International Paper Closes SCA Deal – Analyst Blog

International Paper (IP) is tripling its existing Asian operation by completing the acquisition of Svenska Cellulosa Aktiebolaget Group’s (“SCA”) Asian packaging arm for approximately $200 million in cash. The acquired assets consist of 13 corrugated box plants and two specialty packaging facilities primarily located in China. The acquisition strengthens International Paper’s presence in the world’s largest corrugated market.

 

Sweden-based Svenska Cellulosa Aktiebolaget Group is a global consumer goods and paper company. It develops, produces and markets personal care products, tissue, packaging, publication papers and solid-wood products, and sells products in more than 100 countries. It is Europe’s second-largest producer of corrugated board and containerboard and one of the largest producers of corrugated board in China. The SCA’s Asia Pacific business group manufactures and sells packaging, personal care products and tissue.

 

On April 26, 2010, International Paper announced its intention to acquire SCA’s packaging business in Asia, subject to post-closing adjustments. The purchase price of $200 million represents about eight times 2009 EBITDA (earnings before interest, tax, depreciation and amortization) and about six times the projected 2010 EBITDA.

 

International Paper’s existing footprint of 12 corrugated box plants in China is complemented by SCA’s facilities. The combined sales of the new corrugated business will be $350 million, more than three times the current International Paper’s $100 million.

 

Expecting a boost in demand for corrugated products, the company aims to grow revenues to $800 million by utilizing current idled capacity but escaping any additional capital investment. The company estimates annual growth to be 15% in China.

 

SCA’s Asian packaging business generated revenues of $250 million in 2009. The purchase price of $200 million also stands at 80% of revenues. Even though SCA had full installed capacity to meet the needs of a growing market, it operated its business utilizing just 40% of its capacity in 2009 due to the recession. Consequently, International Paper has immense scope for improvement backed by its unused capacity.

 

With this acquisition, International Paper expands its Chinese packaging market with high-quality assets at a much cheaper price in contrast to the cost and time the company would have had to incur to build these facilities from scratch.

 

However, weak volumes, input cost pressures and the company’s inability to offset the same with increased prices remain a concern. We thus maintain our Neutral rating and Zacks Rank #3 on the stock.