Volume 85, Number 42 October 17, 2009

Official Board Markets
www.packaging-online.com

Containerboard Consolidation Coming

A merger between bankrupt smurfit-Stone Container Corp. (SSCC) and either Temple-Inland (TI) or Koch/Georgia-Pacific could benefit the entire containerboard, industry, states Chip Dillon, paper industry analyst for Credit Suisse, New York City, in an equity research report released last week.
"If Temple-Inland were to merge with Smurfit-Stone, the synergies accruing to current TI shareholders could equal close to one-half of the current market capitalization," he writes.
Using estimated year-end 2009 net debt, TI has a current enterprise value of $2.5 billion (including the current equity market capitalization of $1.7 billion), Dillon notes. SSCC's enterprise value is $3.3 billion, making for a combined enterprise value of about $5.8 billion. A combination of TI or Koch/GP with SSCC would create a 28 percent player---similar in size with IP (the number one U.S. containerboard player with 29 percent of domestic capacity). Even if only $400 million in synergies can be achieved, the value created would be $2.6 billion (using a 35 percent tax rate and a 10 multiple) ---roughly 50 percent of the combined enterprise value of SSCC and TI.
In August 2008, International Paper Co. (IP) acquired the containerboard assets of Weyerhaeuser in a deal that created the number one U.S. player. After two decades of consolidation, the top five players now command 74 percent of the market. This level of consolidation has proven to be sufficient to stabilize the market, Dillon writes. Containerboard prices have fallen since the fall of 2008 but "industry margins have remained solid..."
He adds that with most industry participants producing solid profits in containerboard, he has seen IP experience greater profitability than would have occurred if it had not acquires the Weyerhaeuser containerboard assets because its synergies from the deal have not been competed away. Specifically, IP now sees $500 million in annual synergies.
SSCC won't emerge from the chapter 11 prcoess (it filed in January) until early next year. Dillon doesn't expect a merger of the company to close until after it emerges, though discussions could heat up beforehand. OBM