In a strategic bid to tap India’s growing paper and packaging market, International Paper Co. (IP) announced plans to acquire a 75% stake in leading Indian paper company Andhra Pradesh Paper Mills Limited.
Andhra Pradesh Paper Mills Limited (“APPM”) is one of the biggest, integrated pulp and paper manufacturing companies in India and caters to both the domestic and foreign markets. Andhra Pradesh Paper Mills produces writing and printing and copier papers at its two mills with a combined annual capacity of about 250,000 tonnes.
International Paper will buy a 53.5% stake in Andhra Pradesh Paper Mills Limited for approximately $257 million in cash. The company has also agreed to pay $62 million as non-compete payment to the sellers. Pursuant to Indian securities law, International Paper will launch a mandatory public tender offer to acquire up to an additional 21.5% of the outstanding shares of Andhra Pradesh Paper Mills for approximately $104 million in cash.
The acquisition of the 75% stake is expected to be completed by the third quarter of 2011, subject to approvals from Indian regulators. Once completed, the transaction will mark International Paper as the first global paper and packaging company to have a significant presence in India’s paper and packaging industries. International Paper plans to form a new division, IP India, to manage its stake in APPM.
Increase in Quarterly Dividend
In a separate development, International Paper hiked its quarterly dividend by 40% to 26.25 cents per share from the previous 18.75 cents. The increased dividend will be paid on June 15, 2011 to shareholders of record on May 17, 2011. This marks the third increase in the past twelve months. Earlier, in April 2010 and January 2011, the company had twice hiked its quarterly dividend thus raising the quarterly dividend payout from 2.5 cents to 18.75 cents.
Our Take
The APPM acquisition will help International Paper capitalize on the burgeoning demand for paper and packaging products in India. We also believe the dividend hike will reinvigorate investor optimism as the company had slashed its quarterly dividend by 90% to 2.5 cents in March 2009 in an effort to preserve cash during the severe economic downturn.
We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, indulging in acquisitions and reducing its total debt. Its high debt levels and underfunded pension liability remain concerns as it curbs the company’s ability to ramp up its capital expenditure.
Furthermore, International Paper’s first quarter has traditionally been slow and the quarter’s results are expected to be slightly lower than the fourth quarter of 2010, with stable volumes, prices and operations offset by rising input costs. Input costs (particularly fiber, energy and chemicals) are expected to be steeper. We thus maintain our Neutral recommendation backed by a short term Zacks #3 Rank (Hold).
Memphis, Tennessee-based International Paper Company is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its business through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. International Paper competes with MeadWestvaco Corporation (MWV) and Weyerhaeuser Co. (WY).
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