Temple-Inland Poison Harmless as Merger Can Rise 28%: Real M&A

International Paper Co. Chairman and CEO John Faraci
John Faraci, chairman and chief executive officer of International Paper Co., said “a negotiated transaction represents the best path for all share owners.” Photographer: Jin Lee/Bloomberg

Temple-Inland Inc. may squeeze $1.1 billion more out of International Paper Co.’s bid that’s already the most costly in the packaging industry in four years.

The unsolicited $4.1 billion offer values the corrugated cardboard maker at 9.8 times the last 12 months’ earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That’s the most expensive for a packaging acquisition greater than $100 million since 2007. Based on next year’s higher projected Ebitda, the deal is at a discount to the industry median of 8.2 times, signaling Temple-Inland may command a 28 percent increase to $5.26 billion.

To side step Temple-Inland’s so-called poison pill and negotiate a friendly deal, International Paper may be forced to compensate the Austin, Texas-based company’s investors if it wants to boost its corrugated-packaging market share to 37 percent in North America. With a market value of $13 billion and committed financing from UBS AG, the world’s largest paper and pulp producer can afford to raise the $30.60-a-share bid to as high as $41, according to Barclays Plc.

“It wouldn’t surprise me if International Paper came back with a higher bid,” said Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $60 billion. “In terms of market cap, nobody is close to International Paper. The company is well positioned to do this deal.”

Chris Mathis, a spokesman for Temple-Inland, didn’t return a call seeking comment.

‘Very Rich Offer’

“We’ve put a very rich offer on the table, a 46 percent premium to what the shares closed at on Monday,” Tim Nicholls, International Paper’s chief financial officer, said in an interview. “If people are looking forward and using forecasts to base their multiples, you’ve got to evaluate how accurate you think those multiples are. They haven’t happened yet. They’re just a number versus an actual number that has happened.”

International Paper in Memphis, Tennessee, made public the $4.1 billion cash bid, including net debt, on June 6 after it was rejected by Temple-Inland’s board. At 9.8 times trailing 12-month Ebitda of $422 million, it’s the most expensive for an acquisition greater than $100 million in the packaging and container industry since private-equity firm Nordic Capital Svenska AB purchased Swedish transport packager Nefab AB for 10.6 times Ebitda in 2007, data compiled by Bloomberg show.

“The first offer is probably not the last offer,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion. “Typically when you see that kind of move it’s a signal of a genuine intent that is likely to be followed up by more action.”

Increased Offer

Temple-Inland’s earnings are projected to reach $640.4 million next year, 52 percent higher than the past 12 months, based on analysts’ estimates compiled by Bloomberg.

At that level, International Paper’s offer is only valued at 6.4 times Ebitda and needs to be increased by $1.1 billion to be on par with the industry median since 1998, data compiled by Bloomberg show. The higher bid would equate to $41.79 a share, or an 80 percent premium to the stock’s 20-day average price before the current offer was announced at a 31 percent premium.

“A negotiated transaction represents the best path for all share owners,” International Paper’s Chairman and Chief Executive Officer John Faraci said on a June 6 conference call. “All reasonable options for us are on the table with respect to next steps.”

Poison Pill

Temple-Inland closed at $29.49 yesterday, 3.6 percent below the proposal, after the board adopted a poison pill to prevent an unwanted takeover if any investor buys 10 percent or more of the stock. The shares gained 1.4 percent to $29.89 today, while International Paper fell 3.3 percent to $28.79.

“There are all sorts of games that are being played here,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion. “This is not going to be a slam dunk close-in-a-quarter type of thing. IP could pull their offer and you could see Temple stock crash to where it was pre-offer. Probably that’s why the stock isn’t trading above the offer price.”

An eventual takeover won’t be “substantially higher” than $30.60 a share because that’s already well above where Temple-Inland has been trading, Ghriskey said.

Mark Wilde, a New York-based analyst at Deutsche Bank AG, doesn’t expect a raised bid to top $35 to $37 a share given Temple-Inland’s recent declines and a slow economic recovery. The shares had lost 1.1 percent since the start of 2011 before yesterday.

Stock Underperforms

In the 12 months before the bid was announced, Temple-Inland returned 12 percent to shareholders including dividends, half that of the Standard and Poor’s Supercomposite Containers & Packaging Index and a third of the S&P Supercomposite Paper Products Index, data compiled by Bloomberg show.

About 17 percent of Temple-Inland’s revenue comes from building products, where sales have dropped 42 percent since 2006. U.S. new home sales sank to an annual pace in February that that matched the rate in August as the lowest in data going back to 1963, according to the Commerce Department.

Temple-Inland said International Paper is trying to buy the company at a “bargain” when “little to no” value is being ascribed to the unit.

Still, some analysts expect a much sweeter proposal. International Paper can pay as much as $41 a share given low financing costs and Temple-Inland’s strategic importance and strong corporate defenses, Peter Ruschmeier, a New York-based analyst at Barclays, wrote in a June 7 note. Mark Connelly, an analyst at Credit Agricole SA in New York, said the “right ballpark” is about $40 a share.

First Unsolicited Deal

International Paper is pursuing its first-ever unsolicited deal and the largest since its $6 billion acquisition of Weyerhaeuser Co.’s corrugated-packaging business in August 2008, according to data compiled by Bloomberg. It expects to raise about $2 billion in debt to fund the Temple-Inland purchase.

“They’re not betting the farm on this transaction,” said Ed Sustar, a Toronto-based senior credit analyst at Moody’s Investors Service, who expects International Paper to keep its Baa3 rating that’s one level above junk.

S&P today affirmed International Paper’s BBB rating, one level higher than Moody’s.

Sustar said he doesn’t see U.S. antitrust regulators preventing International Paper from boosting its share of the North American corrugated-packaging market to 37 percent from 27 percent, already the No. 1 position. Domtar Corp. claims almost 40 percent of the North American office paper market, and AbitibiBowater Inc. has been allowed to control more than half of the continent’s newsprint, he said.

International Paper CEO Faraci said the offer will add to profit in the first year and fully values a recovery in corrugated packaging, where demand for boxes will take four to five years to return to 2007 levels, and “to a degree” in building products.

“I don’t think this is done at any stretch,” Deutsche Bank’s Wilde said. Temple-Inland is “doing what you and I would do if someone came up to us and said we want to buy your house and your house wasn’t formerly for sale. They’re trying to get the best price.”

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