International Paper To Divest Foodservice Business In China

Paper and packaging products manufacturer, International Paper Company (NYSE:IP) recently inked a definitive agreement to divest its foodservice business in China. The transaction is likely to be completed in the next couple of months, subject to mandatory closing conditions and regulatory approvals.

The assets will be 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 held-for-sale asset portfolio includes two manufacturing plants involving employee strength of roughly 200.

The foodservice business of International Paper offers innovative single-use packaging solutions to cater to the evolving needs of its customers. The company manufactures hot and cold cups, food containers and buckets, lids and accessories, as well as various environment-friendly options for foodservice establishments across the country – from one-store locations to large national chains. These products are developed from responsibly managed forests as the company remains committed to improving its environmental footprint through sustainable business practices.

Over the past couple of years, the company has strategically offloaded businesses in China to focus more on its U.S. operations. The company 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 exports from the U.S. and other parts of the world.

Last year, 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 involving 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 intends to focus more resources on high-return capital projects within its core businesses that can drive additional earnings growth. The company has outperformed the Zacks categorized Paper & Paper Products industry in the last three months with an average return of 9.6% compared with a 6.5% gain for the latter. International Paper is undergoing restructuring initiatives to transform itself into a core packaging company. The company intends to invest $300 million through 2017 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%.

In North America, the company envisions a large opportunity within its industrial packaging business, which continues to generate the best margins in the industry. The company is taking initiatives to drive further margin expansion across the business through inorganic growth. The acquisition of Weyerhaeuser’s pulp business has strengthened its position in the global fluff pulp market and augmented its operating cash flow. With a combined capacity of nearly 1.9 million metric tons of pulp, the acquisition is likely to generate annual synergies of approximately $175 million by the end of 2018 along with a higher flexibility to manage a wide portfolio of products to meet customer needs through superior R&D capabilities and priceless patent portfolio.

International Paper currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Fibria Celulose S.A. (NYSE:FBR) , WestRock Company (NYSE:WRK) and Clearwater Paper Corporation (NYSE:CLW) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fibria Celulose has a long-term earnings growth expectation of 18.4%.

WestRock has a long-term earnings growth expectation of 9.1%. It has beaten earnings estimates in each of the trailing four quarters with a positive surprise of 9.8%.

Clearwater Paper has a long-term earnings growth expectation of 5.0%.

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