WEBVTT - Vertical's Dillon on IP Buying WY Pulp Asset: 'Win Win' (Audio)

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<v Speaker 1>Paper, International Paper buying Warehouser's pulp business price tag two

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<v Speaker 1>point to billion dollars. Here to tell us more about it,

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<v Speaker 1>as Chip Dylan, he's a partner and head of Global

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<v Speaker 1>Paper and Packaging Practice at Vertical Research Partners. Chip Dlon,

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<v Speaker 1>thank you very much for joining us. Good to join you, PIM.

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<v Speaker 1>All right, So why is International Paper making this purchase? Well,

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<v Speaker 1>you know, International Papers sort of boxed in part in

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<v Speaker 1>the pun in terms of its ability to grow, given

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<v Speaker 1>that they are the largest in corrugated boxes in the US,

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<v Speaker 1>and I don't think that the antitrust authorities would let

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<v Speaker 1>them grow bigger. This is a specialty niche business. The

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<v Speaker 1>pulp that they are buying is used in high end

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<v Speaker 1>consumer products that are used for absorbency, such as disposable diapers,

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<v Speaker 1>feminine care products, and adult and continent products. And so

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<v Speaker 1>I think it's a very strong market that's growing pretty

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<v Speaker 1>rapidly around the world, and so it's an attractive avenue

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<v Speaker 1>for them. Now, this is called fluff pulp. Correct, yes,

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<v Speaker 1>fluff pulp. So what will be left at Warehouser after

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<v Speaker 1>this purchase, Well, Warehouser will essentially be out of the

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<v Speaker 1>paper and pulp manufacturing side of the business, and what

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<v Speaker 1>you have with Warehouser is the largest tree owner or

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<v Speaker 1>timberland owner UH in the United States, coupled with some

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<v Speaker 1>wood products manufacturing facilities that use the timber from those lands.

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<v Speaker 1>So Warehouser will in essence become more of a pure

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<v Speaker 1>play and for international paper this deal will be what

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<v Speaker 1>a creative to earnings well, you know, pim truth be told.

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<v Speaker 1>Just about anything you do this day with the money

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<v Speaker 1>for nothing in the sense of low interest rates is

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<v Speaker 1>going to prove a creative. But I would say that

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<v Speaker 1>even discounting that, it is a very attractive deal for

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<v Speaker 1>international paper. When you look at the fluff market, it's

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<v Speaker 1>a very technically demanding UH product in fact us to

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<v Speaker 1>the fluff that was made before the nineteen nineties was

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<v Speaker 1>made by Procter and Gamble and Kimberly Clark, which is,

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<v Speaker 1>you know, are very high end consumer products companies, and

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<v Speaker 1>they only in the last twenty five years have if

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<v Speaker 1>in essence, sold off those operations for others to make

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<v Speaker 1>the fluff pulp. So there's really only three or four

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<v Speaker 1>major players. It's not a very wildly swinging commodity price

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<v Speaker 1>type product. And so it gives steady, solid returns and

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<v Speaker 1>that's more what i P is seeking to be. You'll

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<v Speaker 1>notice that in the corrugated box business they've seen their

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<v Speaker 1>returns get much more stable in the last seven eight

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<v Speaker 1>years as they and others have consolidated that business. And

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<v Speaker 1>who are there big competitors we talked in Georgia Pacific.

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<v Speaker 1>Georgia Pacific, which you know is privately owned UH Warehouser course,

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<v Speaker 1>will be leaving and dom Tar is the other major buyer.

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<v Speaker 1>And I will add this, I don't think the government

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<v Speaker 1>necessarily will let i P buy all of the Warehouser

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<v Speaker 1>assets without some divestitures, but I do think they're going

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<v Speaker 1>to allow them. And if there are divestitures to them,

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<v Speaker 1>I think Domtar is the most likely buyer of the

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<v Speaker 1>mill or two that would be required to be divested

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<v Speaker 1>and and so it should be a win win win

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<v Speaker 1>all around. And what about the actual paper mills, what

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<v Speaker 1>are they buying? Where are they located? Well, these mills

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<v Speaker 1>are located, uh, basically in the southeastern United States. There's

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<v Speaker 1>one that's up in Canada. But what's interesting is is

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<v Speaker 1>that i P has two mills already in the Fluff

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<v Speaker 1>area that are located near one of Domtar's mills, So

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<v Speaker 1>it wouldn't surprise me if i P actually was if

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<v Speaker 1>you will upgrading buying the Warehouser assets which used to

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<v Speaker 1>be owned by Procture and Gamble, and and and maybe

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<v Speaker 1>it would be open to selling one or both of

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<v Speaker 1>its own mills if it's required, and we're not trying

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<v Speaker 1>to say they will be required. I would also add

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<v Speaker 1>I think that i P and Domtar are going to

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<v Speaker 1>look better in this than Warehouser necessarily will, because they

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<v Speaker 1>have a pretty stiff tax bill on the sale of

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<v Speaker 1>these mills. Chip, just last point to you. International Paper

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<v Speaker 1>the stock pays about a four percent dividend, It's up

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<v Speaker 1>more than fifteen percent so far this year, trades at

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<v Speaker 1>forty dollars to share. Do you recommend people buying it? Absolutely?

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<v Speaker 1>In fact, both i P and Domtar are are stocks

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<v Speaker 1>we would recommend people buying upside. Thank you very much,

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<v Speaker 1>Chip Dylan. He is a partner head of Global Paper

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<v Speaker 1>and Packaging Practice at Vertical Research Partners. Shares of International

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<v Speaker 1>Paper up fifteen cents right now forty three dollars and

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<v Speaker 1>forty three cents