Nov. 14 (Bloomberg) -- Koch Industries Inc. agreed to buy Georgia-Pacific Corp. for $13.2 billion in cash, adding Dixie paper cups, cardboard boxes and lumber to fuel and chemical businesses to become the largest closely held company in the U.S.

Koch will pay $48 for each Georgia-Pacific share, or 39 percent more than the stock's $34.65 closing price on Nov. 11, the companies said yesterday in a statement. The transaction would be the biggest ever for Wichita, Kansas-based Koch, which will assume $7.8 billion in Georgia-Pacific debt.

Chief Executive Officer Charles Koch, whose family controls the company his father founded during the Depression, is taking over a business threatened by rising energy costs and sluggish paper and lumber prices. International Paper Co. and Smurfit-Stone Container Corp. are among forest-products companies that are trying to cope by shutting mills or selling assets.

``We view the deal as attractive,'' said Claudia Shank, an analyst at J.P. Morgan Securities in New York who calculates Koch is paying 7.5 times Georgia-Pacific's estimated 2005 earnings before interest, tax, depreciation and amortization. ``The news is positive for the paper and forest products sector, as it signals that private-equity interest in the sector is alive and well.''

Shares of Atlanta-based Georgia-Pacific surged $12.63, or 37 percent, to $47.28 in New York Stock Exchange composite trading. Before today, the shares had fallen 7.5 percent this year and traded at 12 times earnings, compared with 18.8 times for the Standard & Poor's 500 Paper and Forest Products Index. Third- quarter profit fell 40 percent.

Shares Gain

Weyerhaeuser Co., the world's biggest lumber maker, climbed $1.27, or 2 percent, to $63.49. International Paper rose 62 cents, or 2.1 percent, to $30.45. Smurfit-Stone gained 19 cents, or 1.9 percent, to $10.64.

Georgia-Pacific CEO Alston ``Pete'' Correll, who will remain with the business, chose to sell after becoming frustrated with his company's depressed share price, the London-based Financial Times reported on its Web site.

``The credibility of public-company CEOs is at an all-time low in this country, and we're all spending a lot of time trying to convince the world that we're doing the right thing,'' Correll, 64, said in an interview, according to the newspaper.

Koch has annual revenue of more than $60 billion, compared with $19.66 billion at Georgia-Pacific. A combination of the two businesses would put Koch ahead of Cargill Inc., which had sales of $71.1 billion in the 12 months through June, its Web site says, and currently ranks as the biggest closely held company in the U.S., according to Forbes magazine.

Mill Purchases

Koch acquired two mills in Brunswick, Georgia, and New Augusta, Mississippi, from Georgia-Pacific for $610 million in May 2004. The mills make fluff pulp used in diapers, baby wipes and sanitary products.

Georgia-Pacific has been hurt by asbestos-related legal settlements, falling lumber prices and rising energy costs. It has sold paper and lumber mills to reduce debt to $7.94 billion.

Correll has spent the past five years transforming Georgia- Pacific from a paper and lumber maker into one that relies mainly on consumer tissues. He spun off the company's timberlands in 2001 and sold the lumber-distribution unit last year.

The tissue business represented 51 percent of Georgia- Pacific's $1.34 billion in pretax profit in the first three quarters. Correll was slated to retire next year and was likely to be replaced by President Lee Thomas.

Reinvestment

Koch said in a letter to Georgia-Pacific workers that it reinvests as much as 90 percent of profits back into its businesses to fuel growth.

``We have extensive experience with cyclical, highly competitive businesses and the ability to commit appropriate resources to enhance the company's assets and pursue a growth agenda,'' CEO Charles Koch, 70, said in the statement.

Charles Koch's father, Fred C. Koch, founded the business after developing a process for refining more gasoline from crude oil in 1928, the company said on its Web site. Charles Koch and his brother, David, bought out brothers Frederick and William, David's fraternal twin, for $1 billion in 1983, according to Hoover's Inc.

