Times Change Temple's Appetite for IP Deal
By the Financial Times (Financial Times) -- Temple-Inland's management protested in June that International Paper's $30.60 bid "grossly" undervalued the company. Now the bid is less than 5 per cent higher, and it is handshakes all around. Were the Temple bosses simply bluffing -- and are they now folding before a disciplined buyer?
Actually, no. A great deal has changed over the summer that affects Temple-Inland's value. Expectations for an economic recovery have damped. In July, estimates of gross domestic product growth were revised from 1.9 per cent to 0.4 per cent. In August, second-quarter GDP estimates were tamped down by 30 basis points, to 1 per cent. The box and packaging business correlates closely with overall output, and IP now estimates that box shipments will not be back to pre-crisis levels until 2015.
A key element of Temple-Inland's undervaluation argument was that the value of the company's loss-making housing products business was "temporarily" depressed and IP was trying to get it for, essentially, nothing. But with housing starts actually lower in July than in June, that argument looks weaker.
If Temple-Inland wanted a much bigger premium, it would mean IP (or any buyer) would need more financing and, in all likelihood, more debt financing. But debt costs could soon become a deterrent: in August, leveraged loan and junk bond indices traded down sharply as investors repriced risk.Finally, there is the little matter of Guaranty Bank, which Temple-Inland spun off in 2007 and went bankrupt in 2009. The liquidation trustee filed a lawsuit in August, alleging that Temple-Inland "looted" over $1 billion assets from the bank before the separation.IP's first bid was hardly gross; the new one looks positively appetizing. Temple-Inland's shareholders should count themselves lucky.E-mail the Lex team in confidence at firstname.lastname@example.org
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV