Industry Reports

Deutsche Bank Reports Summaries

080317 Deutsche Bank Report - IP Requires WY Packaging

Deutsche Bank - Equity Research

International Paper {Ticker: IP, Closing Price: USD 29.47, Target Price: USD 40.00, Recommendation: Buy}.

* IP agrees to buy WY's packaging business IP will pay $6B in cash, and the deal is expected to close in 3Q.

Equity investors seem to think that WY got the better of the deal, as IP's stock fell sharply, while WY's stock rose slightly. We think the opposite. We maintain our Buy ratings on both IP and WY – IP based on the value in this deal and modest valuation on current earnings power, and WY based on asset value and restructuring potential.

* The tax man is taking a big chunk of WY's proceeds

We previously estimated that WY's packaging business was worth $5.0- 5.5B, but this was based on a deal structure which would be tax-free to WY, such as the Reverse Morris Trust employed in the merger of the white paper business with Domtar. This cash deal will trigger a taxable gain to WY of $5.0B, and a tax liability of almost $2B.

* WY's pain is IP's gain

The net present value of IP's tax shield is worth roughly $1.4B. This is a somewhat smaller amount than WY's tax liability, because the benefits of IP's tax shield will be spread out over several years. Adjusting for this tax benefit, as well as one-time integration costs and reasonable synergy savings, we think the adjusted LTM EV/EBITDA ratio was 5.6x – a bargain compared to containerboard pure plays, which we think are themselves trading at depressed levels.

* Valuation/risks

As detailed below, our price target on IP is based on EPS and EV/EBITDA multiples, as well as a modified DCF analysis. Our price target on WY is based primarily on a net asset value approach. For both companies, the key risks include the economy, foreign exchange, capacity growth abroad, and rising input costs.