M-REAL ADOPTS REVISED STRATEGY AND TAKES

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M-real Corporation Stock Exchange Bulletin 18.8.2004 at 3.00 p.m.
                                  
M-REAL ADOPTS REVISED STRATEGY AND TAKES ACTION TO STRENGTHEN BALANCE
SHEET

- M-real’s core businesses are Consumer Packaging, Publishing,
Commercial Printing and Office Papers
- New business and management structure aligning the organization
with its core businesses aims for internal efficiency and increased
profit responsibility
- Investments to be targeted on improving cost-competitiveness of
core businesses and on product quality; structural investments will
focus on growth areas of Consumer Packaging, Publishing and
Commercial Printing
- Divestiture of forest assets is expected to be finalized by the end
of the year. Options regarding selected non-core assets are being
evaluated
- Balance sheet effects of adopting IFRS accounting standards have
been estimated
- M-real intends to raise approximately €450 million in equity
capital through an underwritten rights offering. M-real’s principal
shareholder, Metsäliitto Cooperative, has committed to subscribe for
its pro rata share of the new shares
- Revised targets set for return on capital employed at a minimum of
10% on average over the business cycle, and gearing ratio not to
exceed 100%

M-real announces today a program of strategic initiatives to refine
its business focus, improve its operational efficiency and strengthen
its balance sheet. Hannu Anttila, Senior Executive Vice President and
designate President and CEO (effective January 1, 2005), said “Over
the last few months we have conducted a thorough review of M-real’s
strategy and operations. The review has confirmed that Consumer
Packaging, Publishing, Commercial Printing and Office Papers are M-
real’s core businesses. The initiatives announced today, together
with the previously announced cost reduction and profitability
improvement programs, will assist in strengthening the Company’s
position as one of the leading European paper and board companies.
These measures are designed to give us the financial flexibility to
benefit from improving fundamentals in the paper and board industry.ö

INITIATIVES TO STRENGTHEN STRATEGIC FOCUS

Revised Business Strategy

M-real’s core businesses are Consumer Packaging, Publishing,
Commercial Printing and Office Papers. As part of its revised
strategy, the Company intends to prioritize major development
investments on high-quality packaging and graphics products which
management has identified as the most attractive future growth areas
for M-real. The Company seeks to increase the competitiveness of
existing operations by improving product quality and increasing
production efficiency. Although not expected to be a major investment
focus in the near-term, Office Papers will remain a core product area
supporting M-real’s other businesses and its overall strategy.

The Company remains committed to its business relationship with Map
Merchant Group, but it will evaluate opportunities to further develop
its merchanting business. This may take place through participation
in the consolidation of the business area or through other measures,
not excluding solutions which would dilute the Company’s ownership
position to below 50%.

M-real’s revised target for return on capital employed has been set
at a minimum of 10% on average over the business cycle and its
revised target gearing ratio is not to exceed 100%. Total investments
(including acquisitions, if any) will be approximately equal to
depreciation in 2005 and 2006, assuming a cyclical recovery.

Revised Operational and Management Structure

The goal of the revised operating and management structure is to
realign production with sales and marketing within each core
business.

The business area heads will be responsible for the operations of
their respective business areas including sales, marketing and
production and will be accountable for strategy, profitability and
return on capital employed of the business areas.

The business area heads will be members of the Corporate Executive
Board. The Corporate Executive Board will approve the business area
strategies and review any strategic investment requests with the
objective of achieving the Company’s financial targets.

The business area heads will be responsible for executing the agreed
strategy and generating the required returns. They will be supported
by centralized corporate functions. The business area heads will be
remunerated, in part, based on the operating performance of their
respective business areas and on the Company’s performance overall.

The new organizational structure will take effect on September 1,
2004.

Divestiture of Forest Assets

The Company is in the process of divesting its 95% holding in
Forestia Oy and expects to finalise the process by the end of the
year. Forestia Oy has been independently valued at €172 million.

