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IP to Buy Weyco’s Packaging Business
March 22, 2008 Official Board MarketsInternational Paper (IP), Memphis, Tenn., will purchase Weyerhaeuser’s containerboard, packaging and recycling business for $6 billion in cash, subject to post-closing adjustments. The deal should be completed in the third quarter.
Because the transaction is a purchase of assets rather than of stock, IP will realize a tax benefit that has an estimated net present value of about $1.4 billion. Taking this benefit into account, the net purchase price is about $4.6 billion. IP projects that the acquisition will be earnings accretive for the 2009 full year.
IP is obtaining nine containerboard mills, 72 packaging operations, and 33 other facilities. This business brought in $5.2 billion is sales last year.
“We could have seen $6 billion or more after tax in a Reverse Morris Trust, but financing woes likely scuttled such a deal,” says Chip Dillon, paper industry analyst for Citi, New York City. “Assuming $15 million for each of the box plants and roughly $400 million for the recycling business, we estimate a per ton value of just over $700, equal to around 60 percent to 70 percent of replacement cost.”
Attractive Valuation--
“This deal represents a compelling opportunity for International Paper and our shareholders at a very attractive valuation,” says Chairman and CEO John Faraci.
Integrating Weyerhaeuser’s packaging business into our North American packaging platform fits very well with our strategy to improve our earnings cash flow and returns by strengthening existing businesses.”
Carol Roberts, senior vice president of IP’s packaging business, says she sees low integration risk and considerable upside potential in the deal.
“Weyerhaeuser has low-cost well-run assets that complement our existing mill and converting system and offer significant synergies,” she says. “The acquisition expands our geographic presence in the U.S. and Mexico and diversifies our customer base in key product lines.”
IP has identified profit improvement opportunities of about $400 million annually from the acquisition. The company expects to achieve at least 40 percent of the improvement within 12 months of completing the deal, with the remainder fully realized by the end of the third year. This will occur through reducing duplicate overhead costs, integrating manufacturing operations, optimizing product mix, and improving operational and supply chain efficiencies.
Citi’s Dillon points out that IP’s net debt doubles to nearly $12 billion because of this deal, increasing its risk profile. He adds that $4 billion of the $6 billion in new debt is a “bridge” loan due in 18 months. Weyerhaeuser’s net debt will drop to less than $2.5 billion when the deal closes, versus its market capitalization of $13 billion.
“For the balance of the industry, we see this move as a positive, as the top three U.S. players would now have more than 50 percent of the industry’s capacity, which should improve producer discipline,” he says.OBM
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