Winner’s curse unfairly haunts $7 bln paper deal
22/04/2024 09:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Liam Proud
LONDON, April 19 (Reuters Breakingviews) - Chunky
acquisitions tend to destroy shareholder value, numerous studies
have found. It’s therefore understandable that investors often
take fright when a company they own launches a takeover bid.
Sometimes that scepticism obscures a good thing, however – as
International Paper’s IP.N purchase of UK-listed packaging
peer DS Smith SMDS.L might show.
The transatlantic pairing, agreed on Tuesday, was sealed on
Friday when rival bidder Mondi MNDI.L dropped out of the race.
The Memphis, Tennessee-based victor is handing DS Smith
investors 0.1285 of its own shares in return for each one they
hold of the target’s, implying an equity offer of almost $7.4
billion based on undisturbed share prices.
The worry for International Paper chair and outgoing CEO
Mark Sutton is that investors seem wary. His share price is down
by more than a tenth since March 25, the last trading day before
the public approach. That’s reduced the real premium on offer
for DS Smith to 30%, rather than the original 48%. The rest of
the paper and packaging sector has dropped, but not by as much
as the acquiror.
The slide is arguably surprising since the combination will
create annual cost savings of around $500 million, according to
International Paper. Those synergies have a net present value of
$3.4 billion, based on Breakingviews calculations using a 25%
tax rate, 10% discount rate and the buyer’s estimated
integration costs of $370 million.
True, Sutton is effectively paying away two-thirds of that
value to DS Smith since the undisturbed bid premium over the
target’s share price was equivalent to about $2.4 billion. But
there should still be about $1 billion worth of goodies left for
International Paper itself. Sutton’s shareholders seem not to
believe it.
Investors may see the cost-cut estimate as overcooked, or
they may mistrust cross-continental empire building. Even if
only two-thirds of the synergies came through, however,
International Paper’s return on the investment would be about
$950 million in four years’ time, using Visible Alpha consensus
operating profit estimates for DS Smith of $935 million and a
25% tax rate. That’s a near-10% return on investment. Assume all
the synergies materialise, and the return is a handy 11%.
It’s worth considering the alternative. Peers like Smurfit
Kappa SKG.I and WestRock WRK.N are pairing up, in a sector
that generally rewards scale. Forgoing a deal, for International
Paper, would come with risks of its own. At least Sutton hasn’t
left himself strategically boxed in.
Follow @Breakingviews on X
CONTEXT NEWS
UK packaging and paper group Mondi said on April 19 that it
had dropped its pursuit of local peer DS Smith.
The board of DS Smith on April 16 blessed a rival offer made
by International Paper.
Shares in DS Smith fell by 10.1% to 359.1 pence as of 1420
GMT on April 19.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: International Paper vs. sector index since DS Smith bid
https://reut.rs/3JqYkf2
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Editing by George Hay and Oliver Taslic)
((For previous columns by the author, Reuters customers can
click on PROUD/
liam.proud@thomsonreuters.com; Reuters Messaging:
liam.ward-proud.thomsonreuters.com@reuters.net))