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Andhra Pradesh Paper Surges by Limit on Sale; Rivals Advance

Andhra Pradesh Paper Mills Ltd. surged by the daily limit in Mumbai, sparking a rally in its domestic rivals, after International Paper Co. agreed to pay more than twice the market price to buy the Indian company.

The world’s top paper producer will buy 53.5 percent for $257 million, or 544 rupees a share, and make an offer for 21.5 percent, spending a total $361 million. Andhra Pradesh Paper closed at 197.5 rupees before the announcement yesterday.

International Paper is making the acquisition to benefit from growth in India and as consumption in the U.S. and other regions declines, Paul Brown, Asia president, told reporters in Mumbai after trading ended yesterday. Demand may increase 57 percent to 14 million metric tons by 2015, according to the Indian Paper Manufacturers Association.

“The only way to grow in this industry is through mergers and acquisition because capacity takes time to set up,” said Kishor Ostwal, managing director of CNI Research (India) Ltd., a publicly traded equities research provider in Mumbai. “The deal with Andhra Pradesh Paper has set a benchmark in a booming industry. Paper mills will now get better valuations.”

Andhra Pradesh Paper surged 20 percent to 236.95 rupees, a record close and the best performer on the BSE Small-Cap Index. Ballarpur Industries Ltd., India’s biggest paper maker, surged by the daily 20 percent limit before closing 17 percent higher at 37.60 rupees, the steepest advance since April. JK Paper Ltd. rallied 20 percent to 57.8 rupees. The nation’s seven paper mills still trade at an average 7 times earnings, compared with 10 times for the small-cap gauge, according to Bloomberg data.

Paying Premium

Andhra Pradesh Paper, India’s fifth-biggest producer with a capacity of 250,000 tons, posted profit of 542 million rupees ($11.4 million) in the year ended March 31, 2010, more than double from a year ago. Net debt was 4.7 billion rupees, about half the current market value, data compiled by Bloomberg show.

International Paper’s total acquisition cost is 32 times Andhra Pradesh Paper’s 2010 net income and about 30 percent of the combined market value of its six rivals.

“The price we are paying is commensurate with the levels at which deals are happening,” Brown said. “We are focusing more on the opportunity that we are getting.”

International Paper owns and operates plants in the U.S., Russia, Morocco and Turkey. It paid $200 million in June for Svenska Cellulosa AB’s Asian packaging business. It may consider opportunities to expand in Eastern Europe and China where it sees greater profitability, Chief Executive Officer John Faraci said on Feb. 23.

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