International Paper Co. (IP) completed its land monetization program with the sale of 163,000 acres of land to an affiliate of Rock Creek Capital for $199 million. International Paper will receive $160 million in cash immediately and the balance (including interest) within three years. In addition, the company will receive a 20% profit interest in the affiliate.
The concerned land is located in the southeastern part of the U.S. The sale is expected to contribute $50 million in earnings to the Forest Products segment in the third quarter of fiscal 2010. Profits from the Forest Products segment are driven by land and mineral rights sales. The segment generated an operating profit of $40 million in the second quarter of 2010, primarily due to a $39 million gain on the sale of mineral rights on more than 7 million acres throughout the U.S. to Natural Resources Partners LP (NRP).
Going back, in July 2005, International Paper announced a major transformation plan starting 2006 to improve returns, strengthen its balance sheet, and return cash to shareholders. In accordance with the transformation plan, the company divested several of its businesses. In 2006, the company sold 5.6 million acres of forestland for approximately $6.6 billion, resulting in a significant decline in its forestland acreage.
Since then, International Paper managed the remaining forestlands as a portfolio and marketed them to optimize the economic value of its shareholders. The portfolio mostly consisted of properties that were held for sale to investors and other buyers for various uses or held for real estate development. As of December 31, 2009, International Paper had approximately 200,000 acres of forestlands remaining for sale in the United States, approximately 250,000 acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government owned forestlands in Russia.
Following the current sale, International Paper has approximately 24,000 acres of land in its portfolio, primarily comprising timberland tracts. The company during its second-quarter earnings call had declared that once the sale closes, it would mark the completion of its land sales program. Further, the company had planned to discontinue the Forest Products segment at the beginning of 2011.
As of June 30, 2010, International Paper had cash and cash equivalents of $1.871 billion, up from $1.749 billion as of March 31, 2010. As of June 30, 2010, the debt-to-capitalization ratio was 61.1% compared with 60.6% as of March 31, 2010. The sale will further bolster the company’s cash position, leveraging it for debt reduction through the latter half of the year and into early next year.
The economic downturn has been a severe headwind for the company. However, the company has been taking proactive measures by curtailing and closing capacities, further reducing costs and preserving cash. We believe International Paper’s acquisition of Sweden-based SCA’s Asian packaging business in April 2010 provides the scope to expand in the growing Chinese packaging market. We maintain our Neutral rating supported by a Zacks #3 Rank (Hold) on the company, waiting for results from its initiatives.
Memphis, Tennessee-based International Paper 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
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