International Paper Company IP was spurned yet again when its sweetened bid to take over Ireland-based Smurfit Kappa was rejected by the European rival. This is the second unsolicited offer within a month by International Paper, indicating its urgency to expand operations beyond North America to capitalize on increasing demand for packaging materials for online shopping.
The latest proposal included a cash-and-stock offer of €25.25 in cash (up from the previous offer of €22) along with 0.3 new shares of International Paper for each share of Smurfit. However, Smurfit management summarily rejected the bid citing gross undervaluation.
On the other hand, International Paper believed that the proposed transaction would have created annual synergies worth at least $450 million. The company reportedly accounts for one in three cardboard boxes manufactured in the United States and the acquisition of Smurfit would have made it a leader in Europe. The combined entity would have gained an unrivalled competitive advantage, benefiting from the rise in demand for packaging materials from the e-commerce industry.
Smurfit has operations in 35 countries across Europe. The company believes that its exposure in varied European markets makes it an enviable candidate for acquisition by other companies if its deal with International Paper fails to materialize.
Mergers and acquisitions remain a key strategy for International Paper to strengthen its long-term business proposition. In North America, the company envisions a large opportunity within its industrial packaging business, which continues to generate the best margins in the industry. It is further taking initiatives to drive margin expansion across the business through inorganic growth.
At the same time, International Paper is divesting its non-core businesses to focus more resources on high-return capital projects in its core businesses that can drive additional earnings growth. The company has strategically offloaded businesses in China to focus more on its U.S. operations. It believes that it could cater to the markets in China and Asia more effectively by supplying globally competitive products primarily through its Ilim joint venture in Russia and through exports from the United States and other parts of the world.
However, International Paper has underperformed the industry in the last three months with an average decline of 9.5% against 1.8% gain for the latter. The company has huge pension obligations for substantially all U.S. salaried employees hired prior to Jul 1, 2004 and largely all hourly and union employees regardless of the hire date. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns, changes in general interest rates and in the number of retirees are likely to increase pension costs and reduce its cash flow, thereby limiting the positives from its acquisition spree, a primary growth driver.
Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the industry include Fibria Celulose S.A. FBR, Verso Corporation VRS and Veritiv Corporation VRTV, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Fibria Celulose is currently trading at a forward P/E of 12.4x.
Verso is currently trading at a forward P/E of 6.4x.
Veritiv has a long-term earnings growth expectation of 6%. It has beaten earnings estimates thrice in the trailing four quarters with an average positive earnings surprise of 34.7%.
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