Friday, 1 April 2011 Analysts take on AP Paper Mills - International Paper deal

International Paper has agreed to acquire 53.5% stake of promoters of Andhra Pradesh Paper Mills for all cash deal at USD 257 million and will be paying USD 104 million for acquiring additional 21.5% stake from other share holders. International Paper will pay USD 62 million non-compete fee for AP Paper.

We have collated views of analysts on the announcement of deal. The same is as under:

Kartik Mehta - AVP Equity Research, Sushil Finance:

AP Paper has created hope for re-rating of entire paper sector where earlier valuation were compressed. Paper demand in India is expected to grow at 8%+ CAGR for FY10-20E, compared to sluggish scenario is overseas markets. Also Indian paper companies generate higher return ratios (almost double) compared to global players in developed markets. In terms of per capita paper consumption, India scores very less at 8.5Kg compared to 63Kg, 227Kg, 55Kg and 45Kg of China, USA, World average and Asia average, respectively. With high growth in GDP, increasing literacy rate, education sector gaining importance and improving standard of living, growth in the paper industry is expected to remain robust. For example, an increase of 1 kg in the per capita consumption would absorb an additional production of 1.1 MTPA of paper.
International Paper has agreed to acquire 53.5% stake of promoters of AP Paper for all cash deal at USD 257mn and will be paying USD 104mn for acquiring additional 21.5% stake from other share holders. This gives per share valuation of AP Paper at Rs.632. This price is still 2.67 times higher than today’s closing price of Rs.236.15 on BSE.
Hence we see AP Paper stock price to reach at least Rs.500+ considering all the remaining stake holders (46.5%) surrenders their shares implying 46% acceptance ratio by International Paper for acquiring additional 21.5% stake.

Prashanth Tapse, senior research analyst, Mehta Equities:

Shares of paper companies were overlooked from long time and saw suddenly in demand following to the International Paper’s acquisition of Andhra Pradesh Paper Mills. APPM is the country’s fifth largest paper producer by revenues behind Ballarpur Industries, JK Paper, Tamil Nadu Newsprint and the paper division of diversified firm ITC. The stock was in action from last couple of days mainly on the back of talks with world’s largest paper company International Paper for majority stake and last evening the deal was finalised to acquire 53.5% or entire promoters stake in mid size firm Andhra Pradesh Paper Mills Limited (APPM) for $257 million or Rs 1,150 crore in cash. Also agreed to a USD 62 million or Rs 2800 million non-compete payment to the sellers. International Paper will also coming out with a mandatory public tender offer and seeks to acquire up to an additional 21.5% of the outstanding shares of APPM for approximately USD 104 million or Rs 4700 million in cash. If totally successful as it is expected to be, International Paper will end up with 75% stake in the company, the maximum allowed in a listed firm.

On the data available on public grounds calculations show International Paper is paying a significant premium to the existing market price with the deal struck at around Rs 542 a share (not counting the non-compete fee to the Bangurs). The share purchase and public tender are expected to be completed by third quarter of 2011, after regulatory approvals. Once it’s completed, the transaction will position International Paper as the first global paper and packaging company with a significant position in India`s fast growing economy. We believe that the acquisition of APPM by International Paper will help industry to be re-rated which was once ignored and neglected. Hence we advised investors to hold on to there investments in paper industry as we expect some more deals to strike the industry as it is hovering around for better prospects. We seen AP Paper deal certainly brings focus onto the paper sector which had been missing. We like Ballarpur and TNPL for long term investment.

Shares of the company gained Rs 39.35, or 19.99%, to close at Rs 236.15. The total volume of shares traded was 10,619 at the BSE (Wednesday).

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