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International Paper Divests North America Consumer Packaging

International Paper Company IP recently completed the divesture of its consumer packaging business in North America. The assets were sold to Graphic Packaging Holding Company GPK, a leading provider of paper-based packaging solutions for food, beverage and other consumer product companies. The divested asset portfolio included two manufacturing plants and four converting facilities with employee strength of roughly 3,900.

Graphic Packaging will own 79.5% of the combined company while International Paper will have ownership of the remainder. The transaction would help Graphic Packaging extend its business in the foodservice and folding carton markets. Also, the divesture helped International Paper to focus on its core businesses and strengthen its balance sheet as Graphic Packaging assumed $660 million of its debt.

Over the years, International Paper has divested its non-core businesses to focus more resources on high-return capital projects in its core businesses that can drive additional earnings growth. With continued portfolio restructuring activities, the paper and packaging products manufacturer aims to improve its long-term profitability as it faces stiff competition from diverse players across the industry. International Paper has underperformed the industry in the last three months with an average return of 3.5% compared with 8% for the latter.

In September last year, International Paper completed the divesture of its foodservice business in China. The assets were sold to Huhtamaki Hong Kong Limited, one of the world’s largest packaging companies with 68 manufacturing units and 23 sales offices in 34 countries, for an undisclosed amount. The divested asset portfolio included two manufacturing plants with employee strength of roughly 200.

International Paper has strategically offloaded businesses in China to focus more on its U.S. operations. It believes that it could cater to the Chinese and Asian markets more effectively by supplying globally competitive products primarily through its Ilim joint venture in Russia and through exports from the United States and other parts of the world.

In 2016, International Paper sold its corrugated packaging business in China and Southeast Asia to Xiamen Bridge Hexing Equity Investment Partnership Enterprise, which specializes in packaging and related industries, for approximately RMB 1 billion ($150 million). These included 18 manufacturing plants with employee strength of about 3,000.

In 2015, the company also sold 55% equity interest in its Chinese coated-board joint venture with Shandong Sun Holding Group Co., Ltd. for RMB 149 million (roughly $23 million). The joint venture had one manufacturing facility in the Shandong Province, which produced about 1.4 million metric tons of coated-board products.

Moving forward, International Paper aims to continuously undergo restructuring initiatives to transform itself into a core packaging company. It intends to invest considerably to further improve its North American containerboard mill system, enhance product quality and reduce manufacturing and delivery costs. These projects are expected to have a collective internal rate of return of 20%.

International Paper currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include DS Smith Plc DITHF and Sappi Limited SPPJY, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

DS Smith has a modest long-term earnings growth expectation of 8%.

Sappi Limited has a modest long-term earnings growth expectation of 7.6%.

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