As is so often the case, once again an acquisition target's howls of protest have been soothed by a modest increase in the price of the deal. On Tuesday morning, International Paper (NYSE:IP) announced that it has reached an agreement with Temple-Inland (NYSE:TIN) on a friendly acquisition with a slightly higher price than IP's original bid.
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A Small Bump To "Yes"
International Paper secured the support of Temple-Inland's board by offering $32 a share in cash and the assumption of $600 million in debt - a total deal value of $4.3 billion. At that price, Temple-Inland shareholders are seeing a roughly 30% premium to Friday's close and a trailing EV/EBTIDA valuation of roughly 10 - a slight discount to Rock-Tenn (NYSE:RKT), but a premium to Packaging Corp (NYSE:PKG) and the larger packaging sector.
Investors may recall that the road to "yes" has been a little bumpy for International Paper. IP originally made its play for Temple-Inland back in early June, with an unsolicited bid of $30.60 - a 46% premium to TIN's price at the time. The way Temple-Inland's board responded, you'd have thought that IP shot their dog and then tried to bill them for the bullet. Temple-Inland called the deal grossly unfair and then launched a poison pill when IP threatened to take its offer straight to shareholders via a tender offer.
Now, though, things have settled down. IP bumped up its offer by about 5% and Temple-Inland is now (apparently) happy, or at least willing, to sell.
At this new slightly higher price, IP shareholders are still capturing more than half of the benefits of the combination (assuming that IP can deliver most of the synergies it projects). Moreover, shareholders should not be thrilled that Temple-Inland management presumed to deny them the chance to decide for themselves on the merits of the deal. All of that said, though, Temple-Inland got roughly $150 million out of IP by fighting, and even granting that actions like launching poison pills cost money, TIN shareholders are richer for having their board fight this battle.
While we're at it, though, it is worth speculating whether an outside influence might have helped this deal move along. Specifically, word came out just a couple of weeks ago that Temple-Inland is being sued by a liquidation trustee for more than $1 billion in a dispute relating to how Temple-Inland handled the spin-off its Guaranty Financial Group subsidiary; a financial services business (or bank) that went bankrupt under the weight of mortgage-backed bonds and the collapse of the residential construction market.
The New Market
Assuming this deal goes through, IP will widen its lead in corrugated packaging - IP was number one before this deal and Temple-Inland was number three. Rock-Tenn was the number-two player before this deal and Georgia-Pacific and Packaging Corp will still be trailing players. This is a business that seriously rewards scale and operating efficiency, so it is logical that big players want to continue to consolidate. Corrugated packaging is a noticeable cost item for packaged food companies like Kraft (NYSE:KFT) and Kellogg (NYSE:K), though, so there could be some opposition to this deal and "number-one plus number-two deals" do tend to get the attention of regulators.
The Bottom Line
Rock-Tenn and Packaging Corp were interesting companies and stocks before this deal and still are interesting now that IP and Temple-Inland have found a middle ground. Likewise, other peripheral players like MeadWestvaco (NYSE:MWV) and KapStone (NYSE:KS) are worth a look - both from the perspective of market consolidation and their own inherent performance potential.
Temple-Inland shareholders should probably be content with this deal. It's not full value for their assets, but the recent lawsuit likely means that full value isn't attainable. Private equity or rival bidders could yet get involved here (akin to how Silgan (Nasdaq:SLGN) thought it had a deal for Graham before Reynolds jumped in), but few buyers will have the same synergy potential as IP. What's more, since IP is paying cash and the market's aren't especially healthy, Temple-Inland shareholders can likely afford to sit tight and see how this all plays out. (For additional reading, check out Mergers And Acquisitions: Understanding Takeovers.)
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