Int'l Paper, TIN Extend Review Time

The International Paper (IP - Analyst Report) – Temple-Inland (TIN) merger has been delayed as both parties have agreed to extend the U.S. Department of Justice's (DOJ) review period till February 13, 2012. The extended timeline will provide both parties the time to resolve DOJ's concerns regarding the transaction and enter into a definitive agreement on terms that are acceptable to all.

The DOJ approval remains the only hurdle in the creation of a company that would enjoy about 40% share of the North American corrugated packaging materials market. In December last year, the merger had been approved by more than 98% of Temple’s shareholders.

The pursuit of 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 the former. 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. The acquisition of Temple-Inland will further strengthen its foothold in the North American containerboard market besides bringing in more efficiency by way of integration, rationalization and optimization.  

The alliance is likely to aid in cost cuts at the 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 relies on 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.

Furthermore, through its joint ventures, International Paper has significant projects underway in Russia and China. These will help the company sustain its earnings growth. We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, acquisitions and reducing its total debt.

We retain an Outperform 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.

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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