International Paper’s (IP) high short position results largely from the DS Smith acquisition, with overvaluation concerns adding pressure. Currently at consensus price target, IP’s rising short interest may reverse if the deal completes. If the deal falls through, however, short-sellers could face a significant squeeze risk. • IP has one of the highest short positions as a percentage of float among S&P companies. The stock is not distressed and is not trending downward. • The trend has been higher stock prices coupled with increasing short positions. • As the stock has risen, the P/E ratio has also increased. At the same time, the number of "sell" ratings from analysts has risen to 18%, which corresponds with the large short position. The stock is currently trading at the consensus price target.

IP Stock and Forward PE Ratio

• Another factor driving the short position is the deal with DS Smith, a UK-based company. Each SMDS LN share will be converted into 0.1285 shares of IP if the deal is completed. • For each dollar of SMDS purchased, an arbitrageur would need to short about one dollar of IP. • SMDS has a market cap of $9 billion, while IP has a market cap of $19 billion, meaning IP is acquiring a company half its size, which is significant compared to other deals. • The deal was announced in April but traded at a wide spread until June, when Brazilian company Suzano announced it would not pursue an acquisition of IP. After that, the spread narrowed, and the deal began to trade more like a typical transaction.

Smith/IP Deal Spread

• After the announcement, the short interest on IP increased from 5% to 13%. • Arbitrageurs represent a significant portion of the short interest in IP.

• If the deal is completed, the short positions will be covered by long positions, with no significant market impact on the stock, though short interest will likely return to pre-deal levels. • IP currently has a "squeeze score" of 70, which is notable. However, it would only become a significant issue if the deal falls through. • If the deal breaks, which is unlikely, the arbitrageurs will be caught in a short squeeze, as their positions would no longer be hedged.

International Paper’s high short interest primarily reflects arbitrage in its DS Smith acquisition, with valuation concerns adding risk. If the deal proceeds, short covering should have minimal impact; if it fails, the squeeze risk would likely increase.

Want to know more?

Access this data in real time using S3’s BLACK APP or Contact us to get started.