INTERNATIONAL PAPER CO /NEW/ | 2013 | FY | 3


2013: On January 3, 2013, International Paper completed the acquisition (effective date of acquisition on January 1, 2013) of the shares of its joint venture partner, Sabanci Holding, in the Turkish corrugated packaging company, Olmuksa International Paper Sabanci Ambalaj Sanayi ve Ticaret A.S. (now called Olmuksan International Paper or Olmuksan), for a purchase price of $56 million. The acquired shares represent 43.7% of Olmuksan's shares. Prior to this acquisition, International Paper held a 43.7% equity interest in Olmuksan.

Because the transaction resulted in International Paper becoming the majority shareholder, owning 87.4% of Olmuksan's outstanding and issued shares its completion triggered a mandatory call for tender of the remaining public shares which began in March 2013 and ended in April 2013, with no shares tendered. As a result, the 12.6% owned by other parties are considered non-controlling interests. Olmuksan's financial results have been consolidated with the Company's Industrial Packaging segment beginning January 1, 2013, the effective date which International Paper obtained majority control of the entity.

Following the transaction, the Company's previously held 43.7% equity interest in Olmuksan was remeasured to a fair value of $75 million, resulting in a gain of $9 million. The fair value was estimated by applying the discounted cash flow approach, using a 13% discount rate, long-term sustainable growth rates ranging from 6% to 9% and a corporate tax rate of 20%. In addition, the cumulative translation adjustment balance of $17 million relating to the previously held equity interest was reclassified, as expense, from accumulated other comprehensive income.

The final purchase price allocation indicates that the sum of the cash consideration paid, the fair value of the noncontrolling interest and the fair value of the previously held interest is less than the fair value of the underlying assets by $21 million, resulting in a bargain purchase price gain being recorded on this transaction. The aforementioned remeasurement of equity interest gain, the cumulative translation adjustment to expense, and the bargain purchase gain are included in the Net bargain purchase gain on acquisition of business in the accompanying consolidated statement of operations.

The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 1, 2013, which was completed in the fourth quarter of 2013. 
In millions
 
  
Cash and temporary investments
 
$
5

Accounts and notes receivable
 
72

Inventory
 
31

Other current assets
 
2

Plants, properties and equipment
 
106

Investments
 
11

Total assets acquired
 
227

Notes payable and current maturities of long-term debt
 
17

Accounts payable and accrued liabilities
 
27

Deferred income tax liability
 
4

Postretirement and postemployment benefit obligation
 
6

Total liabilities assumed
 
54

Noncontrolling interest
 
18

Net assets acquired
 
$
155



Pro forma information related to the acquisition of Olmuksan has not been included as it does not have a material effect on the Company's consolidated results of operations.

2012: On February 13, 2012, International Paper completed the acquisition of Temple-Inland, Inc. (Temple-Inland). International Paper acquired all of the outstanding common stock of Temple-Inland for $32.00 per share in cash, totaling approximately $3.7 billion, and assumed approximately $700 million of Temple-Inland’s debt. As a condition to allowing the transaction to proceed, the Company entered into an agreement on a Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required the Company to divest three containerboard mills, with approximately 970,000 tons of aggregate containerboard capacity. On July 2, 2012, International Paper sold its Ontario and Oxnard (Hueneme), California containerboard mills to New-Indy Containerboard LLC, and its New Johnsonville, Tennessee containerboard mill to Hood Container Corporation. By completing these transactions, the Company satisfied its divestiture obligations under the Final Judgment. See Note 7 for further details of these divestitures.

Temple-Inland's results of operations are included in the consolidated financial statements from the date of acquisition on February 13, 2012.

The following table summarizes the allocation of the purchase price to the fair value of assets and liabilities acquired as of February 13, 2012, which was finalized in the fourth quarter of 2012.
In millions
 
  
Accounts and notes receivable
 
$
466

Inventory
 
484

Deferred income tax assets – current
 
140

Other current assets
 
57

Plants, properties and equipment
 
2,911

Financial assets of special purpose entities
 
2,091

Goodwill
 
2,139

Other intangible assets
 
693

Deferred charges and other assets
 
54

Total assets acquired
 
9,035

Notes payable and current maturities of long-term debt
 
130

Accounts payable and accrued liabilities
 
704

Long-term debt
 
527

Nonrecourse financial liabilities of special purpose entities
 
2,030

Deferred income tax liability
 
1,252

Pension benefit obligation
 
338

Postretirement and postemployment benefit obligation
 
99

Other liabilities
 
221

Total liabilities assumed
 
5,301

Net assets acquired
 
$
3,734


The identifiable intangible assets acquired in connection with the Temple-Inland acquisition included the following:
In millions
 
Estimated
Fair Value

Average
Remaining
Useful Life
Asset Class:
 
 
(at acquisition
date)
Customer relationships
 
$
536

12-17 years
Developed technology
 
8

5-10 years
Tradenames
 
109

Indefinite
Favorable contracts
 
14

4-7 years
Non-compete agreement
 
26

2 years
Total
 
$
693

 


In connection with the purchase price allocation, inventories were written up by approximately $20 million before taxes ($12 million after taxes) to their estimated fair value. As the related inventories were sold in the 2012 first quarter, this amount was expensed in Cost of products sold for the quarter.

Additionally, Selling and administrative expenses for the years ended December 31, 2013 and 2012 included $62 million before taxes ($38 million after taxes) and $164 million before taxes ($105 million after taxes), respectively, in charges for integration costs associated with the acquisition.

The following unaudited pro forma information for the year ended December 31, 2012 represents the results of operations of International Paper as if the Temple-Inland acquisition had occurred on January 1, 2012. This information is based on historical results of operations, adjusted for certain acquisition accounting adjustments and does not purport to represent International Paper’s actual results of operations as if the transaction described above would have occurred as of January 1, 2012, nor is it necessarily indicative of future results. 
In millions, except per share amounts
2012

Net sales
$
28,125

Earnings (loss) from continuing operations (a)
805

Net earnings (loss) (a)
845

Diluted earnings (loss) from continuing operations per share (a)
1.82

Diluted net earnings (loss) per share (a)
1.92


(a) Attributable to International Paper Company common shareholders.

2011: On October 14, 2011, International Paper completed the acquisition of a 75% stake in Andhra Pradesh Paper Mills Limited (APPM). The Company purchased 53.5% of APPM for a purchase price of $226 million in cash plus assumed debt from private investors. These sellers also entered into a covenant not to compete for which they received a cash payment of $58 million. Additionally, the Company purchased a 21.5% stake of APPM in a public tender offer completed on October 8, 2011 for $105 million in cash. International Paper recognized an unfavorable currency transaction loss of $9 million due to strengthening of the dollar against the Indian Rupee prior to the closing date, resulting from cash balances deposited in Indian Rupee denominated escrow accounts.

In November 2011, International Paper appealed a directive from the Securities and Exchange Board of India (SEBI) that would require us to pay to the tendering shareholders the equivalent per share value of the non-compete payment that was paid to the previous controlling shareholders. The Company has deposited approximately $25 million into an escrow account to fund the additional non-compete payments in the event SEBI’s direction is upheld. By an order dated September 12, 2012, the Indian Securities Appellate Tribunal (SAT) upheld the SEBI directive. As a result of this initial unfavorable ruling, International Paper included the $25 million escrowed cash amount in the final purchase price consideration of APPM. On October 8, 2012, International Paper appealed the SAT's decision to the Indian Supreme Court.

APPM's results of operations are included in the consolidated financial statements from the date of acquisition on October 14, 2011.

The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of October 14, 2011. 
In millions
 
  
Cash and temporary investments
 
$
3

Accounts and notes receivable
 
7

Inventory
 
43

Other current assets
 
13

Plants, properties and equipment
 
352

Goodwill
 
138

Deferred income tax asset
 
4

Other intangible assets
 
91

Other long-term assets
 
1

Total assets acquired
 
652

Accounts payable and accrued liabilities
 
67

Long-term debt
 
47

Other liabilities
 
11

Deferred income tax liability
 
90

Total liabilities assumed
 
215

Noncontrolling interest
 
37

Net assets acquired
 
$
400


The identifiable intangible assets acquired in connection with the APPM acquisition included the following: 
In millions
 
Estimated
Fair Value

Average
Remaining
Useful Life
Asset Class:
 
 
(at acquisition
date)
Non-compete agreement
 
$
58

6 years
Tradenames
 
20

Indefinite
Fuel supply agreements
 
5

2 years
Power purchase arrangements
 
5

5 years
Wholesale distribution network
 
3

18 years
Total
 
$
91

 


Pro forma information related to the acquisition of APPM has not been included as it does not have a material effect on the Company’s consolidated results of operations.

