International Paper Co IP’s $45-per-share acquisition bid for Smurfit Kappa could be an excellent strategic initiative and help competitively position the company through cost synergies. Some sell-side analysts, though, are expressing concern that the integration of the two companies will be a difficult short-term issue.
Wells Fargo analyst Christopher Manuel downgraded International Paper from Outperform to Market Perform and lowered the price target from $75 to $60.
BMO: Corporate Culture Differences
IP’s mill-oriented model and SKG’s entrepreneurial, packaging-oriented model could have trouble integrating, BMO's Wilde said in a Wednesday note.
SKS’s model has historically been decentralized and focused on serving modest-sized local markets, with the company reconditioning and relocating paper machines and converting equipment, the analyst said. This approach has involved a “pragmatic and disciplined approach to capital," he said.
Conversely, IP has described its approach as operating “fewer, bigger, better assets," the analyst said.
Due to IP’s engineering-oriented model, the company would likely make extensive capex efforts with SKG’s mills, which could ding free cash flow, Wilde said.
“While the need to continually reduce costs and drive efficiency is obvious, we're also sensitive to maintaining appropriate scale/cost in developing markets.”
Wells Fargo: Deal Has 'Potential To Unlock Value'
Despite Wells Fargo's Tuesday downgrade, the firm remains positive about the long-term outlook on an IP-SKG deal.
“From a long-term perspective, we believe consolidating the European containerboard market has potential to unlock value," analyst Manuel said in a note.
A similar process took nearly 15 years to complete in the U.S. "and did not transpire without bumps along the way," Manuel said.
SKG's "body language" shows the company wants a higher per-share offer, but the deal's economics appear "full" at the proposed 9.1x TTM EBITDA multiple, the analyst said.
"As a result, we believe an increased offer would only push out the time frame to surpass IP's cost of capital."
At the time of publication, IP shares were down nearly 5 percent at $54.88.
Photo courtesy of International Paper.
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