William and Frederick Koch later claimed they were shortchanged and sued their brothers and even their mother over her distribution of trust-fund money, Hoover's said. They lost their case against Charles and David Koch in 1998.

Conservative Links

The Koch family has been linked to conservative politics since the days of founder Fred Koch, who helped found the John Birch Society, which campaigned against communism in U.S. politics during the 1950s, Hoover's said. David Koch ran for U.S. vice president on the Libertarian party ticket in 1980.

Koch Industries has expanded its oil refining and added pipelines, engineering businesses and ranching. It has interests in chemicals, fertilizer and asphalt. In 2004, it sold its Entergy- Koch energy trading business to Merrill Lynch & Co.

Koch last year acquired an Alaska refinery and a 3 percent interest in the Trans Alaska Pipeline System from Williams Cos. Koch bought chemicals business and assets from BP Plc and fiber and polymers businesses from DuPont Co.

As a unit of Koch, Georgia-Pacific will be able to focus on long-term profit growth rather than quarterly results, Georgia- Pacific spokeswoman Robin Keegan said.

``It's more difficult to make long-term investments sometimes when you're operating as a publicly held company,'' Keegan said. ``You can weather business cycles better and make decisions better to optimize long-term profits.''

Competitors

Georgia-Pacific, the maker of Brawny paper towels, competes with Procter & Gamble Co., Kimberly-Clark Corp. and Svenska Cellulosa AB in the tissue business. In North America, the company is the biggest plywood maker and third-biggest maker of boxes, used mostly in shipping.

Koch is ``getting an amazing franchise,'' Steven Chercover, an analyst at D.A. Davidson & Co. in Portland, Oregon, said. Georgia- Pacific has ``second-to-none distribution capabilities because they've got monster relationships with Wal-Mart and Costco and Home Depot and Lowe's for the consumer products and building materials respectively.''

Georgia-Pacific, which will retain its name and headquarters, also announced that it would buy back $2.6 billion in bond debt. The company's debt increased after its 2000 purchase of tissue maker Fort James.

Georgia-Pacific's 9 3/8 percent notes maturing in February 2008 rose 1.75 cents to 112.5 cents on the dollar, according to Trace, the bond reporting system of the NASD. The yield fell to 7.1 percent from 7.4 percent.

Third-Quarter Profit

Georgia-Pacific said on Oct. 27 that third-quarter net income dropped 40 percent to $145 million, or 55 cents a share, as box prices fell and costs rose for chemicals, energy and wood. Prices for lumber and plywood also have fallen over the past year, hurting the company's earnings, as the industry's production increased.

The takeover announcement was a surprise, Shank of J.P. Morgan said in a note. ``We do not believe there are any other potential acquirers to step in, given the magnitude of the transaction as well Georgia-Pacific's business mix,'' Shank said.

Forest products companies have struggled to boost their stocks because of falling paper and lumber prices and increasing costs for raw materials, natural gas and shipping. Natural-gas futures have risen more than sixfold since September 2001.

International Paper, the biggest paper maker in North America, plans to sell off as much as $10 billion in assets, including its timberlands, beverage packaging and lumber businesses to focus on its main paper and box units. Before today, the stock had fallen 27 percent in the past year.

Weyerhaeuser, which on Oct. 21 announced plans to close a pulp mill, also may sell some units. Shares of the company before today had fallen 6.9 percent in the past year.

Smurfit-Stone Container, the biggest box maker in North America, on Nov. 9 said it would shut as much as 20 percent of its box-making plants after the stock had fallen 42 percent in a year.

Goldman Sachs Group Inc. advised Georgia-Pacific while Citigroup Inc. advised Koch, according to the statement.

To contact the reporter on this story: Darrell Hassler in Chicago at dhassler@bloomberg.net.

Last Updated: November 14, 2005 16:16 EST