Domtar Corp. is selling its diaper and adult incontinence business for US$920 million, nearly a decade after adding the new line of products to offset declining paper sales.
The Montreal and South Carolina-based pulp and paper company says it has signed an agreement to sell the operations to private equity firm American Industrial Partners.
It follows a decision announced in August to conduct 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 towards packaging.
“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,” said Domtar CEO John Williams
He said the sale maximizes value for shareholders by strengthening its balance sheet, enhancing its cash position and buying back shares.
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.
Construction hopes to begin in the second quarter and finish by the end of 2022, ahead of earlier expectations.
The company's goal is to expand packaging capacity to up to 2.5 million tons over time.
Domtar shares lost $1.61 or 3. per cent at $42.24 in early afternoon trading on the Toronto Stock Exchange.
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.
With the sale of the personal care business expected to close in the first quarter, Quinn said Domtar becomes a more attractive acquisition target to containerboard producers given the potential to convert several facilities.
"While we are disappointed by the price received, the transaction does simplify the story and position Domtar as a potential acquisition target."
This report by The Canadian Press was first published Jan. 8, 2021.
Companies in this story: (TSX:UFS)
Ross Marowits, The Canadian Press
