International Paper Co. (IP) has priced a sale of $1.5 billion in debt to fund its previously announced acquisition of competitor Temple-Inland (TIN). International Paper will sell $900 million in senior notes due 2022 and $600 million in senior notes due 2041. The proceeds along with other debt financing and cash will be used to fund the $3.7 billion purchase.
In September, International Paper inked a deal to acquire all of the outstanding common stock of Temple-Inland for $32.00 per share in cash. The company will also assume $600 million in Temple-Inland's debt. The acquisition is expected to close in the first quarter of 2012 with earnings accretive to International Paper after one year of closing.
Earlier, in June, International Paper had made a $3.3 billion or $30.60 per share offer, all in cash, to buy Austin, Texas-based Temple-Inland Inc. However, Temple-Inland rejected the offer stating that it grossly undervalued its business and was therefore not in the best interest of its shareholders.
The takeover is International Paper’s largest since its August 2008 acquisition of Weyerhaeuser Co.’s (WY) corrugated-packaging business for $6 billion. International Paper is seeing a rebound in demand and prices of its corrugated packaging and office paper business in North America after suffering a collapse during the financial crisis.
The acquisition of Temple-Inland will further strengthen its foothold in the North American containerboard market. The deal will also enhance the business through integration, rationalization and optimization.
The combination would increase International Paper’s share of the North American corrugated-packaging market to about 40% from roughly 27% at present. It would also enable the company to implement cost cuts at its corrugated-packaging business and spur the overall bottom line in the very first year.
The acquisition is also expected to yield synergies of $300 million annually within 2 years of closing, derived largely from operations, freight, logistics, selling expense and overheads.
The company ended the third quarter with cash and cash equivalents of $2.72 billion and a debt-to-capitalization ratio of 53.3%.
The company continues with its merger and acquisition strategy to strengthen its business over the long term. Recently, in a strategic bid to tap India’s growing paper and packaging market, the company completed the acquisition of a majority stake in leading Indian paper company Andhra Pradesh Paper Mills Limited.
We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, indulging in acquisitions and reducing its total debt. However, its high debt levels and underfunded pension liability remain concerns as it curbs the company’s ability to ramp up its capital expenditure. Further margins remain under pressure due to input cost inflation.
We retain a Neutral recommendation on International Paper. The quantitative Zacks #3 Rank (short-term Strong Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Memphis, Tennessee-based International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. International Paper competes with MeadWestvaco Corporation (MWV) and Weyerhaeuser Co. (WY).
INTL PAPER (IP): Free Stock Analysis Report
MEADWESTVACO CP (MWV): Free Stock Analysis Report
WEYERHAEUSER CO (WY): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment