Winner’s curse unfairly haunts $7 bln paper deal

Through mill. Chunky acquisitions tend to destroy shareholder value, numerous studies have found. It’s refore understandable that investors often take fright when a company y own launches a takeover bid. Sometimes that scepticism obscures a good thing, however – as International Paper’s purchase of UK-listed packaging peer DS Smith might show.

transatlantic pairing, agreed on Tuesday, was sealed on Friday when rival bidder Mondi dropped out of race. Memphis, Tennessee-based victor is handing DS Smith investors 0.1285 of its own shares in return for each one y hold of target’s, implying an equity offer of almost $7.4 billion based on undisturbed share prices.

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, last tring day before public approach. That’s reduced real premium on offer for DS Smith to 30%, rar than original 48%. rest of paper and packaging sector has dropped, but not by as much as acquiror.

slide is arguably surprising since 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 buyer’s estimated integration costs of $370 million.

True, Sutton is effectively paying away two-thirds of that value to DS Smith since undisturbed bid premium over target’s share price was equivalent to about $2.4 billion. But re 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 cost-cut estimate as overcooked, or y may mistrust cross-continental empire building. Even if only two-thirds of synergies came through, however, International Paper’s return on 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 synergies materialise, and return is a handy 11%.

It’s worth considering alternative. Peers like Smurfit Kappa and WestRock 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.