TIN Temple Inland

International Paper Co. (IP) will sell three containerboard mills under an antitrust agreement with the U.S. Department of Justice that allows the company to complete the $3.48 billion purchase of rival Temple-Inland Inc. (TIN).

The settlement agreement filed Friday in a federal court in Washington requires International Paper to sell Temple-Inland mills in New Johnsonville, Tenn., and Ontario, Calif., and an IP mill in Hueneme, Calif. The sale of the mills will trim 970,000 tons of containerboard production capacity, or about 7% of the total capacity of the combined companies. International Paper will have four to six months to sell the plants.

Containerboard is used to make corrugated cardboard boxes. The Justice Department demanded the sales to maintain a competitive market in a consolidating industry for cardboard boxes.

Austin, Texas-based Temple-Inland is the fourth-largest producer of industrial packaging in North America with a 10% share of the market. International Paper of Memphis, Tenn., is the market leader with a 27% share of the North American market. Following the sale of the three mills, International Paper's market share is projected at 34%.

International Paper said the agreement with the Justice Department will allow the purchase of Texas-based Temple Inland to close as soon as next week. International Paper will pay Temple shareholders $32 for each of their approximately 110 million shares of stock. The company values the total cost of the deal at $4.3 billion based on a higher share count from exercised stock options and $600 million in assumed debt from Temple.

IP Chairman and Chief Executive John Faraci said he's satisfied with the Justice Department agreement, predicting that the devestitures will not disrupt the company's goal of reaching $300 million in cost-saving synergies from Temple over the next two years.

"With better U.S. economic data, improving box demand and export prices stabilizing, we think we're very well-positioned to get this off to a good fast start," said Faraci during a conference call Friday with analysts. Temple-Inland will "make International Paper's already-good industrial packaging business an excellent one."

Paper industry analysts said the number of mills IP has to sell is more than they anticipated, but noted the Justice Department left intact the network of plants that converts containerboard into boxes.

"They made no conditions on the box plants and that's where all the synergies are," said Chip Dillion, an analyst with Vertical Research Partners.

Dillion said the California mills on the selling block are higher cost operations than many of the mills IP was allowed keep because they rely on recycled cardboard to make containerboard. The recycled feedstock is subject to more price volatility than wood pulp used by other mills.

The combined company will have 17 mills. With Temple, IP expects to generate about $30 billion a year in sales with projected income before taxes and interest of about $4.3 billion.

International Paper does not expected to have difficulty selling the three mills. But if IP is unable find a buyer for its Hueneme mill, it will attempt to sell its mill in Henderson, Ky.

The company also intends to sell Temple's construction materials business.

"With signs of improvement in housing market, that should positively impact the sale of the building products business," Faraci said.

Temple-Inland's board had adamantly refused IP's overtures last summer for a merger, insisting that IP's original $30.60-a-share offer severely undervalued the company. Temple's board adopted a so-called "poison pill" plan to block IP's attempt to obtain a majority of Temple's stock by purchasing shares directly from Temple shareholders.

But by the end of August, Temple's leverage to extract a higher price from IP had eroded. The stock market deteriorated and the U.S. economy hit a soft spot, causing Temple shareholders to become nervous about the company's stonewalling of International Paper.

Moreover, Temple encountered unanticipated liabilities that threatened to diminish the value of the company. Bankruptcy trustee for creditors of a bank Temple once owned sued the company for $1 billion in damages. The complaint accused Temple of looting Texas-based Guaranty Bank's assets and engaging in risky banking practices before spinning off the bank in 2007. The bank collapsed in 2009.

Temple also was hit with expenses stemming from the accidental discharge of waste material from a Louisiana paper mill into the Pearl River. The mishap depleted the oxygen level in the water, killing thousands of fish and shellfish. Expenses related to the bank case and the spill remain unresolved.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

--Brent Kendall contributed to this article.

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