Updated from 2:55 p.m. EDT

In a deal that will create the world's leading manufacturer of tissue products,

Georgia-Pacific

(GP)

agreed to buy rival

Fort James

(FJ)

for about $7.5 billion worth of stock and cash, the companies said Monday.

Under the terms of the deal, Georgia-Pacific will acquire all of Fort James' shares for $29.60 per share in cash and 0.2644 share of Georgia-Pacific stock. Based on Friday's closing prices, the deal represents a 51% premium to the market for Fort James' shareholders. Georgia-Pacific will also assume approximately $3.5 billion of Fort James net debt.

The stock prices of the two companies went in predictable directions, with Georgia-Pacific finishing down 2 1/4, or 8%, at 26 3/8. Fort James finished up 8 7/16, or 34%, at 33.

Georgia-Pacific produces paper, office products and tissue products under such brand names as Coronet, Sparkle and Angel Soft. Fort James makes Dixie plates and cups, Brawny paper towels and Quilted Northern bath tissue.

Georgia-Pacific said the deal continues a series of major strategic actions aimed at strengthening its position as a high value-added paper and building products company. In 1997 Georgia-Pacific sold off its timber business, beginning its move away from cyclical commodities businesses to a focus on consumer tissue products.

"We've got to focus on fewer businesses," said A.D. Correll, chairman and chief executive of Georgia-Pacific, in a conference call with analysts following the announcement.

In connection with the deal, Atlanta-based Georgia-Pacific is set to divest selected businesses, and will shed about 250,000 tones of tissue manufacturing capacity for away-from-home products. The company will announce within a week which assets it will sell off, Correll said.

In the conference call, a couple of analysts expressed concerns over whether the deal, which will create the world's largest tissue manufacturer, can pass antitrust reviews. Correll said the company had retained "the best antitrust counsel in the nation," and assured analysts that no significant regulatory hurdles exist.

"The transformed Georgia-Pacific will be able to focus on those paper and building products businesses that are value-added and fit our strategic direction," Correll said.

The combined revenue of the two companies exceeded $24.8 billion last year. Correll expects $500 million a year in savings by combining the operations of both companies.

The maximum value that Fort James shareholders can receive is $40 per share. Thus, if the price of Georgia-Pacific shares rises above $39.33, the stock portion of the deal will be lowered.

Merrill Lynch

and

Banc of America Securities

were Georgia-Pacific's investment bankers for the deal, while

Morgan Stanley

represented Deerfield, Ill.-based Fort James.

In a separate announcement Monday, Georgia-Pacific said its second-quarter earnings beat Wall Street estimates by 4 cents a share. For the quarter that ended July 1, the company earned $1.20 per share compared to the analyst consensus of $1.16 per share, according to

First Call/Thomson Financial

. The company earned the same amount per share in last year's second quarter.

Net income for the quarter came in at $206 million, compared to $212 million in the same period last year. Revenue for the quarter was $5.5 billion, compared to $3.8 billion for the second quarter of 1999.