Suzano, a leading global producer of market pulp, has recently confirmed its interest in acquiring the assets of International Paper with a proposal valued at US$15 billion. According to S&P Global Ratings, even if Suzano increases its debt for the acquisition, it can still maintain its investment-grade rating.
The Brazilian pulp producer is currently negotiating with banks to finance the potential offer for International Paper. This acquisition would enhance Suzano’s international presence and accelerate its growth in the sector, particularly by entering the corrugated cardboard packaging segment.
The market’s initial reaction to the potential acquisition has caused significant volatility in Suzano’s shares on the B3, including a day marked by the largest drop in the Ibovespa. This volatility has raised investor concerns about a potential downgrade in Suzano’s rating post-acquisition. However, Fabiana Gobbi, an analyst at S&P, stated: “The acquisition, which is only a possibility at the moment, would not directly lead to a downgrade”.
Since attaining investment-grade status in 2018, Suzano has focused on strengthening its market position. The merger with International Paper would not only solidify its standing as the world’s largest pulp producer but also bring stability by diversifying its operations into packaging products, which are less subject to the price fluctuations characteristic of the pulp market.
Currently, Suzano faces a challenge with approximately US$12 billion in net debt but has reiterated its commitment to preserving its investment-grade rating. The company plans to achieve this through cost-cutting measures, the sale of non-essential assets, and dividend reductions. These strategies were successfully employed during the acquisition of Fibria in 2018, demonstrating Suzano’s ability to manage its leverage effectively.
Recently, Suzano made a strategic move by acquiring a 15% stake in Lenzing, an Austrian company specializing in soluble pulp and textiles, for €230 million. This investment marked Suzano’s significant entry into the textile industry.
If the acquisition of International Paper goes through, the combined entity would have a net debt amounting to five times its EBITDA (earnings before interest, taxes, depreciation, and amortization). Gobbi noted that this ratio is above the usual multiple of 3.5 for companies like Suzano, which have a BBB- rating, just one notch above speculative grade. However, she believes that a clear strategy to reduce leverage and bring it back to investment-grade standards within three years could help Suzano maintain its credit rating.
International Paper has rejected Suzano’s initial offer of US$42 per share and is expected to reject any further attempts below US$50 per share, according to sources.
With the start-up of its new plant in Ribas do Rio Pardo, in Mato Grosso do Sul, Brazil, called the Cerrado Project, Suzano is expected to increase cash flow generation this year, expanding pulp production by 20% by next year. This growth will assist with its debts, even amid a possible decline in global prices due to increased supply.
