On August 15th amidst the market sell-off I wrote an article on Boise Inc., arguing that it was oversold. In light of the announcement on September 6, that International Paper (IP) has signed a definitive agreement to acquire Temple Inland (TIN) I wanted to revisit the valuation of Boise Inc. (BZ) in light of the IP TIN deal.
International Paper is acquiring Temple-Inland for $32.00 per share in cash, plus the assumption of $600 million of Temple-Inland's debt. The total transaction value is approximately $4.3 billion. The press release suggests that the deal is expected to result in $300mm of annual synergies and will be accretive to International Paper’s earnings within a year of closing.
The transaction values Temple Inland at 10.3x trailing twelve month EBITDA, 17x trailing twelve month earnings, and 17.8x consensus fiscal year 2012 earnings.
Boise Inc. is a paper and packaging products company. On the paper side, Boise manufactures office paper, commercial printing paper, envelopes, forms and newsprint. The packaging segment manufactures label and release paper, flexible papers used for food wrap and other applications, linerboard and corrugating medium, which are combined to make containerboard, the base raw material in corrugated sheets and containers. The company began operations in February 2008, when Boise Cascade sold its paper and packaging assets, which were renamed Boise Inc.
Boise remains inexpensive. Boise is trading at 3.4x trailing twelve month EBITDA, 5.5x trailing earnings, and 7.0x consensus 2012 earnings.
In 2010 TIN generated 83% of its revenue from its corrugated packaging business with the remaining 17% coming from building products. At the pre-tax income level packaging generated $333mm of pre-tax profit while building products resulted in a pre-tax loss of $19mm. Building products is levered to residential construction. In the 2010 10-K risk factors TIN points out that: “Profitability in our building products segment will continue to be negatively affected as long as the United States continues to experience historically low levels of residential construction.” It is safe to conclude that the value in TIN today is in the packaging segment.
What does this mean for Boise’s Valuation?
At $5.80 per share Boise has a market capitalization of approximately $700mm and an enterprise value of $1.2 billion. In the twelve months ended June 2011, Boise generated $130mm of EBITDA from its packaging segment and $225mm from its paper segment. Valuing Boise’s packaging business at the 10x that IP is paying for TIN suggests that Boise’s packaging is valued at $1.3 billion, over 100% of the current market capitalization of the entire company. Said another way, buying Boise today provides a free option on Boise’s paper business, a business that generated $225mm of EBITDA over the past twelve months. Paper is an economically sensitive commodity business and, as a result, should be valued at a low multiple. Even if Boise’s paper business is valued at only 3x EBITDA, the-sum-of-the-parts results in a total enterprise value of over $1.9bn and a market cap of approximately $1.5bn, which equates to $12.00 per share. This represents a premium of over 100% versus the share price today.
In a difficult market environment investors should look for valuation dislocations and opportunities that have a high margin of safety. Boise is one of these rare situations and is worthy of a long look.
Disclosure: I am long BZ.