Maker of Angel Soft Buys Maker of Brawny

Georgia-Pacific's  takeover of rival papermaker Fort James  for $11 billion in cash, stock, and assumed debt is as much a defensive move as an offensive one. The deal improves Georgia-Pacific's competitive position and makes it less attractive as a takeover target, but it also burdens the company with a lot of debt.

The main prize in this deal was Fort James' tissue business, which makes up nearly 80% of its revenue and includes brands such as Brawny and Quilted Northern. Georgia-Pacific gets most of its revenue from commoditylike products such as building materials and plain paper, with only 11% coming from the higher-margin manufacturing of its Angel Soft and Sparkle brands. Georgia-Pacific's chief executive officer, Pete Correll, said in Monday's conference call that this merger is part of his effort to make the company's product mix more branded and less cyclical.

On the down side, the merger will increase Georgia-Pacific's debt load to uncomfortable levels. Georgia-Pacific has kept a reasonable amount of debt on its balance sheet, but Fort James is highly leveraged, with a debt/equity ratio of 3.3 (versus 1.1 for the S&P 500 index). In addition, Georgia-Pacific will issue $6.3 billion more debt to pay for the merger, so the combined company will be leveraged to the hilt.

Another effect of the merger is that it makes Georgia-Pacific less attractive as a takeover target. There has been a lot of consolidation in the paper industry lately, causing speculation about which companies are ripe to be acquired next. Georgia-Pacific's post-merger size and heavy debt will deter most potential suitors.