Investing.com — Suzano Papel e Celulose's (NYSE:SUZ) bid for International Paper (NYSE:IP) is looking increasingly likely to succeed as a combination of better financing options with the possibility of the Brazilian pulp giant offering shares in the newly formed company as part of the premium could bridge the gap between the two giants.
Originally, Suzano had reportedly offered $42/share for IP's full takeover, a bid that only implied a small premium over the American cardboard giant's current price.
Given IP's current turnaround under recently appointed CEO Andrew Silvernail, sell-side analysts and concerned investors were pricing a successful bid at the high fifties—a level that would, in theory, position it outside of Suzano's reach due to the Brazilian company's high debt level.
Moreover, IP's ongoing $10B merger with London-based DS Smith (LON:SMDS) poses another hurdle for the acquisition, mainly for two reasons: the high $221 breakup fee and the deal's own synergies, which are seen as beneficial to IP shareholders.
However, new developments from Suzano's side might be beginning to turn the deal's odds the other way, indicating that IP's Board might find itself compiled to take a mid-to-low $50s bid if the Brazilian pulp company manages to structure the financing route.
The latest reports indicate that while nothing will change in the $42/share all-cash part of the deal, Suzano may also add stock of the newly formed company to the mix, potentially pushing the bid to around $52/share - 40% above IP's latest closing price before Suzano's interest broke across the media.
In such a case, IP would still control roughly 21% of the newly formed company, according to a recent report by Wells Fargo (NYSE:WFC).
Financing Options Improving
While such a bid would still imply a high leverage for the Brazilian company, low-rate financing options could help mitigate that problem. Suzano has reportedly been in talks with Japanese banks Mizuho, Nomura, and Mitsubishi for parts of the cash.
The other part, according to analysts involved in the deal, could come from Brazil's National Bank for Economic and Social Development (BNDES). In the past, the company used the support of the development bank to acquire Brazilian pulp rival Fibria Celulose for around $4.5B, considering 2018's real-to-dollar exchange rate.
The main game-changer on that front, however, would be the inclusion of the newly formed company in the NYSE. This move would potentially improve Suzano's average rating and price target due to its better-than-average EBITDA and valuation metrics for the industry—mainly due to the lower average multiples of the Brazilian stock exchange, where Suzano stock currently trades.
Synergies Could Push the Extra Mile
The key part of the puzzle at this point seems to be the synergy created by the newly formed company. According to analysts consulted by Investing.com, a combination of Suzano's massive production output with IP's solid paper and packaging market positioning in the US and Europe would create a pulp and cardboard behemoth with competitive advantages.
"This deal aligns with both the trend and economic theory," says Rafael Barisauskas, Senior Economist for Latin America at Fastmarkets.
Among the deal's main positives is Suzano's fast track into US and European markets, a move that, considering the Brazilian company's solid operational advantages and lower costs, would be considerably hard to compete against.
Against this backdrop, Brazilian-based bank Itaú considers that in the newly formed company, paper and packaging (a higher-yielding part of the operation) could account for nearly 45% of the consolidated EBITDA margin—a number that currently hovers around 15%.
The sales base diversification would also make the company more resilient by lowering its exposure to China, which currently accounts for the greater share of the world's pulp demand growth.
The strategy aligns with the current broader trend in the pulp and paper industry, which has seen consolidation as one of the primary means for expansion in the last few years. "vertical and horizontal integration is a trend in the pulp sector, whether through direct integration (within already existing chains) or indirect integration (to gain foothold in new markets). This is evident when we observe global movements in this direction, as most producers use this strategy to seek optimal allocation of resources and assets," says Barisauskas.
Equity Side Also Attractive
On the equity side, such an offer would likely be compelling to IP's board, which would be faced with the decision to cash in on the 35-40% premium or seek out the long-term growth story with the DS acquisition.
However, considering IP's current multiples are significantly above its historical average, the former becomes even more attractive.
The current math also indicates that the bid would be favorable to IP shareholders from a risk perspective, particularly on the EV/EBITDA side, which would extend well beyond the current and historical average for IP.
Moreover, IP's investors realize that a good share of its leverage in the deal could easily fade should the market correct more broadly in the months ahead, likely pushing the stock price lower while the merger drags on.
Bottom Line
As the deal moves more favorably for Suzano, two main factors still hang in the balance. First, IP's Board will have to decide whether to take the higher premium now or believe in Silvernail's long-term turnaround plan. Market conditions may play a significant factor in that equation, meaning that things could change quickly if they decide to pursue the more risky route.
On the other hand, Suzano's leadership will need to convince IP's Board of the likely synergies created by the deal, thus persuading IP that owning 20% of the new company plus the cash today is the better move at this point.
Uncertainties aside, the latest information round shows that the table is moving more favorably toward Suzano's plan, mainly due to the Brazilian company's willpower to make the deal work.