Turning point for IP



Over the last few weeks International Paper (IP) has signed agreements to sell 90 per cent of its US forestland – not bad for a month’s work. But then, once it had decided on its new direction, there was no reason for the paper maker to hold back. 

During the last week of March the company announced the sale of 287,000 acres of forestland across ten US states to conservation groups The Conservation Fund and The Nature Conservancy; on 4 April it agreed to sell 5.1 million acres to two separate investor groups; and on 11 April it revealed an agreement to sell 275,000 acres to Lyme Timber Company. The sales mark one of the largest private land transactions in history.

The divestments are part of IP’s three-part transformation plan announced last July to improve returns, strengthen the balance sheet and return cash to shareholders. Selling off forestland is a big part of this plan and involves the sale of 5.7 million of its 6.3 million acres of US forestland for the approximate price of $6.6 billion. The new focus will be on two platform businesses: packaging and uncoated business.


Spokesperson for IP Amy Sawyer explained to OPI+: "We are happy with how the strategy has gone and the value that we have got out of it. We have now kept 800,000 acres of forestland in the US, which may be sold over the coming years to maximise value of the lands. The two businesses of packaging and uncoated paper place us in the best position for our global presence in the future."


As a result of its strategy, IP will be forced to source wood fibre from elsewhere, something it has been doing for some time already. With its extra sourcing needs in mind, it has laid down long-term harvesting agreements with the organisations with which it made its recent land sale agreements, and these last for as long as 10-12 years. It also has a number of sourcing agreements with organisations in other countries such as Russia.


IP would go into no details regarding the cost of sourcing from other landowners, but maintained that the land sales were "the best value for the company". And it has certainly cashed in from the sales, making as much as $1,200 an acre for the sale of 5.1 million acres, a healthy sum by any estimate and more than the $900-$1,000 that many analysts expected.


But then the time was right to strike; the US real estate market is currently hot. The haul from the sale, which IP estimates could be as much as $11 billion, will allow the company to reduce its debt from around $10.6 billion to $5.2 billion, according to CIBC World Markets estimates. Around 30 per cent of it will go to shareholders. "We are confident in our strategy," maintained Sawyer. "It will steer the company towards a future that would improve returns to shareholders."


Some of the proceeds of the sale are expected to arrive in Q3, with the bulk arriving in Q4, she added.


The announcements have certainly revived IP’s stock from a slump in recent months. And some analysts have praised the move as the right one to strengthen the company and turn it into a better investment vehicle.


But some analysts have disagreed on the merits of the land sale strategy, claiming the overhaul goes too far and that IP is killing off a vital source of revenue in exchange for a short-term cash injection. Peter Ruschmeier at Lehman Brothers was one who was against IP’s decision to sell the forestland and pay taxes on the proceeds, believing that the company would have done better to opt for a tax-free spin-off into a timber real estate investment trust.


IP’s Sawyer dismissed these claims and reinforced the long-term profit expected from the improvement plan, the chance to reduce costs and the resulting opportunity to strengthen the company. She also voiced selective ways that IP would use the proceeds from the sales to reinvest in its global business.


IP’s recently-announced 50:50 joint venture with China’s Shandong Sun Paper is an example. IP, which operates in more than 40 countries and sells products in more than 120, is currently expanding in China where it already has some packaging operations. Its JV with China’s Shandong Sun Paper, in which IP is expected to be investing $140 million, will produce a form of coated bleached paperboard used primarily in packaging  for tobacco, drink boxes and other products – an niche area, but one that is enjoying strong demand in China.


"The move gives us a stronger presence in China," said Sawyer and added that the company was also looking at operations in Brazil. "We will now focus on emerging markets where demand is strongest, but this global focus is in no way related to our land sales. These land sales are part of a broader strategy to improve value."


When asked if IP would consider other JVs or acquisitions, Sawyer said that although she couldn’t speculate it would consider selective ways to "reinvest" the money made from the US land sales.