Mergers and acquisitions remain a key strategy for International Paper to strengthen its long-term business proposition. In North America, the company envisions a large opportunity within its industrial packaging businesses, which continue to generate the best margins in the industry. The company is taking initiatives to drive further margin expansion over time across the business. International Paper is also continuing with its reinvestment opportunities, which include the restart project for its containerboard business; the expansion of its Canton, OH foodservice facility; and the coated paperboard enhancement project.
In July 2014, International Paper divested its distribution business, xpedx, and merged it with distribution solution firm Unisource Worldwide, the parent company of UWW Holdings, to form a new publicly traded entity called Veritiv Corporation VRTV . International Paper received $400 million in cash and owns 51% stake of the new company, with UWW Holdings owning the remaining stake.
With the divesture of xpedx, the company's overall margins and return on invested capital are also likely to increase, with expected improvements in procurement, replenishment orders, stock keeping units (SKU), and supply chain mechanisms. The formation of Veritiv is expected to unlock considerable value for International Paper and generate significant synergies. International Paper is likely to gain from the extensive geographic footprint, wide-ranging product portfolio and differentiated service platform of Veritiv. The spinoff is a part of the company's restructuring initiatives to transform itself into a core packaging company. We believe that these initiatives will boost results and will be accretive to EPS, going forward.
However, the company expects pricing and mix to be unfavorable in its North American paper business due to some seasonal weakness, and also expects to witness lower pricing and less favorable regional mix in Europe and Russia. In addition, International Paper's failure to realize synergies from acquisitions could negatively impact the company's earnings. International Paper has divested Temple-Inland's mills in Ontario, CA and New Johnsonville, TN, and its existing mill in Hueneme, CA. This has nullified some of the positives from the Temple-Inland acquisition.
International Paper currently has a Zacks Rank #3 (Hold). A couple of stocks that look promising and are worth a look now in the industry include Clearwater Paper Corporation CLW and Wausau Paper Corp. WPP , both carrying a Zacks Rank #2 (Buy).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.