by Andrew Bary
Jefferies analyst Philip Ng writes today in a client note that "there is a high likelihood one of the containerboard producers creates an MLP structure over the next 6-12 months." MLPs are master limited partnerships. In this scenario, the companies would put many of their mills into MLPs, which might garner much higher valuations within MLPs thanks to ample dividend yields and tax benefits than they now get inside the corporations.
Ng writes that MLP creation could produce 30% to 50% gains in three stocks: International Paper (IP), Packaging Corp. of America (PKG) and Rock-Tenn Co. (RKT). International Paper shares are up 2% this morning to 47.67; Packaging Corp. is 2% higher at 63.69 and Rock-Tenn is up 1.5% to 47. He continues:
We initially had reservations on the MLP structure for containerboard, but based on IP and RKT’s recent comments and the assurance they would not move forward unless they were able to run their business as currently constructed (i.e. ability to take downtime and raise prices), we believe there is a high likelihood one of the containerboard producers create an MLP over the next 6 – 12 months. While there is still a moratorium on PLRs, we have heard chatter it could be lifted as soon as this fall.
PLRs refer to private-letter rulings from the IRS, which are needed for a company to create an MLP.
Barron's wrote last month that International Paper, Rock-Tenn and Kapstone Paper and Packaging (KS) could have significant upside potential if they create MLPs. International Paper and Rock-Tenn management have said they are seriously considering the idea, which has been advocated by New York investment firm Perry Capital. Ng sees a sum-of-the-parts value of $61.50 for IP, $72.32 for Rock-Tenn and $87.73 for Packaging Corp.
Shares of International Paper have gained 2.3% to $47.82 at 10:07 a.m., while Packaging Corp. of America has risen 2.3% to $63.75, Kapstone has jumped 3.7% to $28 and Rock-Tenn Co is up 2% at $47.22.
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