International Paper Company (NYSE:IP) announced today that it is discussing the possibility of combining its paper distribution business, Xpedx, with Unisource.

International Paper Company

According to International Paper Company (NYSE:IP), Xpedx and Unisource are both business-to-business distributors of printing, packaging, and facility supplies. Unisource proposed the merger of its business with the global paper and packaging company on April 19, 2013. The two companies entered into a non-binding letter of intent to explore a possible deal.

Under the letter of intent, the structure of the transaction is “Reverse Morris Trust” wherein International Paper Company (NYSE:IP) will contribute the assets of Xpedx to the combined company. International Paper will receive a dividend that will be financed with debt under the capital structure of the combined corporation.

International Paper Company (NYSE:IP) said that the combined corporation will be a spin off to the shareholders of the company, and it will immediately merger with Unisource in a transaction that is tax free for its shareholders.

John Faraci, chairman and chief executive officer of International Paper Company (NYSE:IP), thinks the proposed merger has a potential to go through. He said, “This is a unique opportunity for Xpedx and Unisource to create a new company that is stronger, more competitive and [can] provide even greater value to customers. Both companies are well-run, with a lot of talented employees and a good customer base.”

The two companies agreed to negotiate exclusively with each other for a period to either reach a definitive agreement or terminate the letter of intent.

According to International Paper Company (NYSE:IP), “No assurances can be made that the parties will reach agreement on a mutually acceptable transaction or that the transaction, if completed, will be on the terms outlined in the letter of intent.”  The company said that if both parties failed to reach an agreement, Xpedx would continue its business operations and remain a unit of International Paper.

Both parties are still negotiating the amounts of relative ownership by International Paper and Unisource shareholders in the merged corporation. The two companies are also discussing the amount of dividend payment to International Paper. After the spin-off and merger, the new corporation will become an independent publicly traded company. Its management will be led by executives from Xpedx and Unisource, and its board will composed of independent directors.

International Paper Company (NYSE:IP) also emphasized that it has no intention to seek alternative transactions for Xpedx.