International Paper Purchases Shorewood for About $600 Million

Updated from 9:55 a.m. EST

International Paper (IP Quote) announced Thursday that it would acquire Shorewood Packaging (SWD Quote) for about $600 million in cash, effectively foiling rival Chesapeake's (CSK Quote) $500 million hostile bid.

The market liked the deal. Shares of Shorewood, based in New York City, jumped 1 7/8, or 10%, to close at 20 3/4, slightly lower than International Paper's bid. Meanwhile, shares of International Paper, based in Purchase, N.Y., were down just 11/16, or 2%, to close at 42 1/2.

International Paper's bid values Shorewood at $21 a share, a 6% premium to its closing price Wednesday of 18 7/8. That's also 22% higher than Chesapeake's offer of $17.25 a share. International Paper will also assume $275 million of Shorewood's debt, putting the total value of the offer at $875 million.

Chesapeake first bid for Shorewood back in November, at $16.50 a share, which was then about a 40% premium to Shorewood's price. Shorewood rejected that outright and has continued to resist Chesapeake's overtures, including the ramped-up bid, all the while seeking other buyers.

As of Thursday's close, Shorewood stock was up 74% since Chesapeake first made its bid.

Chesapeake said it would allow its tender offer to expire Friday and also noted that it "reserves its right to resume its efforts to acquire Shorewood should circumstances warrant."

"This is a pretty good outcome," said Joel Tiss, an analyst at Lehman Brothers. "It's a fair valuation, and now they [Shorewood] don't have to be bought by Chesapeake and lose their jobs." Before Thursday's announcement, Tiss rated Shorewood an outperform. He does not cover International Paper. His firm has done no underwriting for Shorewood.

There are certainly overlaps in the two company's businesses. However, International Paper is more of an integrated company that makes the raw materials, such as white paper board, that are converted into packaging, while Shorewood does not manufacture the raw materials and is a converter that concentrates on making the final packaging product.

Shorewood specializes more in the production of the so-called high-end folding cartons, for cigarettes, cosmetics, compact discs and other entertainment-related items. These products are difficult to make and print and are very customized according to each customer.

The companies will combine their retail packaging operations into a single business under the Shorewood name. Sales are expected to be over $750 million. Retail packaging is the largest segment of International Paper's consumer packaging operation.

The transaction is expected to close by the end of March. International Paper anticipates that annual cost savings from the acquisition will amount to $25 million and that it will be accretive to its earnings in the first year.

Another deal in the industry was also announced Thursday. Finland's UPM-Kymmene (UPM Quote) has agreed to acquire Champion International (CHA Quote) in a deal that values Champion's equity at $6.5 billion.

Chesapeake's stock closed up 1/8, or .5%, at 25 3/8.