Analyst: Investors Should 'Applaud' International Paper For Ending Proposed M&A Deal

International Paper Co IP, a producer of renewable fiber-based packaging, confirmed Tuesday it will no longer pursue an acquisition Smurfit Kappa Group and investors should "applaud" the decision, according to BMO.

The Analyst

BMO Capital Markets' Mark Wilde upgraded International Paper from Market Perform to Outperform with a price target lifted from $65 to $70.

The Thesis

International Paper's decision to no longer pursue an acquisition of Smurfit Kappa is "good news" for shareholders, Wilde said in the June 6 note. The decision removes any near-term concerns that the company is pursuing a fully priced or even over-priced acquisition of a company that would generate a culture clash and come at the "relatively late" stage in the economic cycle.

International Paper has a reputation of overseeing poorly performing acquisitions and by not chasing Smurfit Kappa the management team sent a "very loud and constructive message" to the investment community, the analyst wrote. As such, the company now has the necessary resources to pursue more attractive options which could help boost the stock's "substantial" valuation discount to its peers.

The analyst's new $70 price target is based on an 8.2x multiple on 2019 EBITDA estimates and the prior $65 price target was based on a pro forma combined EBITDA of Intentional Paper had it acquired Smurfit Kappa.

Price Action

Shares of International Paper were trading around $58.76 Thursday afternoon.

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