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Booming Diaper Use Drives $2.2 Billion International Paper Deal

  • Buying Weyerhaeuser assets will double output of fluff pulp
  • Material used in growing market for diapers, hygiene products

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

The Memphis-based company said 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 Corp. analyst Mark Wilde.

“The market is a good market,” International Paper Chief Executive Officer Mark Sutton said on a conference call to discuss the acquisition. “It’s growing globally. It’s all about consumer products that make people’s lives better."

International Paper, the world’s largest paper company, said 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 tons and employ about 1,900 workers in the U.S., 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 said 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 percent 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," said in a note.

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 said on the call. The new capacity being added to the market "is targeted at different levels of products," he said. "I think we’ll be able to operate very, very well within that environment."

Federal Way, Washington-based Weyerhaeuser said in a separate statement that the sale completes the first phase of its review of its cellulose-fibers 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 program. Its stock rose 0.5 percent to $32.28.

Morgan Stanley was financial adviser to Weyerhaeuser on the transaction, and Cravath, Swaine & Moore LLP is representing the company. Debevoise & Plimpton LLP gave legal advice to International Paper.

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