Initial Thoughts on 8-K/TIN Pro Forma; Lowering 2013
Estimates
Reviewing Incremental Data Points; Maintain Neutral Rating:
Incremental information disclosed in the 8-K include TIN full year
results, additional detail on pro forma balance sheet items
including net debt, and further quantification of the step up of
D&A. While we think 2013 could be interesting if all goes
according to plan, we believe 2012 expectations skew to the high
side, noting we do not expect that implementation of a
containerboard price increase is likely this year.
Temple-Inland (TIN) 4Q11 Results Modestly Softer than We
Expected: Based on the filing, we calculate 4Q11 TIN adjusted
EBITDA of $32m, a little below our estimate of $47m. However, this
includes a higher than expected $9m sequential increase in
unallocated corporate costs (versus our expectations) that likely
isn't representative of normal run-rate. Corrugated Packaging EBIT
of $80m declined $23m y/y ($4m sequentially) on what we believe was
primarily cost inflation. Full year TIN EBITDA was $392m in 2010
versus $404m in 2010.
Additional Debt of ~$100m (Likely From Transaction Costs): Post
the close of the Temple-Inland acquisition, IP updated that assumed
TIN debt of $740m. We believe the increase from ~$600m is likely
due to transaction costs.
TIN Transaction Still Appears Neutral to EPS This Year; Building
Products Will Be a Discontinued Op Going Forward: The step-up of
$147m in D&A is higher than initial estimates of $100m. That
said, our understanding is that Building Products ($30m reported
loss of operating profit in 2011) will be excluded from continuing
operations going forward. As such, the TIN continues to look
neutral to EPS this year (dilutive in 1Q as synergies begin ramping
up). Earnings from required mill divestitures (~$100m of annual
EBITDA) will be included in earnings until sale (3Q/4Q timing per
agreement with DOJ). Annual pro forma D&A with the step-up in
asset value is $1.5b (excluding the Building Products
business).
We Estimate ~$1B in Proceeds from Divestitures: We assume
approximately ~$600m for required mill divestitures (6x EBITDA) and
~$400m for Building Products. We believe it's possible Building
Products could yield more than $400m noting valuations for
building/housing related companies have experienced a meaningful
rise in recent months.
Minor Adjustments to Our Earnings Forecast: Our 2012 EPS
estimates do not change as the exclusion of building products
offsets a $30m higher than expected D&A step-up versus our
previous forecast. Our 2013 EPS estimate moves to $3.14 from $3.21
primarily due to higher D&A expense (our previous forecasts
started excluded Building Products beginning in 2013 rather than
2012).