Reviewing Options Regarding Non-Core Assets

During the past three years, the Company has divested certain assets
including, most recently, Metsä Tissue. In order to reduce its high
indebtedness, the Company has further identified certain other non-
core assets, which it may divest as and when appropriate. Also the
Company will evaluate its strategic options concerning its three
carton plants and the Savon Sellu mill.

COST REDUCTIONS AND PROFITABILITY IMPROVEMENTS

The Company has completed the 2001-2003 cost reduction and efficiency
improvement program. Of the targeted annual €295 million cost
reductions and efficiency improvements, €205 million in annualised
cost reductions were achieved by the second quarter of 2004 and €50
million in efficiency improvements have been implemented but require
operating rates in excess of 90% in order for the benefits to be
realized. €40 million of the expected cost reductions were not
achieved.


The Company is confident it will achieve approximately €30 million of
cost reductions under the new program in 2004, and believes it will
be able to implement the remaining €170 million by the end of 2006.

ADOPTION OF IFRS ACCOUNTING RULES

From January 1, 2005, M-real is required to convert from Finnish
Accounting Standards (“FASö) to International Financial Reporting
Standards (“IFRSö). The Company is required to prepare its opening
IFRS balance sheet as of January 1, 2004. Based on preliminary
investigations, the conversion in accounting standards is estimated
to have the following significant effect on the Company’s
consolidated financial statements prepared in accordance with FAS:
  ·        €320 million reduction in reported shareholders’ equity
     mainly related to pension liabilities, reversion of sale and
     leaseback agreements, deferred taxes, financial instruments and asset
     impairments
·        €60 million net increase in interest-bearing indebtedness
due to the reclassification of finance leases, operating leases and
pension liabilities
  
An asset write-down of €55 million under FAS will be recordeed in the
third quarter of 2004. This amount has been included in the estimated
effects on the opening balance sheet of adopting IFRS and forms part
of the €320 million reduction in shareholders’ equity (asset
impairment).

URUGUAY PULP PROJECT

As previously disclosed, the shareholders of Metsä-Botnia are
considering investing approximately $1 billion in a pulp project in
Uruguay. This project would provide the shareholders of Metsä-Botnia
with an additional pulp capacity of one million tons per annum and
the mill is expected to be one of the lowest-cost pulp production
assets in the industry, strategically positioning the shareholders
for growth in fine paper demand. M-real is evaluating the merits of
the pulp project and is committed to maintaining its pulp self
sufficiency within the limits of its financial targets.

INITIATIVES TO STRENGTHEN BALANCE SHEET

Background to the Rights Offering

In the late 1990s, most leading producers within the forest products
industry recognized that significant growth could not be achieved
organically without causing severe disruptions in the balance of
supply and demand. From the second half of the 1990s, the industry
experienced a period of rapid consolidation and many industry
transforming transactions were completed in 2000 and early 2001,
which subsequently proved to be the peak of the last economic and
industry cycle. M-real was an active participant in the consolidation
of the industry, as evidenced by its increased market shares in its
core businesses through the acquisitions of Modo Paper and Zanders.

Many leading paper producers entered the recent period of global
economic decline with financially leveraged balance sheets. Financial
leverage and a protracted cyclical downturn created a challenging
operating environment for producers. For European producers, this
challenging environment has been exacerbated by the recent strength
of the euro relative to the U.S. dollar. As a result, M-real’s
operating performance declined as part of this general trend and it
has not reduced its financial gearing as quickly as anticipated.

M-real has responded by introducing two cost reduction programs,
divesting assets and adopting a revised business strategy to focus on
further improving operational efficiency.

The Rights Offering

M-real intends to raise approximately €450 million in equity capital
through an underwritten rights offering based on the pre-emptive
subscription right of its shareholders (the “Offeringö). The Company
intends to use the proceeds of the Offering to reduce outstanding
indebtedness.

The Company’s principal shareholder, Metsäliitto Cooperative, which
owns 38.5% of the Company’s share capital, has committed to subscribe
for its pro rata portion of the new shares to be issued in the
Offering.

