What happened
International Paper (IP 0.93%) appears set to spark a bidding war for British rival DS Smith (SMDS), attempting to disrupt a planned deal between the target and London's Mondi (MNDI 1.07%). Investors appear concerned IP might have to pay up, sending shares of the paper and packaging giant down 7% as of 3 p.m. ET.
U.K. paper push
The paper and packaging industry is readjusting capacity and expectations now that a post-pandemic shipping surge is over -- and that means consolidation. Last year, Irish company Smurfit Kappa Group agreed to acquire WestRock for $11.2 billion, and earlier this month, Mondi made a $6.58 billion (or 373 pence per share) offer to acquire DS Smith.
Now, apparently, IP wants in on the act. DS Smith said it's in talks with International Paper about a potential counteroffer that would reportedly value the target at between 400 pence and 420 pence per share.
International Paper is larger than Mondi and presumably could outlast its British counterpart in a bidding war. But investors are worried about how far IP will be willing to go and how much dilution will be required to get an all-stock deal done.
Is International Paper stock a buy following the deal talk?
Investors are selling IP because of the uncertainty about what's to come. For that reason, it's not a wise move to jump in and buy shares following the drop. Buying DS Smith would have strategic advantages for IP and help broaden the company's geographic heft, but many mergers come undone because the buyer is forced to overpay.
Even with Tuesday afternoon's drop, IP shares are up 11% over the past year, despite the difficult macro conditions. The company, with its 4.8% dividend yield, is an attractive option for income-focused investors. But potential buyers should wait to see how this potential bidding war plays out before buying in.
