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IP makes Champion play
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April 25, 2000: 4:20 p.m. ET
International Paper bids $6.2B plus debt for firm trumping UPM-Kymmene
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LONDON (CNNfn) - International Paper Inc. made an unsolicited $6.2 billion cash and stock bid to acquire rival Champion International Inc. Tuesday, threatening to overwhelm Champion's current merger agreement with Finland's UPM-Kymmene and accelerate the ongoing consolidation within the paper industry.
IP, the world's largest paper company and a component of the Dow Jones Industrial Average, said the proposed agreement also includes the assumption of $2.3 billion in Champion debt. The combined companies would create a paper and timber titan specializing in everything from coated paper used in magazines to standard office supplies.
In conjunction with the deal, the Purchase, N.Y.-based International Paper (IP: Research, Estimates) also said it plans to sell more than $3 billion in assets by the end of 2001 to focus more closely on its core businesses.
"Our cash and stock offer is far more attractive to Champion shareholders," said John Dillon, IP's chairman and chief executive officer, in a letter delivered to Champion's board Tuesday morning. "A merger with Champion affords us the opportunity to significantly improve profitability by strengthening our core business.
"There's no question in my mind we will be a stronger company," Dillon added.
 UPM-Kymmene said in a statement it "will consider the situation," while Champion said it would consider the IP proposal and "respond as appropriate."
Analysts had expected that another bidder might step forward, particularly given shares in the Finnish company have tumbled since its merger with Champion was first announced.
Champion shareholders are tentatively scheduled to vote on the UPM-Kymmene bid on June 14, but investors clearly believed the bidding war had only started Tuesday. Champion (CHA: Research, Estimates) shares soared 12-3/4 higher to 64-3/16 in late-afternoon trading while International Paper shares lost 2-7/16 to 37-9/16.
Meanwhile, American depositary receipt shares of UPM-Kymmene (UPM: Research, Estimates) rose 1-3/16 to 27-11/16.
Seizing an opportunity
UPM-Kymmene's all-stock merger agreement with Champion initially was valued at $6.56 billion, but analysts largely criticized the deal as being too expensive, inducing a sharp drop in the value of UPM-Kymmene's shares and shaving roughly $1.47 billion, or about 22 percent, off of that deal's value.
Before UPM-Kymmene shares rallied 7.5 percent to  29.75 in Helsinki on Tuesday -- lifted by the prospect that it might not go ahead with the merger -- its merger deal only valued Champion shares at $52.74 each.
IP's offer values Stamford, Conn.-based Champion at $64 per share -- a 25 percent premium above Champion's closing price Monday -- composed of $43 in cash and $21 in IP stock for every Champion share. In addition, IP would pay the $210 million break-up fee associated with the UPM-Kymmene/Champion deal.
Company officials said the proposed deal would permit International Paper to save about $425 million annually through more efficient purchasing and integrated manufacturing. The deal is also expected to be about 10 percent accretive to the company's earnings next year.
 In a conference call with analysts, Dillon denied that the bid was an attempt to capitalize on a faltering UPM-Kymmene share price. Instead, he framed the proposal as an appropriate method to improve International Paper's position in an ever-consolidating business.
"At some point in the future, I think there will be relatively few companies competing on a worldwide basis," Dillon said. "From IP's perspective, what we are doing is building a strong leadership position in each of our businesses."
Als Stenqvist, an analyst with ratings agency Standard and Poor's, said the fragmented paper and pulp industry had been consolidating as companies seek ways to cushion the impact on profit of the industry's cyclical nature. He said swings in the price of products were more related to supply, which is tough to control in an industry consisting of many small suppliers, than to demand, which has remained relatively constant.
A UPM-Kymmene counter-bid?
IP is no stranger to the buyout business, having completed a $6.6 billion purchase of Union Camp last year. Key Finnish rival Stora Enso, the world No. 2 in terms of production after IP, two months ago announced plans to buy U.S.-based Consolidated Papers for about $4.9 billion.
Mark Wilde, an analyst with Deutsche Banc Alex Brown, said the Champion deal is particularly attractive because the company has already discarded several of its non-profitable business lines and boasts attractive operations in Brazil and Canada -- two areas where International Paper isn't particularly strong. (525K WAV) (525K AIF)
Still, Wilde said he expected some sort of counter-proposal from UPM.
"I wouldn't be surprised if we saw UPM come in with another bid here," he said. "I think Champion is worth well more than what IP is bidding."
Wilde said he believed Champion would ultimately sell for between $70 and $72 per share, although he admitted "at the end of the day, it's going to be hard to top IP."
"It's very easy between two U.S. companies to see that IP will probably get more synergies and cost savings out of the transaction," he said.
Dillon refused to disclose what areas of International Paper's business might become involved in the divestiture plan, but the strategy is not a new one. The company sold roughly $1 billion in non-core assets in 1997 and has concentrated its acquisitions primarily on its printer paper, packaging and timber acquisitions since that time.
Dillon did say proceeds from the divestitures would be used to help pay down corporate debt. 
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