Perry Capital, the $10.9 billion hedge-fund firm run by Richard Perry, is betting on the paper and packaging industry anticipating that the value of companies could double if they adopt a new tax structure.
Perry took positions or increased holdings in International Paper Co., Rock-Tenn Co. (RKT) and KapStone Paper and Packaging Corp. (KS), according to a second-quarter letter to investors, a copy of which was obtained by Bloomberg News. Perry said that containerboard management teams can create master limited partnerships for their paper mills, which would increase earnings. MLPs pay no federal income tax so long as they distribute most of their cash to shareholders and are commonly used in the oil and gas industry.
“This could translate into 50 to 100 percent share price appreciation across the industry,” New York-based Perry wrote in the letter.
Perry Partners International, the firm’s main fund, rose 0.3 percent in June and 2.8 percent this year, as gains on corporate, structured and sovereign debt were weighed down by hedges and Ally Financial Inc. shares. Perry established three new positions in its top 10 holdings: Puerto Rico municipal bonds, Caesars Entertainment Corp. (CZR) debt and International Paper, according to the letter.
International Paper rose 5.5 percent to $50.65 in New York after climbing as much as 8.3 percent. Rock-Tenn advanced 7.5 percent and KapStone increased more than 10 percent.
“We’ve been aware of the Perry Capital proposal for some time and have been analyzing the many relevant considerations and complexities of the MLP structure,” said International Paper spokesman Tom Ryan.
A Rock-Tenn spokeswoman and Kapstone’s chief financial officer, Andrea Tarbox, didn’t immediately return messages seeking comment.
Perry said it conducted due diligence on the industry over the past few months and concluded that MLPs could be used for domestic virgin containerboard mills, which process logs and wood chips into containerboard used to produce corrugated boxes.
The firm commissioned PricewaterhouseCoopers LLP to analyze whether the companies could use the MLP structure and confirm its theory. The accounting firm concluded that factories using less than 25 percent recycled fiber, based on annual input weight, should be eligible and that such assets could be contributed to an MLP, according to the letter.
“These companies share attractive industry fundamentals, as the containerboard industry has become increasingly concentrated, price discipline has improved and management teams have increased each company’s margin profile,” Perry wrote. “Yet the industry continues to trade at inexpensive valuations, and these companies have an unrealized asset in the form of a virgin mill MLP.”
Perry also initiated a credit wager on Caesars Entertainment Operating Company, the Las Vegas-based company’s largest unit. It anticipates the biggest owner of casinos in the U.S. will avoid a default, it said in the letter.
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