| Richard Perry (Bloomberg) |
Richard Perry has identified what he thinks is a big opportunity in the paper and packaging industry, taking stakes in companies that make containerboard in the hope that they will pursue a beneficial tax structure that is now being used by other natural resources companies. Perry, the founder of New York-based hedge fund firm Perry Capital, thinks that if the companies follow his suggestions, the opportunity “could revalue upwards the entire containerboard industry” by 50 percent to 100 percent, according to a letter sent to clients and obtained by Alpha. Perry tells clients he has spent the past few months conducting extensive due diligence on the industry.
Containerboard is used to produce corrugated boxes; virgin containerboard mills process logs and wood chips into containerboard. “These mills are considered irreplaceable because it is prohibitive from both a permitting and economic perspective to build a new virgin containerboard mill in the U.S.,” he elaborates.
Perry is calling for the companies that operate these mills to create so-called Master Limited Partnerships, or MLPs, for their containerboard mill operations, according to the letter. MLPs that meet certain Internal Revenue Service tests do not pay corporate taxes, and their income is passed through to shareholders on a tax-free basis.
Perry explains that the IRS allows MLPs to be used by companies engaged in natural resource activities, including the processing, refining and marketing of oil, gas, petroleum products, coal and timber. He notes that while the IRS has released so-called private letter rulings, which allow specific companies to set up MLPs, pertaining to various types of timber-related MLPs, he has not found any containerboard producers so far that have requested private letter rulings from the IRS. However, he says he got assurance from PricewaterhouseCoopers tax professionals that domestic virgin containerboard mills using less than 25 percent recycled fiber should be able to create an MLP structure, and assets could be placed into an MLP on a tax-efficient basis.
Perry explains this applies to all domestic virgin containerboard mills. He adds that virgin bleached board and kraft paper mills also should be able to create an MLP since their production processes are similar to that of containerboard.
If companies pursue this structure, it would provide a huge opportunity for investors, he says. “The industry continues to trade at inexpensive valuations,” Perry states.
He identifies five companies that are in best position to benefit from his fundamental case. “All have an unrealized asset in the form of a virgin mill MLP,” he says. Based on his analysis, Perry says there is the potential for 50 percent to 100 percent price appreciation in the stocks across the industry.
Perry says the five largest containerboard producers are International Paper; Rock-Tenn Company; Georgia-Pacific, a subsidiary of Koch Industries; Packaging Corporation of America; and KapStone Paper and Packaging Corporation.
Perry’s style can generally be described as event driven and opportunistic, but he has occasionally pursued activist campaigns over the years. So it wouldn’t be entirely surprising if he did so with these companies if they don’t follow his suggestions.
He figures IP is worth $75 per share, or roughly 50 percent above its price on July 11. He says Rock-Tenn is worth $177 per share, which works out to 76 percent price appreciation, while KapStone is worth $58, nearly double its recent stock price.
Perry managed $9.75 billion at the start of the year, up from nearly $7 billion the prior year. Perry Partners International, launched in 1993, is up 2.81 percent this year through July 11. Last year it was up a little more than 20 percent and gained about 15.6 percent in 2012.
