International Paper’s Divestitures as Part of Temple-Inland Acquisition Is Credit Positive

International Paper’s Divestitures as Part of Temple-Inland Acquisition Is Credit Positive

On 10 February, International Paper Company (IP, Baa3 stable) said it reached an agreement with the US Department of Justice to sell three containerboard mills within six months as a condition of its $4.5 billion acquisition of Temple-Inland Inc. (Baa3 stable). The Temple-Inland deal closed last Monday.

The divestures are credit positive for IP because the influx of cash from the containerboard mill sales will allow the company to pay down debt quicker than if they kept them. Within 18-24 months, we expect IP’s debt-to-EBITDA ratio will decline to about 3.0x from a pro forma adjusted debt-to-EBITDA ratio of about 3.5x for the 12 months ended December 2011.1

IP’s antitrust settlement agreement with the Justice Department calls for the company to sell Temple-Inland’s containerboard mills in New Johnsonville, Tennessee, and Ontario, California, and either IP’s containerboard mill in Oxnard, California, or its mill in Henderson, Kentucky. Containerboard is the thick paper sheet that is used to make corrugated boxes. It consists of fluted corrugating medium sandwiched between two layers of linerboard. The decline in leverage will come from the combined company’s strong cash generation, proceeds from the mill divestitures and the sale of Temple-Inland’s noncore building-products segment. The required mill divestitures do not affect the company’s ability to achieve its target of $300 million of synergies in two years.

The Department of Justice did not require IP to divest any of its own 133 US corrugated box plants or Temple-Inland’s 59 corrugated box plants that convert containerboard into corrugated boxes. Corrugated boxes are the thick brown boxes used to transport various durable (i.e., washers and dryers) and non-durable products (i.e., produce and meat). Retaining these facilities will increase IP’s earnings stability as the percentage of containerboard that IP converts into corrugated boxes in its own converting facilities increases to 86% from 77% before the acquisition. The increase reduces the earnings volatility that often results when IP has to sell its containerboard to domestic independent converters or in the global export market.

IP is the market leader, with a 27% share of the North American industrial packaging market.
Temple-Inland is the fourth-largest producer of industrial packaging in North America with a 10% share of the market. Following the sale of the three mills, we estimate IP’s North American market share will be 34%. The sale of the mills will reduce IP’s containerboard production capacity by about 970,000 tons, or about 7% of the combined companies’ total capacity.