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Strategies & Market Trends : Speculating in Takeover Targets
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From: richardred3/18/2008 12:31:45 AM
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Int'l Paper to buy Weyerhaeuser unit for $6 billion
Monday March 17, 10:10 am ET
By Euan Rocha

NEW YORK (Reuters) - International Paper (NYSE:IP - News) said on Monday it has agreed to acquire Weyerhaeuser Co's (NYSE:WY - News) packaging business for $6 billion, making it North America's largest corrugated box maker.

The paper and packaging industry in North America and Europe has been consolidating and reducing production capacity in a bid to tackle soaring raw material costs and dwindling demand for paper due to the increasing influence of the Internet.

"This is an acquisition that is being made not for next quarter's earnings, but to position International Paper for 2010," said International Paper's chief executive, John Faraci, in an interview with Reuters.

International Paper has shed a large part of its non-core operations, including the bulk of its once vast timberland assets, while expanding the company through investments in South America and Eastern Europe.

"This deal is a win, win, win," said Longbow Research analyst Joshua Zaret, "It's a win for International Paper, a win for Weyerhaeuser and a win for the industry."

Memphis, Tennessee-based International Paper said because the transaction is a purchase of assets rather than of stock the company will realize a tax benefit of about $1.4 billion. Taking this benefit into account, the net purchase price is about $4.6 billion.

Shares of International Paper were down 5.6 percent to $30.46 in early trade on the New York Stock Exchange, while those of Weyerhaeuser rose 2 percent to $63.25.

International Paper said it expects the deal to boost its 2009 earnings and it anticipates about $400 million in annual cost savings from the deal, with about 40 percent of those savings being realized within 12 months of closing the deal. The deal is expected to close in the third quarter.

IP said it had secured $6 billion in loans to finance the purchase, including an 18-month term loan for $4 billion. It declined to comment on the terms of that loan.

"The decision we made a couple of years ago to keep our balance sheet strong, pay down debt and maintain our financial flexibility has really paid off," said Faraci, adding that this gave the company an advantage over other competitors in the current credit environment.

Temple Inland Inc (NYSE:TIN - News) and Smurfit-Stone Container Corp (NasdaqGS:SSCC - News) had also been linked with a possible bid for the Weyerhaeuser assets. But with the current credit environment analysts had become increasingly skeptical about their chances of pulling-off such a deal.

Faraci said including cost savings, he expects the deal to generate earnings before interest, taxes, depreciation and amortization of over $1 billion.

The acquisition includes nine containerboard mills, 72 packaging locations, along with a host of other facilities and affects about 14,300 employees.

Weyerhaeuser, which announced that it was exploring the possible sale of its packaging business in May 2007, can now focus more on its key timberland assets.

The company has in recent months been badly hurt by the slump in the U.S. housing market, which has hurt its wood products and real estate businesses.

"People believe that Weyerhaeuser is still an asset play and this deal certainly does nothing to change that view, if anything it enhances that view," said Zaret.

(Reporting by Euan Rocha; Additional reporting by Matt Daily and Yinka Adegoke editing by Dave Zimmerman)
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