NEW YORK (Dow Jones) -- International Paper Co. (NYSE:IP) has agreed to buy Weyerhaeuser Co.'s (NYSE:WY) containerboard, packaging and recycling business for $6 billion in cash, a deal significantly expanding IP's operations in North America, the companies said Monday.

The Memphis-based paper and packaging maker (IP) expects the acquisition to close in the third quarter and contribute to earnings starting in 2009. The company will also realize a related tax benefit of about $1.4 billion and sees about $400 million in related cost cuts.

"IP will become North America's largest containerboard producer following the deal," said J.P. Morgan analyst Claudia Hueston.

"We believe the increased concentration will lead to improved market fundamentals," she added in a research note.

The move came as something of a surprise. International Paper (NYSE:IP) has been shifting its operations focus to emerging markets and away from a flat and more volatile North America.

In a broadly lower market, Weyerhaeuser's shares traded up more than 1% to $ 62.71 at last check. However, shares of International Paper (NYSE:IP) were down nearly 8% to $29.71, possibly due to concerns on how it intends to finance the deal.

"We had expected the 'transformed' but always restless IP to return more cash to shareholders, not to make a major acquisition," wrote Gimmie Credit analyst Carol Levenson in a note, adding that nothing makes investors and bondholders more "queasy" than a company announcing a multbillion-dollar deal amid " unprecedented" market turomoil.

Levenson downgraded her credit rating for the company to deteriorating.

International Paper (NYSE:IP) said it has secured financing for the deal from five banks: Deutsche Bank, J.P. Morgan, UBS, Goldman Sachs, and the Royal Bank of Scotland.

For Weyerhaeuser (WY), the deal completes a review of what to do with the containerboard and packaging business, said Steven Rogel, chairman and chief executive of the Federal Way, Wash., forest-products company.

Last May, the company had said that it would assess strategic alternatives for the business, which has 14,300 employees.

Weyerhaeuser said it would use proceeds largely to reduce debt. Morgan Stanley advised Weyerhaeuser on the transaction.

John Faraci, International Paper's (NYSE:IP) chief executive, said on a conference call with analysts that buying Weyerhaeuser's containerboard, packaging and recycling business took advantage of an attractive opportunity that would improve earnings and cash flow through additional sales and improvements to the supply chain.

Further, the agreement expands its business in the U.S. and Mexico and diversifies its customer base.

"This deal represents a compelling opportunity for International Paper (NYSE:IP) and our shareholders at a very attractive valuation," Faraci said, noting that 40% of the cost savings projected by management would occur within the first year of ownership.

After related cost cuts, International Paper (NYSE:IP) expects annual earnings before income, taxes, depreciation and amortization to reach $3.9 billion following the merger, up nearly 40% compared to its current $2.8 billion.

International Paper's (NYSE:IP) been expanding its presence in Asia, East Europe and Latin America to take advantage of rising demand in those regions while sales have been flat to down in North America. Last year, the company sold off nearly all its North American timberland, raising $11.3 billion for future investments, to pay off about $6.2 billion in debt and for buying back about $1.4 billion in stock.

Containerboard industry as beneficiary

The deal also lifts International Paper's (NYSE:IP) share of the North American containerboard market to 13% from 7%, which could pay long-term benefits for the wider industry because of potential capacity reductions and improved product pricing.

"We view the deal as a positive for the containerboard industry," J.P. Morgan's Hueston said. Timberland-Inland Inc. (TIN), Smurfit Stone Container (NASDAQ-NMS:SSCC) ( SSCC), Rock-Tenn Co. (NYSE:RKT) (RKT) and Packaging Corp. of America (NYSE:PKG) (PKG) all stand to gain, she said.

Sales generated by the Weyerhaeuser-owned unit increased in 2007 as a result of a rise in export sales, partly due to high-quality recovered fiber demand in China and high-performance containerboard and packaging demand in other industrial countries. Packaging volume, however, was down.

Weyerhaeuser has been taking a number of steps to increase its competitiveness and boost returns. Earlier in 2008, the company has said it would close a number of plants and mills and divest other assets.

On Feb. 1, management said it would figure out what to do with its commercial construction sales business, which provides engineered lumber products and services to contractors. Alternatives include selling the business, continuing to operate it or some combination of the two.

And two weeks ago, Weyerhaeuser said it would partner with Chevron Corp. (NYSE:CVX) (CVX) , the San Ramon, Calif., integrated oil giant, on a 50-50 venture to develop renewable transportation fuels from non-food sources.

    (END) Dow Jones Newswires   03-17-08 1406   Copyright (c) 2008 Dow Jones & Company, Inc.