Industry Reports

Deutsche Bank Reports Summaries

070228 Deutsche Bank Report - Arizona Chemicals Sale

Deutsche Bank - Equity Research

International Paper {Ticker: IP.N, Closing Price: USD 36.01, Target Price: USD 45.00, Recommendation: Buy}.

International Paper took another step toward completion of its huge asset sale program. IP announced the sale of Arizona Chemicals to Rhone Capital for $485MM in cash plus a 10% retained interest in the business. The adjusted value of the transaction is then $539MM. In its Q4 earnings presentation, IP provided an update on its transformation plan and suggested that it could receive $500MM for Arizona Chemical. We think the valuation is fair based on recent performance.

Arizona Chemicals earned $85MM in '06 EBITDA. This suggests a 6.34X multiple for the business, in-line with the 6-6.5X range that commodity chemicals businesses are trading at relative to '06. We think IP actually received reasonable value, especially when one considers that in '05, EBIT was only $6.4MM and EBITDA was $31.4MM.  On a free cash flow basis we assume that out of $85MM in '06 EBITDA, D&A was $25MM. On that basis we assume cash taxes would be around $21MM. We then assume CapEx was $18MM. On this basis, we estimate a free cash flow of $46MM and a free cash flow yield of 8.5%.