Int'l Paper to buy Weyerhaeuser unit for $6 bln

NEW YORK (Reuters) - International Paper (IP.N) said on Monday it has agreed to acquire Weyerhaeuser Co's (WY.N) packaging business for $6 billion, making it North America's largest corrugated box maker.

The paper and packaging industry in North America and Europe has been consolidating and reducing production capacity in a bid to tackle soaring raw material costs and dwindling demand for paper due to the increasing influence of the Internet.

"This is an acquisition that is being made not for next quarter's earnings, but to position International Paper for 2010," said International Paper's chief executive, John Faraci, in an interview with Reuters.

International Paper has shed a large part of its non-core operations, while expanding the company through investments in South America and Eastern Europe.

"This deal is a win, win, win," said Longbow Research analyst Joshua Zaret, "It's a win for International Paper, a win for Weyerhaeuser and a win for the industry."

Memphis, Tennessee-based International Paper said that, because the transaction is a purchase of assets rather than of stock, the company will realize a tax benefit of about $1.4 billion. Taking this benefit into account, the net purchase price is about $4.6 billion.

In a note to clients, JPMorgan analyst Claudia Shank said the deal is about as good as Weyerhaeuser could have gotten, given the credit market conditions. But, cautioned that the company would be exposed to greater earnings volatility given its heightened exposure to wood products and homebuilding.

Shares of International Paper were down 8.5 percent to $29.51 in afternoon trade on the New York Stock Exchange, while those of Weyerhaeuser rose 0.7 percent to $62.41.

DEBT WEIGHS

International Paper said it had secured $6 billion in loans to finance the purchase, including an 18-month term loan for $4 billion. It declined to comment on the terms of that loan.

"The decision we made a couple of years ago to keep our balance sheet strong, pay down debt and maintain our financial flexibility has really paid off," said Faraci, adding that this gave the company an advantage over other competitors in the current credit environment.

Temple Inland Inc TIN.N and Smurfit-Stone Container Corp SSCC.O had also been linked with a possible bid for the Weyerhaeuser assets. But with the current credit environment analysts had become increasingly skeptical about their chances of pulling-off such a deal.

Faraci said that, including cost savings, he expects the deal to generate earnings before interest, taxes, depreciation and amortization of over $1 billion.

However, the cost to insure the debt of International Paper surged 30 percent following the announcement of the deal, according to Markit Intraday.

International Paper's credit default swaps weakened to around 295 basis points, or $295,000 per year for five years to insure $10 million in debt, from 227 basis points at Friday's close.

"Given the company's historically aggressive nature, and with no clear path to balance sheet restoration yet illuminated, we are downgrading our credit score to 'deteriorating,'" said Gimme Credit analyst Carol Levenson.

International Paper said it expects the deal to boost its 2009 earnings and it anticipates about $400 million in annual cost savings from the deal, with about 40 percent of those savings being realized within 12 months of closing the deal. The deal is expected to close in the third quarter.

The acquisition includes nine containerboard mills, 72 packaging locations, along with a host of other facilities and affects about 14,300 employees.

WEYERHAEUSER LOOKS AHEAD

Weyerhaeuser, which announced that it was exploring the possible sale of its packaging business in May 2007, can now focus more on its key timberland assets.

Interestingly, both the U.S. forest products makers have chosen opposing paths. International Paper is betting on paper and packaging and has sold its vast timberland holdings, while Weyerhaeuser has spun-off its paper and packaging businesses so as to focus on its timberland holdings.

In a statement, Weyerhaeuser's Chief Executive Steven Rogel said the company sees its future in the trees and land that it owns.

But, Weyerhaeuser has in recent months been badly hurt by the slump in the U.S. housing market, which has hurt its wood products and real estate businesses.

"People believe that Weyerhaeuser is still an asset play and this deal certainly does nothing to change that view, if anything it enhances that view," said Zaret.

(Reporting by Euan Rocha; Additional reporting by Matt Daily, Karen Brettell and Yinka Adegoke editing by Dave Zimmerman and Gunna Dickson)