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 lex@ft.com
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