In a surprise move, International Paper (NYSE:IP) announced a $3.38 billion hostile bid for rival Temple-Inland (NYSE:TIN), which is a large containerboard operator. However, such transactions are hard to pull off and can easily take more than a year.
Of course, IP did try – through private channels – to strike a friendly acquisition, but it was to no avail. Temple-Inland’s board deemed the offer to “grossly” undervalue the firm.
Despite this, Wall Street is optimistic that Temple-Inland will eventually lose the fight. In Tuesday’s trading, the stock price spiked 41% to $29.67. The buyout bid is for $30.60 a share.
The stock price of International Paper increased as well. It hit $30.41, up 2.5%.
So is the company attractive at these levels? Will the deal be a nice boost? Let’s take a look at the pros and cons:
Pros
Global operator. International Paper has manufacturing operations in North America, Latin America, Asia and even North Africa. But it’s the U.S. market where the company is most dominant. It is No. 1 in industrial packaging, No. 2 in uncoated papers and No. 1 in coated paperboard.
M&A prowess. Back in 2008, International Paper shelled out $6 billion for Weyerhaeuser, and it was a big success. The company provided much more scale and cash flows. In fact, it realized $100 million more in cost savings.
As a result, International Paper is now in a great position to make yet another mega-deal.
Restructuring. Since 2006, International Paper has been aggressive in making key changes. For example, the company has exited noncore businesses – amounting to about $11 billion — as well as reduced fixed costs and capacity. The result has been stronger margins and cash flows. It has helped to reduce the overall debt load and provide more returns to shareholders in terms of dividends. The current yield is 3.5%.
Cons
Economy. Over the past couple months, the U.S. economy has been slowing down, and there is evidence that there may be deceleration in Europe and perhaps even Asia. Because of this, there are likely to be headwinds for economically sensitive companies like International Paper.
Secular problems. The paper and packaging industries are appear to be in long-term decline. Besides, it is a highly commoditized business, with little opportunity for premium pricing.
Competition. International Paper must contend with tough rivals like Smurfit-Stone Container, Domtar (NYSE:UFS), and MeadWestvaco (NYSE:MWV). They all use the same approaches to cut costs and find competitive edges. The environment can be brutal.
Verdict
International Paper’s hostile bid for Temple-Inland looks spot-on. The deal will add $4 billion in sales, $510 million in pretax earnings and 4 million tons of containerboard capacity. It will also boost International Paper’s market share of corrugated packaging products from 27% to 37% in North America.
True, there are risks to the deal — perhaps the most important is the antitrust issues. Yet there is still tough competition in the industry.
However, the fact that the industry is engaging in aggressive consolidation means that there is little opportunity for real growth. Instead, the strategy is to lower costs and reduce capacity. Thus, it is hard for investors to get excited about this scenario. The cons outweigh the pros on the stock for now.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
