Domtar exits diaper business

$US920M DEAL

Domtar Corp. shares fells almost five per cent Friday after the company announced it is selling its diaper and adult incontinence business for US$920 million. The moves comes nearly a decade after adding the new line of products to offset declining paper sales.

The pulp and paper company, based in both Montreal and Fort Mill, S.C., said it has signed an agreement to sell the operations to private equity firm American Industrial Partners.

“This transaction represents a milestone in Domtar's ongoing portfolio transformation and further advances our strategic initiatives that will position Domtar for a sustainable and successful future,” John D. Williams, president and chief executive of Domtar, said.

Domtar shares fell 4.9 per cent to close at $41.68 in Toronto.

Domar said in August it was conducting a review of “value-creating alternatives” for the personal care business it launched in 2011 with the announced purchase of Attends that closed in early 2012.

The sale is part of its strategic transformation toward packaging.

“The sale is an important component of our strategic plan and will provide us with additional capital and resources to strengthen and invest in the future of Domtar, leading to a more focused business portfolio,” the company said.

Domtar said the sale maximizes value for shareholders by strengthening its balance sheet, enhancing its cash position and buying back shares.

It said the proceeds will be used to reduce debt by US$600 million and repurchase US$300 million in shares.

Domtar is converting its Kingsport, Tenn., mill to a lightweight containerboard facility with a capacity to produce about 600,000 tons of recycled linerboard and corrugated material.

“We expect construction to officially begin at Kingsport in the second quarter of 2021, setting the stage for the completion of North America's premier lightweight containerboard facility, with the ability to produce and market approximately 600,000 tons of high-quality recycled linerboard and corrugated medium, by the end of 2022.”

Analyst Paul Quinn of RBC Capital Markets said the deal was at the low end of his estimate of between US$900 million and US$1.2 billion.

“We expect that the purchase multiple of about 6.6 times our 2021 EBITDA forecast will be disappointing to investors,” he wrote in a report.

He said Domtar paid about US$1.1 billion between 2011 and 2016 for various acquisitions.

“So we view the personal care venture as a largely unsuccessful one.”

The lack of interest from a strategic buyer contributed to the low sale price, Quinn added.