International Paper Co. (NYSE:IP) said Friday that it has reached an agreement with the Department of Justice (DOJ) over the Temple-Inland deal, which is expected to close this week.
The settlement positions the industry well for a price increase as demand in the domestic market has improved.While IP has agreed to divest 3 paper mills, the combined entity is still expected to have a 36 percent market share of the U.S. container board industry.
As part of the deal with the DOJ, IP is diverting its mills at Ontario, New Johnsonville and Hueneme. IP noted that the combined EBITDA for these assets are about $100 million, potentially translating to $600 million to $800 million in proceeds.
Jefferies analysts said Boise, Inc. (NYSE:BZ) could be interested in the two Californian mills given their footprint in the West Coast, while the New Johnsonville medium mill could be a strategic fit for Rock-Tenn Co. (NYSE:RKT), KapStone Paper and Packaging Corp. (NYSE:KS) and Packaging Corp. of America (NYSE:PKG), complementing well with their box assets in the region.
"With further consolidation, it supports our view that structurally the container board industry is continuing to improve," Jefferies analyst Philip Ng wrote in a note to clients.
With corrugated box shipments improving in recent months, the momentum likely spilled over into 2012 with the favorable January ISM data and IP noting that its box shipments were up 4 percent in January.
Now, the overhang on the settlement is lifted, Ng said the timing sets up nicely for a price increase as the industry heads into a stronger seasonal period, which could provide upside to estimates for Rock-Tenn and Packaging Corp. of America.
While the weakness in the export market has been a headwind, the companies have noted that export prices have started to stabilize and in certain markets, such as Mediterranean basin and LatAm, prices are starting to edge higher.
Additionally, with the Europe is experiencing an uptick in the prices of old corrugated containers (OCC) and demand stabilizing, many of the European producers have announced price increases for February and March.
"It's unclear how quickly the export market will recover, but we believe export prices have bottomed," Ng said.