With a current market capitalization of ~$20 billion, IP is the largest player in the highlyconsolidated North American Containerboard ("NACB") industry, which benefits from
strong pricing power despite flat volumes due to nearly 100% operating rates. In 2009 and again in 2011, IP took on substantial leverage to acquire assets that dramatically increased IP's revenue mix towards NACB. After a complex integration process, this year NACB will generate at least 60% of IP's total EBITDA and 75% of all North American EBITDA. This "new" IP should produce strong and stable free cash flow, allowing increased capital return to shareholders and valuation uplift.
Aided by these important NACB tailwinds, IP has multiple near‐term catalysts. The most immediate should come by the end of this month when the market learns if the industry's latest price increase has been officially sanctioned. Proceeds from post‐merger asset sales combined with IP's robust pro forma free cash flow should complete IP's multi‐year deleveraging, which has reduced debt by ~$10 billion over the last four years. With a cleaner balance sheet and no opportunities for further acquisitions, we believe IP's consistent cash flows will be returned increasingly to shareholders through buybacks and dividend increases. Even using stressed assumptions, IP should generate +$2.00 FCF per share, and we expect the dividend will eventually rise to this level.
Finally, we are always keenly attuned to a company's management team and its incentives. In 2014, IP mandates the retirement of its CEO John Faraci. During his decade‐long tenure as CEO, Faraci has almost single‐handedly consolidated the NACB industry and by the end of this year will have grown IP's revenue by ~20% and EBITDA by more than 50%, while cutting net debt by $5 billion. We expect Faraci to cement his impressive legacy by using new IP's balance sheet to repurchase shares, increase its dividend, and raise its stock price, reflecting the company's newfound strength.
Important Note to Our Investors and Unintended Recipients: Third Point's Quarterly Letters are designed to inform our investors about recent portfolio developments and provide our views of the market environment. Our letters are not investment recommendations for the general public. The legal disclaimer makes clear that we may trade in and out of positions discussed at any time and undertake no duty to update anyone, except to the extent we are required to make filings with the SEC. Investors who choose to take action based on our investment ideas do so at their own risk.
From Daniel Loeb’s first quarter 2013 investor letter.