The latest deal between U.S.-listed International Papers Co. and a little-known paper producer in India southeastern state of Andhra Pradesh has turned the spotlight on the country’s small and fragmented paper industry. Given the hefty premium International Paper is paying for the company, the transaction is likely to change the way investors value paper stocks, say analysts.
On Tuesday, International Paper said it plans to pay about $361 million to acquire a 75% stake in Andhra Pradesh Paper Mills Ltd. According to the structure of the deal, the buyer will purchase a 53.5% stake from Andhra Pradesh Paper Mills’ founders L.N. Bangur and family members and affiliates for about $257 million and pay an additional $62 million as a non-compete fee. Under Indian laws, the transaction will trigger a mandatory open offer and International Paper plans to pay $104 million to buy an additional 21.5% from public shareholders.
On Wednesday, shares of Andhra Pradesh Paper Mills soared 20% to the day’s upper circuit limit of 236.15 rupees ($5.3), boosted by the news that International Paper was paying the company’s founders a price of 523 rupees per share, more than two-and-a-half times the company’s Tuesday closing price of 196.8 rupees. Investor enthusiasm spread to shares of other paper producers and with good reason.
To say that International Paper paid a hefty price for the Andhran paper producer is an understatement. Most paper manufacturers, including Ballarpur Industries Ltd., the country’s largest, are trading at less than half the value that American company has ascribed to it.
“The deal values AP Mills at 32.8 times its 2009-10 per-share earnings whereas the stock is currently trading at 11 times. Its peers are trading at between 8 times and 15 times 2009-10 earnings and, hence, a re-rating for the sector is likely,” said Bhavika Shah, an analyst at Sushil Financial Services, a Mumbai-based brokerage.
In afternoon trade Wednesday, Ballarpur Industries was trading up 15.8% at 37.50 rupees ($0.8), West Coast Paper Mills Ltd. was 17.6% higher at 90.40 rupees ($2.0) and Tamil Nadu Newsprint & Paper Mills Ltd climbed 10.9% to 135.75 rupees ($3.0). The 30-share benchmark Sensex was up 1.1%.
The IP-AP Mills transaction is also an indication of interest from overseas investors for Indian paper producers and is likely to trigger more mergers and acquisitions in the sector, says Avinash Gupta, vice president at Bonanza Portfolio Ltd.
India is one of the few major markets where the demand for paper is growing at a smart clip and is expected to remain robust in the long term. In the 12 months up to April 2010, the per capita consumption of paper in India grew at 10.6%, according to Assocham, an industry lobby. And India has a long way to go to catch up with peers, indicating that the demand for paper is expected to remain strong in coming years. According to Assocham, the per capita consumption of paper in India was 9.2 kg in 2009-10, compared to 42 kg in China and 350 kg in developed markets.
The sector seems to have turned into a heavyweight overnight.
Fuente: India Real Time