S&P revises Temple-Inland outlook to stable from negative, reaffirms BBB corporate credit rating, on news of definitive merger agreement to be acquired by IP

Kendall Sinclair

NEW YORK , September 8, 2011 (press release) – U.S. forest products company Temple-Inland has entered into a definitive merger agreement to be acquired by International Paper (IP) for $32 per share in cash.
We are affirming our ratings on Temple-Inland, including the 'BBB' corporate credit rating.

We are revising our rating outlook to stable from negative reflecting the diminished likelihood of an adverse leveraging transaction given the company's entry into a merger agreement with IP.

Standard & Poor's Ratings Services said today it revised its rating outlook on Austin, Texas-based Temple-Inland Inc. to stable from negative. At the same time, we affirmed our ratings on the company, including the 'BBB' corporate credit rating.

"The outlook revision follows the announcement that Temple-Inland Inc. and International Paper Co. [BBB/Stable/--] have entered into a definitive merger agreement under which International Paper will acquire all of the outstanding common stock of Temple-Inland for $32 per share in cash, plus the assumption of $600 million in Temple-Inland's year-end debt," said Standard & Poor's credit analyst Tobias Crabtree. "As a result of the proposed merger agreement, Temple-Inland is now unlikely in our view to face shareholder pressure to engage in some form of leveraging transaction, which could have lowered the ratings." Previously, Temple-Inland's Board of Directors rejected International Paper's proposal to acquire all of the outstanding common stock of Temple-Inland for $30.60 per share in cash.

It is our expectation that the Temple-Inland bond issues would remain outstanding following the closing of the acquisition. However, any potential impact to the rating on these notes or on any of International Paper's debt instruments due to potential structural subordination issues will be reviewed once more details of the pro forma capital structure are available.

The merger is subject to certain customary conditions, including the receipt of regulatory approvals and Temple-Inland shareholders' approval, and is expected to be completed in the first calendar quarter of 2012. The merger agreement has been approved by the board of directors of both companies.

On a stand-alone basis, we believe that Temple-Inland's mix of businesses and current capital structure should produce credit measures on average that are in-line with our view of its intermediate financial risk profile and our expectations for the 'BBB' rating, given its satisfactory business risk profile, even if the economic and housing recoveries are somewhat weaker than we currently expect. The rating incorporates our expectations of adjusted debt to EBITDA of 2.5x and funds from operations (FFO) to adjusted debt of 35% on average. For the complete rationale on Temple-Inland, please refer to the research update published June 8, 2011, on RatingsDirect.

The outlook is stable and reflects the diminished likelihood of an adverse leveraging transaction given the company's entry into a merger agreement with International Paper. If the acquisition is completed as currently proposed, and market conditions remain in line with our expectations, we would likely affirm and subsequently withdraw the corporate credit rating on Temple-Inland, which is currently the same as International Paper's.

We could take a negative rating action if the announced merger agreement were not to occur and if the company were to deviate from the financial policies that we have incorporated into our ratings. This could occur if the company pursued a more aggressive financial policy such that we thought leverage would be sustained at more than 3x and FFO to debt at less than 30% on average.

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