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Georgia-Pacific buys rival
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July 17, 2000: 2:42 p.m. ET
Timber firm buys Fort James for $11B in cash, stock, debt; beats 2Q target
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NEW YORK (CNNfn) - Georgia-Pacific Corp. wrapped up a deal Monday to buy rival paper maker Fort James Corp. in a transaction valued at about $11 billion in cash, stock and debt, the latest consolidation in the red-hot paper market.
The combination will make Georgia-Pacific the world's largest producer of tissue products. Deerfield, Ill.-based Fort James (FJ: Research, Estimates) makes Quilted Northern tissue and Brawny paper towel brands, which will be added to Georgia-Pacific's Angel Soft tissue and Sparkle paper towel brands.
The boards of both companies have approved the deal, the companies said. The purchase price includes $3.5 billion in debt to be assumed by Atlanta-based Georgia-Pacific (GP: Research, Estimates).
 The deal values Fort James at $37.17 a share, slightly more than a 50 percent premium over its closing price of 24-9/16 Friday on the New York Stock Exchange, when it was up 1/4.
Georgia-Pacific will pay Fort James shareholders $29.60 a share in cash, 80 percent of the total, plus 0.2644 of a GP share for each Fort James share.
The sale is expected to close, subject to regulatory approval, in the fourth quarter of this year. Georgia-Pacific said it expects the deal to immediately add to its cash earnings, excluding goodwill, and that it will add to earnings, including goodwill, beginning in the second fiscal year after the transaction.
Georgia-Pacific also plans to sell about 250,000 tons of manufacturing capacity for away-from-home tissue products, such as those used in restaurants, as well as other selected commodity and non-strategic businesses. The company has yet to find a buyer, a Georgia-Pacific spokesperson said.
Correll does not anticipate any regulatory problems. "We will complete the transaction in a way that is pleasing to everyone," he said.
The deal includes a $125 million breakup fee, GP Chairman and CEO A.D. Correll told analysts in a conference call. Georgia-Pacific plans to cut its current debt level to $9.5 billion from its current level of $14 billion by early 2003 and does not plan to buy back shares until it reaches that level, Correll said.
Georgia-Pacific shares were down 2-3/4 to 25-7/8 in afternoon trading Monday while Fort James jumped 8-1/2 to 33-1/16.
The latest deal
Consolidation has been rampant in the paper business in recent months, and Georgia-Pacific has more often than not been seen as a potential target rather than as a buyer. Market leader International Paper (IP: Research, Estimates) recently agreed to buy Champion International for about $7.3 billion, wresting that company from a deal with Finland's UPM-Kymmene.
The Fort James deal is the latest step to rebuild Georgia-Pacific, a plan that began in late 1997. The Atlanta-based paper maker has bought four companies in the last five years, including Wisconsin Tissue last year.
The acquisition will dilute earnings by 6 percent in 2001, but will add to earnings in 2002, assuming a flat price that year, said Merrill Lynch analyst Anna Torma in a research note. Merrill Lynch is acting as financial adviser on the deal.
 Torma anticipates that the deal will add 35 cents, or 5 percent, to cash earnings in 2001. She upgraded Georgia-Pacific to an "intermediate-term, long-term" buy and maintained a $58 price target.
In an interview with CNNfn, Georgia-Pacific CEO Correll said the deal would have little impact on the two companies' labor forces. The transaction also is another step in the firm's restructuring plan, transforming it from a commodities-based business to a brands-based business. [WAV 343 KB] or [AIF 343 KB]
Analyst Lise Shonfield of ABN AMRO Inc. discounted speculation that Georgia-Pacific was ever up for sale.
"It's very difficult to see who would want GP because it's difficult to see who a natural buyer would be," she said.
Only two companies -- International Paper and Weyerhauser -- could buy GP, Shonfield said. With the acquisition of Champion, IP "has done its bit for now," she said, adding she never got the impression Weyerhauser was interested in GP.
"There is not anyone else out there to acquire GP," Shonfield said.
However, the deal for Fort James came as a surprise.
"It's a pretty significant acquisition," Shonfield said. "I'm not prepared to think that GP is prepared to take on this size of a move at this stage."
The purchase pits Georgia-Pacific, which traditionally has its strength in building products, against consumer-oriented paper-goods makers, such as Kimberly-Clark (KMB: Research, Estimates) and Procter & Gamble (PG: Research, Estimates).
With the deal, Georgia-Pacific now has a 45 percent market share of the tissue market in North America, analysts said.
Georgia-Pacific expects to unlock more than $500 million in pre-tax synergies, including $150 million in overhead, $175 million in manufacturing and logistics and $175 million in production improvements.
Separately, Georgia-Pacific reported second-quarter net income of $206 million, or $1.20 a diluted share, beating forecasts and meeting year-earlier results. The company attributed results to improved conditions in its pulp and paper businesses, which overcame weaker prices and demand for building products.
Analysts surveyed by earnings tracker First Call had forecast the company to earn $1.16 a share in the period. The company reported net income of $212 million, or $1.20 a share, a year earlier.
Revenue rose to $5.5 billion from $3.8 billion a year earlier, due mostly to the addition of Unisource Worldwide as well as the integration of the former Wisconsin Tissue.
In addition to Merrill, Banc of America Securities advised Georgia-Pacific in its acquisition of Fort James. Shearman & Sterling served as outside legal counsel. For Fort James, Morgan Stanley acted as adviser while Wachtell Lipton Rosen & Katz was outside counsel. 
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