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Is Cheap Debt Driving Paper Deals?

Stocks in this article: IP TIN SLGN GRM SEE PKG MWV

(International Paper-Temple Inland item update with further analyst commentary.)

NEW YORK ( TheStreet) -- International Paper's (IP) move to acquire Temple-Inland (TIN) is yet another example of how low interest rates are motivating deals among manufacturing companies on the hunt for growth and increased market share.

Credit-worthy corporations are racing to take advantage of inexpensive loans before rates eventually rise, analysts say. "To borrow money now is cheap," said Thomas Mullarkey, a stock analyst who covers packaging makers and other manufacturing companies for Morningstar (MORN) in Chicago. "IP can probably get 5% as an interest rate on debt for its Temple acquisition , while their cash is getting nothing. So almost any acquisition is going to be accretive to earnings," assuming that the company's base profit for 2012 remains flat.

UBS (UBS) has agreed to provide debt financing for the deal, International Paper said when it disclosed its offer Monday, though it didn't specify terms.

The number of big transactions in corporate America has picked up in 2011. Since the beginning of the year, 29 U.S. public-market deals have been struck worth more than $2 billion, according to Dealogic. (The total value of those transaction: $169.3 billion The biggest was Duke Energy's (DUK) $13.6 billion take-out of Progress Energy (PGN).) That compares with 17 transactions worth $2 billion or more in the first half of 2010 (there were 46 such deals in all of last year).

The low interest-rate environment has become so M&A-friendly that some companies have made deals that the market views as dubious. Last week, Sealed Air (SEE), which produces the Bubble Wrap packaging that few human beings can resist popping, made a $2.9 billion bid to acquire the privately held Diversey Holdings, which makes industrial cleaners.

Sealed Air's largest shareholder, the fund manager Davis Selected Advisors, has publicly opposed the deal, arguing that industrial cleaning producers were too far afield from Sealed Air's core business.

Packaging in general has been a hot segment for deals (and controversy) of late. Rock-Tenn (RKT) subsumed Smurfit-Stone in a $3.5 billion deal announced in January. And in April, the aluminum-can maker Silgan Holdings (SLGN) agreed to acquire Graham Packaging (GRM) for $1.3 billion -- another deal that has drawn criticism, with a slew of class-action law firms attempting to gain traction with potential suits, claiming Graham's board undersold the company.

International Paper has some wooing to do after Temple-Inland roundly rejected its offer as "obscenely" low, in the words of Morningstar's Mullarkey.

On its web site, the Austin, Texas-based maker of corrugated cardboard boxes and wood-based construction materials uploaded a detailed presentation meant to make the case that IP has undervalued Temple. The company also instituted a poison-pill strategy in hopes of thwarting an IP hostile takeover, declaring a special dividend meant to dilute any move by the paper giant to acquire Temple's stock.

Temple-Inland didn't immediately respond to an email seeking comment. The company's phone lines, meanwhile, were evidently inundated with calls Tuesday morning; all circuits were busy.

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