Booming nappy use drives $2,2bn paper deal

International Paper Co., the largest maker of corrugated cardboard packaging, is betting big on disposable nappies.

The Memphis-based company says Monday it agreed to pay about $2,2-billion to Weyerhaeuser Co. for assets that will double its production of so-called fluff pulp, used in hygiene products.

Demand for the absorbent raw material manufactured from softwood is growing at a faster pace than that for cardboard or paper, helped by booming sales of adult-incontinence products and increased spending on personal-care items by the expanding middle classes in developing nations. The deal will make International Paper the leader in the global fluff-pulp market, putting it ahead of Koch Industries Inc.’s Georgia-Pacific, according to BMO Capital Markets analyst Mark Wilde.

“The market is a good market,” International Paper CEO Mark Sutton says. “It’s growing globally. It’s all about consumer products that make people’s lives better.”

International Paper, the world’s largest paper company, says the all-cash deal is expected to close in the fourth quarter and generate annual cost savings of about $175-million by the end of 2018.

Regulatory scrutiny
The Weyerhaeuser assets have a total annual production capacity of almost 1,9-million metric tonnes and employ about 1 900 workers in the US, Canada and Poland. The transaction will give International Paper five mills and two converting factories that produce fluff pulp, softwood pulp and specialty pulp.

International Paper expects to realize a $300-million tax benefit from the transaction. Net of that saving, the company says it’s paying 5.4 times the target’s 2015 earnings before interest, taxes, depreciation and amortization. That’s less than the multiple paid in six comparable deals over the past five years, according to data compiled by Bloomberg.

The deal is International Paper’s largest since its $4,27-billion acquisition of rival corrugated-packaging manufacturer Temple-Inland Inc. in 2011.
International Paper shares were little changed Monday, rising 0,4% to $43.46 in New York. The deal may draw some regulatory scrutiny and investors are likely to be concerned about the amount of new fluff production capacity hitting “a growing, but relatively modest-sized market over the next three to four years” Wilde, who rates International Paper “market perform”, says.

Possible divestments
To close the acquisition, International Paper may be willing to sell as many as two of the mills if required by regulators, Sutton says on the call. The new capacity being added to the market “is targeted at different levels of products,” he says. “I think we’ll be able to operate very, very well within that environment.”

Federal Way, Washington-based Weyerhaeuser says in a separate statement that the sale completes the first phase of its review of its cellulose-fibres business. The company is still reviewing the future of its liquid-packaging board facility and its newsprint and publishing-papers venture.

Weyerhaeuser expects to use some of the estimated $1,6-billion of after-tax proceeds from the pulp deal to repay term loans related to its $2,5-billion share-buyback programme. Its stock rose 0,5% to $32.28.

By Megan Durisin and Simon Casey for

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