Citigroup and Nordea Corporate Finance have agreed to underwrite all
of the new shares not associated with Metsäliitto’s subscription
rights, subject to customary conditions and with final determination
of the price and other terms of the Offering to be finalized
subsequent to the shareholders’ authorization.

Rationale for the Offering

As the timing and strength of the expected cyclical recovery remains
uncertain, as the conversion to IFRS will result in the reduction of
shareholders’ equity and as management’s current expectation is that
the Company will report a pre-tax loss excluding extraordinary items
for the financial year 2004, the Company believes that it is prudent
and in the best interest of its shareholders to pursue the Offering.
The Offering is intended to improve the Company’s balance sheet
strength, increase financial flexibility and facilitate the
implementation of M-real’s revised strategy. As of June 30, 2004, the
Company’s gearing ratio will improve from 113% to 78%, pro forma for
the Offering, and to 91%, pro forma for the Offering and the
estimated effects of the adoption of IFRS.

Refinancing Plan

Subsequent to the Offering, M-real intends to replace the €700
million revolving credit facility maturing in 2005 with a new
revolving credit facility of approximately €500 million in size. In
addition, the Company is considering accessing the debt capital
markets to extend its debt maturity profile, provided market
conditions allow and terms are acceptable.

Dividend Policy

M-real has redefined its dividend policy. M-real’s dividend policy is
stable and rewarding to shareholders, and aims at paying a dividend
of at least 1/3 of the Company’s earnings per share on average across
the business cycle, nonetheless taking into account its gearing
target.

Hannu Anttila, Senior Executive Vice President and designate
President and CEO as of January 1, 2005 said, “We believe the
strategic and operational changes announced today position M-real to
take advantage of recovering demand for paper and board. These
changes, combined with the cost reduction program instituted earlier
this year and our announced rights offering and refinancing plan, are
designed to provide M-real the platform from which to continue to
develop the Company towards the strategic goals of strengthening our
position as a leading producer and supplier of paper, paperboard and
packaging solutions in Europe and as the preferred supplier of high
quality products for our customers.ö

M-REAL CORPORATION

Board of Directors

M-real organises an international conference call at 17.30 Finnish
time (15.30 UK time).
If you wish to participate in the conference call please dial call-in
number  +44 (0) 20 7162 0181. Replay number is +44 (0) 20 8288 4459
and access code 609142.

Further information:
Hannu Anttila, President and CEO as of 1 January 2005, tel. + 358 10
469 4611
Juhani Pöhö, CFO, tel. +358 10 469 5283

Media contacts: Jyrki Antikainen, tel. + 358 10 469 4940, mobile +358
50 357 4292
IR contacts: Antti Nummi, tel. +358 10 469 4432, mobile +358 50 598
9629

THE INFORMATION CONTAINED HEREIN IS NOT FOR PUBLICATION OR
DISTRIBUTION INTO THE UNITED STATES.  THE MATERIAL SET FORTH HEREIN
IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED, AND SHOULD
NOT BE CONSTRUED, AS AN OFFER OF SECURITIES FOR SALE INTO THE UNITED
STATES.   THE SECURITIES OF THE COMPANY DESCRIBED HEREIN HAVE NOT
BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED, OR THE LAWS OF ANY STATE, AND MAY NOT BE OFFERED OR
SOLD WITHIN THE UNITED STATES, EXCEPT PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND APPLICABLE STATE LAWS.   THERE IS NO INTENTION
TO REGISTER ANY PORTION OF THE OFFERING IN THE UNITED STATES OR TO
CONDUCT A PUBLIC OFFERING OF SECURITIES IN THE UNITED STATES.
THE INFORMATION CONTAINED HEREIN SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY
SALE OF THE SECURITIES REFERRED TO HEREIN, IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION, EXEMPTION FROM REGISTRATION OR QUALIFICATION UNDER THE
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