TIN Shareholders Nod to IP Merger

The International Paper (IP - Analyst Report) - Temple-Inland (TIN) merger has been approved by more than 98% of Temple’s shareholders. This clears a major hurdle in the creation of a company that would enjoy about 40% share of the North American corrugated packaging materials market. There is only one remaining hurdle – the receipt of the important regulatory approval.

The chase for Temple-Inland had begun in June with International Paper making a $3.3 billion or $30.60 per share offer, all in cash, to buy Temple-Inland Inc. However, Temple-Inland rejected the offer stating it grossly undervalued its business and was, therefore, not in the best interest of its shareholders. Finally, in September, International Paper inked a deal to acquire Temple-Inland for $32.00 per share in cash. The deal also included assumption of $600 million in Temple-Inland's debt, taking the deal value to $4.3 billion.  

In November, International Paper priced a sale of $1.5 billion in debt to fund the acquisition. The proceeds along with other debt financing and cash will be used to fund the purchase. The company ended the third quarter with cash and cash equivalents of $2.72 billion and a debt-to-capitalization ratio of 53.3%.

The takeover is International Paper’s largest since its August 2008 acquisition of Weyerhaeuser Co.’s (WY - Analyst Report) corrugated-packaging business for $6 billion. International Paper is seeing a rebound in demand and prices of its corrugated packaging and office paper business in North America after suffering a collapse during the financial crisis.

The acquisition of Temple-Inland will further strengthen its foothold in the North American containerboard market. The deal will also enhance the business through integration, rationalization and optimization. The combination would increase International Paper’s share of the North American corrugated-packaging market to about 40% from roughly 27% at present. It would also enable the company to implement cost cuts at its corrugated-packaging business and increase the overall bottom line in the very first year. The acquisition is also expected to yield synergies of $300 million annually within two years of closing, derived largely from operations, freight, logistics, selling expense and overheads.

The company continues with its merger and acquisition strategy to strengthen its business over the long term. Recently, in a strategic bid to tap India’s growing paper and packaging market, the company completed the acquisition of a majority stake in leading Indian paper company Andhra Pradesh Paper Mills Limited.

We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, indulging in acquisitions and reducing its total debt. However, its high debt levels and underfunded pension liability remain concerns as it curbs the company’s ability to ramp up its capital expenditure. Further, margins remain under pressure due to input cost inflation.

We retain a Neutral recommendation on International Paper. The quantitative Zacks #3 Rank (short-term Strong Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Memphis, Tennessee-based International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. International Paper competes with the likes of  MeadWestvaco Corporation (MWV - Analyst Report) and Weyerhaeuser Co. (WY - Analyst Report).

Austin, Texas-based Temple-Inland is a manufacturing company focused on corrugated packaging and building products. The fully integrated corrugated packaging operation consists of 7 mills and 57 converting facilities. The building products operation manufactures a diverse line of building products for new home construction, commercial and repair and remodeling markets.

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