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International Paper, Ilim Pulp Agree to Joint Venture

Aug. 17, 2007 - International Paper and Ilim Holding S.A. have signed a definitive agreement to form a 50:50 joint venture, the largest foreign-domestic alliance in the Russian forest sector.

The joint venture will operate as Ilim Group (Ilim).

"After extensive negotiations and due diligence, we remain impressed with Ilim's performance and potential, and with demand growth in Russia and Asia for our key products," International Paper chairman and CEO John Faraci said. "Ilim has continued to strengthen its operations and substantially improve its profitability, and we're investing at a good multiple and expect attractive returns. As we continue to transform International Paper, focusing on our global uncoated paper and packaging businesses, the joint venture with Ilim positions us very well within low- cost, high-growth markets in Russia and Asia."

According to the terms of the agreement, International Paper will purchase 50 percent of Ilim Holding, S.A., for approximately $650 million, subject to certain conditions at closing. Ilim Holding has an enterprise value of approximately $1.6 billion, including debt, EBITDA of approximately $212 million for the first six months of 2007, and projected 2007 EBITDA of more than $400 million. The deal received approval from the Russian Federal Antimonopoly Service in June and is expected to close early in the fourth quarter of 2007.

"We are pleased to announce the beginning of a new stage in the Group's development," said Ilim Group chairman Zakhar Smushkin. "This alliance is an example of cooperation between Russian and international companies toward effective development and processing of Russian forest resources."

"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 added. "Our alliance is a response to global market challenges and the appeals from the Russian President and the Government of Russia. Cooperation sets the pace for increasing the share of value-added products in our industry and propels Russia to its well-deserved place in the global pulp and paper industry."

Ilim Group operates the largest pulp and paper mills located in the European and Siberian regions of Russia. On July 1, 2007, the ownership of the mills (formerly, Ilim Pulp's Kotlas Pulp and Paper Mill, Bratsk Wood Industrial Complex and Ust-Ilimsk Wood Industrial Complex) was consolidated under Russian open joint-stock company Ilim Group, a subsidiary of Ilim Holding. These mills produce annually more than 2.5 million tons of market pulp, uncoated papers and packaging. The joint venture will continue to operate this business.

A key element of the proposed joint venture strategy is a long-term investment program in which the joint venture would invest, through cash from operations and additional debt, approximately $1.5 billion in Ilim's four mills over approximately five years. This unprecedented investment in the Russian pulp and paper industry would be used to upgrade equipment, increase production capacity and allow for new high-value uncoated paper, pulp and corrugated packaging product development.

The joint venture will be headquartered in St. Petersburg, Russia, and its board of directors will continue to be chaired by Mr. Smushkin and will include four members each from International Paper and Ilim Group. In addition, Ilim has accepted International Paper's nomination of IP senior vice president Paul Herbert to be the joint venture's CEO.

The pulp and paper mill that International Paper currently owns and operates in Svetogorsk, in Russia's Leningrad region, will not be owned by the joint venture. Similarly, Ilim Pulp's wood-products enterprises will not be integrated into the joint venture; instead Ilim plans to combine them to create Russia's largest timber-processing holding company.

SOURCE: International Paper

See exclusive interview with Zakhar Smushkin in PaperAge, May/June 2007 issue:
Growing Ilim Pulp




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