Consolidation is heating up in the paper and packaging industry, and speculation is building that International Paper (NYSE: IP) could be among the targets for a deal.
Shares of IP gained 29% in May, according to data provided by S&P Global Market Intelligence, on investor hopes that a big offer could be in the company's future.
IP as a buyer, and a seller?
Paper and packaging remain in demand even in a digital world, and the industry has seen a number of deals in recent years as companies battle to build out their global presence. International Paper is among the would-be buyers, agreeing to acquire British rival DS Smith earlier this year.
But Brazilian paper giant Suzano (NYSE: SUZ) might have other ideas. The company has reportedly reached out to International Paper about a potential deal, with Reuters saying that the company could be willing to pay a significant premium to IP's trading price in early May.
The report says that a deal would require International Paper to abandon its pursuit of DS Smith, and raised questions about whether a Suzano offer would be attractive to IP's board or acceptable to U.S. competition regulators.
Is International Paper stock a buy on the deal talk?
The speculation continued to mount as the month went on, with Bloomberg reporting that Suzano has opened discussions with a number of Asian banks in an attempt to raise additional capital to boost its offer. Suzano is apparently aware of the potential political backlash in the United States to an IP deal, and is hoping to offer a price high enough to compensate for that risk.
It appears the interest is real, but it is still far from certain that interest will result in either a signed merger agreement or an eventual deal. Investors buying in purely for the quick payday are likely to be disappointed, as even in the best case scenario, a merger would take quarters to close.
But not all is lost for International Paper even if it goes it alone. The stock was upgraded to a buy at Jefferies late in the month on its prospects as an independent, with analyst Philip Ng writing that he sees "multiple levers" to unlock value including refining the portfolio, focusing on higher-margin goods, and growing in Europe via the potential DS Smith deal.
Investors could be in for a bumpy ride depending on what course the deal talk takes, but deal or no deal, there are intriguing reasons to look at IP shares right now.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool recommends DS Smith. The Motley Fool has a disclosure policy.
