International Paper's Xpedx, Unisource to Explore Merger

International Paper Co., the world’s largest maker of office paper, is in talks about combining its xpedx unit with Bain Capital’s Unisource Worldwide Inc. to form the biggest distributor of office and copier paper.

A deal may be in the form of a so-called Reverse Morris Trust in which International Paper would contribute xpedx’s assets, the Memphis, Tennessee-based company said today in a statement. It “would be spun off to International Paper shareholders and immediately thereafter merged with Unisource in a transaction intended to be tax-free to International Paper and its shareholders,” according to the statement.

“It’s a significant move by International Paper to create value with a unit that has underperformed its cost of capital,” Joshua Zaret, a New York-based analyst at Longbow Research LLC, said today by telephone. “With about $10 billion of combined revenue, IP is betting that synergies from a merger will generate greater returns than from continuing to restructure xpedx.”

International Paper and Unisource will decide how to divide ownership of the new company through further talks, according to the statement. The combined companies would be North America’s largest distributor of products such as office and copier paper, Zaret said.

International Paper rose 3.2 percent to $47.15 in New York. The shares have gained 18 percent this year.

Resurrecting xpedx

“This is a unique opportunity for xpedx and Unisource to create a new company that is stronger, more competitive and provide even greater value to customers,” International Paper Chief Executive Officer John Faraci said today in the statement.

Unisource, based in Norcross, Georgia, is closely held and is “one of the largest independent distributors and marketers of more than 150,000 national and private-label products” in North America, according to its website. The company is majority owned by Boston-based Bain, according to a separate statement from Unisource.

“International Paper’s been trying to resurrect xpedx and make some money for a while,” Paul Quinn, a Vancouver-based analyst at RBC Capital Markets, said today by telephone. “They’ve made progress, but they’re clearly looking at other ways to boost profitability.”

Xpedx operating profit fell 17 percent last year to $71 million on sales of $6.04 billion, according to a presentation on International Paper’s website.

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