RPT-BREAKINGVIEWS-International Paper thinks inside deal box again

By Jeffrey Goldfarb

NEW YORK, Jan 29 (Reuters Breakingviews) - There's nothing like opening up a big box of strategic whiplash. Just a year after International Paper IP.N sealed a $7 billion acquisition to create a cross-border powerhouse, the cardboard maker decided to split the company back into its original regions. Even if it's a better way to package the business, shipping and handling will cost a bundle.

Landing UK-based DS Smith was no easy feat. Mark Sutton, International Paper's CEO at the time, won a bidding war against rival Mondi MNDI.L to expand his empire, calling it a "logical next step." Despite the lack of geographic overlap, he promised more than $500 million of annual synergies, most of them from slashing expenses.

The company's investors and Sutton's successor, Andy Silvernail, failed to see the logic. International Paper unveiled plans on Thursday to carve out the European arm as a separately traded entity, leaving it and the North American operation to go their own ways in "distinct market environments." Any notion that this might have been the cagey plan all along can be dispelled by the fresh roster of financial and legal advisers. Moreover, the $20 billion company couldn't say for sure that the spinoff will be tax-free for shareholders.

It would be another unpleasant consequence from the misadventure. Since completing the DS Smith deal in January 2025, International Paper shares had tumbled around 25%. The breakup, accompanied by a quarterly earnings disappointment, sparked another 9% decline. The company only generated an 8% total shareholder return, including reinvested dividends, over the past five years compared to 86% from rival Packaging Corp of America PKG.N and more than 70% for State Street's materials sector ETF.

International Paper also will cede most of the savings it touted from buying DS Smith, saying they would take four years to fully realize. Undoing the deal is expected to take at least a year, creating additional management distraction as it tries to swing this year's barely positive operating margin closer to the industry's nearly 10% forecast average calculated by Visible Alpha for 2026.

Silvernail may be right that the newly enlarged International Paper is better apart than together. Europe's economy and its customers are far different than those across the Atlantic, making it easier to tailor its guiding principle of focusing on the most profitable 80% of the business. All the heavy lifting required to get there, however, is a reminder to CEOs elsewhere to think outside the financial engineering box.

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CONTEXT NEWS

International Paper said on January 29 that it would split the North American and European parts of its business into separately traded companies, one year after the U.S.-based company completed a $7 billion acquisition of British peer DS Smith.

The spinoff of the European packaging unit will take about 12 to 15 months to complete, and the final terms of the structure will determine whether it is tax-free to shareholders, International Paper said.

Jefferies and Evercore are advising on the breakup.