paper towels into markets in the northeastern portion of the country, including Washington. Sales have been so strong that keeping supplies available has required disrupting the company's normal operations. Yet permanent changes to accommodate the sales flow are not necessarily warranted, Halsey said, because, once the initial promotions are over, sales will likely drop back somewhat.
In other words, an efficient company found itself with an inefficient operation, at least temporarily, and costs higher than planned.
"Manufacturing inefficiencies in Towel and Tissue attributable to the new production introduction have been largely eliminated, and demand and prices for these products are strong," Halsey and Williams told shareholders recently.
"An expected resumption in growth of the U.S. industrial economy following general inventory adjustments should improve demand for specialty industrial papers in the second half. However, industry overcapacity in market pulp and uncoated printing paper could be a longer term problem."
Over the past decade and a half, Halsey and Williams have divided management of James River, with the former as chief executive officer concentrating on acquisitions and financing and the latter on operations. "It really has been a partnership between Bob Williams and myself," Halsey stressed.
Both once were employes of Ethyl Corp., another major Richmond-based corporation whose principal business once was paper. Ethyl decided to concentrate on chemicals instead and sold off most of what had been the core of the Albemarle Paper Co. The buyer had no use for two old mills in Richmond, one of which was the Hollywood mill where the James River headquarters is now located.
Halsey, a chemical engineer with a degree from the University of Virginia, had been Ethyl's director of research. Williams, a mechanical engineer, had been his assistant. At the point that Ethyl was selling, Halsey had moved on to become head of a subsidiary that made shopping bags.
He and Williams decided to pool their limited resources and enlist the help of Citicorp Venture Capital Co. to try to buy the Hollywood mill and the adjacent Riverside converting plant. Their annual production was worth about $4 million. The new venture got the facilities for $1.5 million.
"If we were ever worried, it was in the first three months," Halsey recalled. "We had put up our life savings for a business that was not doing well. But it was obvious what we needed to do. We had to upgrade the product mix."
The mill, even then an old one, made a number of products, including paper for automotive filters. It had a foothold in that segment of the market, but not a big one.
Six months later, James River was on its way. The two men bought Ethyl's sole remaining paper facility, a paper coating operation just down Tredegar Street. It became the only plant they have ever closed after acquisition, and its replacement on the outskirts of the city is the only plant James River has ever built from scratch. Counting the headquarters staff, the company employs about 600 people here out of nearly 22,000 worldwide.
Halsey and Williams controlled their new company, but they agreed early on that it would be more fun to run a big company rather than own more than half of a small one. Today Halsey still is James River's largest individual shareholder, with about 1.7 percent of the 28.9 million shares outstanding. His holding is worth more than $14 million at current share prices. Williams has somewhat less.
Over succeeding years, James River bought unwanted mills and paper conversion plants from industry giants such as St. Regis, Weyerhaeuser, Scott and International Paper, and it bought some small independent companies, too. One of those buys, the 1980 purchase of the Brown Co. from conglomerate Gulf & Western, illustrates the Halsey and Williams approach.
Brown Co., based in Berlin and Gorham, N.H., on the Androscoggin River, was for many years a privately owned corporation. It later passed through the hands of a group of investors that included Michele Sindona, the Italian financier jailed after the failure of the Franklin National Bank in New York. Sindona's group sold out to other investors who in turn sold to Gulf & Western in 1968.
By the end of the 1970s, Brown was in trouble, and many of the residents of the area feared that the large pulp mill, its printing paper machines and particularly the towel and tissue converting plant might be closed. Gulf & Western was not coming up with the capital needed to keep the plants competitive.
Edgar Dean, who heads James River's Berlin/Gorham Group, is one of the managers who James River kept in his same job. They have given him responsibility for pulp sales for other mills in Maine and Canada as well as the Berlin/Gorham operations. And they have given him some capital with which to work.
The "driving force" behind the purchase was the desire to integrate James River, which prior to 1980 had no pulp mills, recalled Dean. Gulf & Western had been required to put about $40 million into pollution control equipment to try to clear up the Androscoggin, "and they didn't want to put money into a capital-intensive business," he said.