JOINT VENTURES

2013: On January 14, 2013, International Paper and Brazilian corrugated packaging producer, Jari Celulose Papel e Embalagens S.A (Jari), a Grupo Orsa company, formed Orsa International Paper Embalagens S.A. (Orsa IP). The new entity, in which International Paper holds a 75% stake, includes three containerboard mills and four box plants, which make up Jari's former industrial packaging assets. This acquisition supports the Company's strategy of growing its global packaging presence and better serving its global customer base.

The value of International Paper's investment in Orsa IP is approximately $471 million. Because International Paper acquired a majority control of the joint venture, Orsa IP's financial results have been consolidated with our Industrial Packaging segment from the date of formation on January 14, 2013. The 25% owned by Jari is considered noncontrolling interest.

International Paper follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. The Share Purchase Agreement related to Orsa IP joint venture contained both a put and a call option that would allow Jari, at the third anniversary of the joint venture formation, to put its remaining shares to IP or allow IP, at the sixth anniversary of the joint venture formation, to call the remaining noncontrolling shares from Jari. Accordingly, the noncontrolling common stock held by Jari would be considered a redeemable noncontrolling interest and meet the requirements to be classified outside of permanent equity and is therefore classified as redeemable noncontrolling interest in the accompanying consolidated balance sheets. The value of redeemable noncontrolling interest is reported at the greater of the redemption value or historical cost at the end of each reporting period. As of December 31, 2013, the Company reported the redeemable noncontrolling interest at the redemption value of $163 million.

The following table summarizes the final allocation of the purchase price to the fair value of assets and liabilities acquired as of January 14, 2013, which was completed in the fourth quarter of 2013.
In millions
 
  
Cash and temporary investments
 
$
16

Accounts and notes receivable
 
5

Inventory
 
27

Plants, properties and equipment
 
290

Goodwill
 
260

Other intangible assets
 
110

Other long-term assets
 
2

Total assets acquired
 
710

Accounts payable and accrued liabilities
 
68

Deferred income tax liability
 
37

Total liabilities assumed
 
105

Noncontrolling interest
 
134

Net assets acquired
 
$
471



The identifiable intangible assets acquired in connection with the Orsa IP acquisition included the following:
In millions
 
Estimated
Fair Value

Average
Remaining
Useful Life
Asset Class:
 
 
(at acquisition
date)
Customer relationships
 
$
88

12 years
Trademark
 
3

6 years
Wood supply agreement
 
19

25 years
Total
 
$
110

 


Pro forma information related to the acquisition of Orsa IP has not been included as it does not have a material effect on the Company's consolidated results of operations.

Due to the complex organizational structure of Orsa IP's operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Orsa IP's operating results on a one-month lag basis.

2011: On April 15, 2011, International Paper and Sun Paper Industry Co. Ltd. entered into a Cooperative Joint Venture agreement to establish Shandong IP & Sun Food Packaging Co., Ltd. in China. During December 2011, the business license was obtained and International Paper contributed $55 million in cash for a 55% interest in the joint venture and Sun Paper Industry Co. Ltd. contributed land-use rights valued at approximately $28 million, representing a 45% interest. The purpose of the joint venture is to build and operate a new production line to manufacture coated paperboard for food packaging with a designed annual production capacity of 500,000 tons. The financial position and results of operations of this joint venture have been included in International Paper’s consolidated financial statements from the date of formation in December 2011.

Additionally, during 2011 the Company recorded a gain of $7 million (before and after taxes) related to a bargain purchase price adjustment on an acquisition by our joint venture in Turkey. This gain is included in Equity earnings (losses), net of taxes in the accompanying consolidated statement of operations.

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