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. Last Updated: 07/27/2016

Ilim Agrees to Form $1.6Bln Venture

Itar-TassA worker weighing processed paper at Kotlass pulp and paper mill in Arkhangelsk region, which is owned by Ilim Pulp.
NEW YORK -- U.S.-based International Paper said Friday that it had signed a definitive agreement to form a $1.6 billion joint venture with Russia's leading forestry firm, Ilim Holding.

International Paper, which signed a letter of intent with Ilim in October, said it would pay about $650 million for a 50 percent stake in the venture, to be called Ilim Group. It expects to close the deal in the fourth quarter.

"We view the deal ... as positive for IP both from a strategic and financial standpoint and continue to view the company's growing emerging market presence as an attractive long-term strategy," JPMorgan analyst Claudia Shank said in a note to clients.

The partners will invest $1.5 billion in Ilim's four pulp mills over the next five years to upgrade equipment, increase production capacity and make high-value paper products.

"The joint venture with Ilim positions us very well within low-cost, high-growth markets in Russia and Asia," said International Paper's CEO, John Faraci.

JPMorgan's Shank said the deal could add at least 20 cents per share to International Paper's 2008 earnings, while adding that the deal offered the largest U.S. paper company an opportunity for margin and revenue improvement.

Credit Suisse analyst Mark Connelly said that deal would be cash flow negative for a few years, however.

"The investment will result in cash outflows for the first six years, so while the math says the deal may be accretive, the project is expected to result in negative free cash until about 2013," Connelly said in a research note.

Ilim Holding has an enterprise value of about $1.6 billion and produces more than 2.5 million tons per year of market pulp, uncoated papers and packaging for sale to Russia and Asia.

The company reported earnings before interest, taxation, depreciation and amortization of about $212 million in the first half of 2007 and full-year EBITDA is forecast to surpass $400 million.

President Vladimir Putin has called on the country's forestry industry to invest more in processing and cut exports of logs. The government this year announced export duties on unprocessed timber to encourage development of the domestic industry.

Ilim Group chairman Zakhar Smushkin said the joint venture, which was approved by the Federal Anti-Monopoly Service in June, was a response both to global market challenges and appeals from the government.

"I hope this alliance will not just give a powerful impetus toward Ilim Group's development but will also open the way for the inflow of investment and know-how that our industry so badly needs," Smushkin said.

Ilim has grouped its pulp and paper mills, the largest in European Russia and Siberia, for inclusion in the joint venture.

The venture will not include International Paper's pulp and paper mill in the town of Svetogorsk, in the Leningrad region. Ilim Pulp will, meanwhile, fold its wood-products business into a separate holding company that will be Russia's largest timber processor.

The joint venture will be headquartered in St. Petersburg. Smushkin will chair a board that will include four directors from either company. International Paper senior vice president Paul Herbert will be the joint venture's CEO.