"We were not really in the paper business," Dean explained. "We were just sort of tagging along. We were in a lot of products and did not have much market share in any of them."
Since Gulf & Western sold, "the main thing that has changed is that they have us working on strategies, up and down the line," Dean continued. "Brent is a hell of a good paper man. . . . With Gulf & Western, even the fellow I was reporting to had no background in paper. And I had a hell of a hard time once something got past him. Gulf & Western had crackerjack people, but everything took a long time. They made marginal moves when they should have made major moves."
Under James River, Dean has more autonomy, in keeping with the corporation's general emphasis on decentralized management. Moves are quicker, some products have been dropped at the low end of the value-added scale and the capital is flowing. Automation has been increased and many controls computerized. A small hydropower generating plant was installed on one of the company's five dams in Berlin and Gorham. The paper machines in the converting plant are being rebuilt. And the list goes on.
Eventually, the mill's and the plants' capacities will be increased, Dean added.
James River got Brown Co., including carton and specialty paper plants in Kalamazoo, Mich., for about $225 million. The price included ownership of about 800,000 acres of timberland in Maine and New Hampshire, three-fourths of which was simultaneously sold to Boise-Cascade and International Paper for $212 an acre. Thus, James River got Brown for less than $100 million, with at least $40 million of timberland.
Halsey was happy to sell most of the timberland because, he said, "just to pay interest to buy or hold land at $212 an acre, the stumpage would have to be about $45 a cord." Stumpage -- the standing timber ready to cut -- was then going for $6 a cord.
Before too long, James River may be in the market for timberland, but not yet. "We led the parade from the industry thinking it was absolutely essential to own it to that it was not necessary. . . . Now some of the returns on southern timberland are not so bad," he said.
Meanwhile, the company has cutting rights of additional hundreds of thousands of acres of land it does not own, including some that came along with another recent acquisition of a pulp mill at Old Town, Maine, and paper mills in Groveton, N.H., Gouverneur, N.Y., and Hyde Park, Mass. The properties were sold by Diamond International.
At Groveton, James River recently brought in a new manager with responsibility for more than just the output of the mill. Stephen K. Parker worked in Kalamazoo for Brown Co. while in college and then again after that facility became a James River plant. He sings the praises of his company.
"James River is unique," he declared. "It gives people the latitude to run a business, the latitude to make it a success."
The negotiations with Diamond International were lengthy, and changes were set in motion in Groveton even before the final agreement was struck. That was typical of the friendly James River acquisitions, in which even the management changes are made before the takeover is completed.
Groveton is an example, too, of the company's determination not to get into the commodity end of the paper business. Diamond International had earlier sold a half interest in a paper machine in the Groveton plant to a group of owners that used its output -- "semi-chem" paper from which the wavy center of cardboard is made -- in their own converting plants. James River wanted no part of that business, but the machine was in the middle of a mill it wanted. The rest of the machine was sold to the other owners by Diamond. James River operates and maintains it for a fee.
As Halsey and Williams have marched from purchase to purchase, they have followed some strict rules about financing. One of them: Don't use floating-rate money.
Whatever the level of interest rates has been, James River has paid the price for fixed-rate financing so that a known cost could be matched against firm profit projections for the newly acquired mills. Besides, when rates were high, the purchase prices tended to be low, Halsey noted. Initially, financing was usually secured by the acquired assets that were held by a subsidiary, not the assets of the parent corporation itself, the chairman explained. Once the new mills had a few quarters of profitability under their belts, they were integrated into James River and their related debt assumed by the corporation.
Just after the Dixie/Northern buy in 1982, James River's ratio of debt to total capitalization soared to almost 70 percent. By the end of October, that had been whittled down to 39 percent by a common stock issue and a big rise in retained earnings.
Now James River is counting on its own cash flow to finance its $1.2 billion capital investment program and perhaps some small acquisitions as well. It has come a long way in a short time from that beginning at the end of Tredegar Street.