The world’s largest paper and packaging company will be created when Ireland’s Smurfit Kappa acquires American rival WestRock for an agreed $11 billion, in an effort to better manage the sluggish economies on both sides of the Atlantic.
The merger will create a business worth close to $20 billion by bringing together the largest paper and packaging maker in Europe and the second-largest player in the US.In pre-market trading on Tuesday WestRock’s shares increased 7.2% while Smurfit Kappa’s fell 10% as experts claimed the premium paid by the Irish company was larger than most of its investors had anticipated.
WestRock shareholders will receive one share in the new business, Smurfit WestRock, as well as $5 in cash for each share they own, or $43.51 per share, according to a joint announcement from the two companies.The 36% premium over WestRock’s $31.88 closing price on September 6, the day before talks were revealed, raised concerns among analysts at JP Morgan and Jefferies. The majority of the investors JP Morgan had spoken to had anticipated a 15%–20% premium, according to JP Morgan.
Ken Bowles, the Smurfit Kappa finance chief who will assume the same position in the new business, told reporters that while the deal’s 28% premium to Monday’s closing price was significant, it was not the main factor in the decision.“When you include the $5, the two companies are merging at a multiple of around seven times. The majority of transactions in this area over the past few years have been double-digit; therefore that deal was significantly less, according to Bowles.
“Neither the top nor the bottom of the cycle are the times we are putting this together. We believe that far better days are ahead since we are in that ideal situation.Tony Smurfit, the CEO of Smurfit Kappa, and Irial Finan, the chair, will continue in their positions in the new business, according to Bowles, who claimed that negotiations began eight months ago.
Shareholders of Smurfit Kappa will exchange each existing share they own for one new Smurfit WestRock share. After the transaction closes, which is anticipated to happen in the second quarter of 2024, they are anticipated to hold roughly 50.4% of the new business.Given the minimal overlap between Smurfit Kappa’s activities in Europe, South and Central America, and WestRock’s U.S. footprint, with the exception of Mexico, where the firms will endeavor to resolve any issues, Smurfit said that there were no antitrust concerns.
DROWNING ON COVIDDuring COVID-19 lockdowns, the demand for goods and e-commerce soared, but packaging companies have struggled to meet those levels as consumers have started spending again on services and producers have begun reducing packaged inventories.
Smurfit Kappa struggled to offset the loss in volumes, which resulted in a decline in first-half core profit, but it forecasted that customer inventory reductions were coming to an end and that there was room to raise box pricing once again when demand improved.WestRock said it continued to be focused on consolidating its portfolio and further cutting expenses even though it topped Wall Street forecasts for third-quarter profit.
According to JP Morgan, the combined company would own about 20% of the European and American corrugated packaging markets.For the fiscal year that concluded on June 30, the firms’ combined adjusted core earnings of $5.5 billion and revenue of nearly $34 billion would put them ahead of their closest competitors, International Paper and Ball Corporation.
In 2018, International Paper made a $9.5 billion buyout offer that Smurfit Kappa declined.With a one-time cash cost of around $235 million, the merged company will aim to achieve pretax cost savings of more than $400 million by the end of the first full year after completion.
The deal might boost Smurfit Kappa’s earnings per share by more than 20% as a result, the company claimed. The synergies, according to Bowles, would eventually exceed that amount.The global headquarters of Smurfit WestRock will be in Dublin, Ireland, which has minimal taxes. Both the New York Stock Exchange and the London Stock Exchange will have a regular listing for them.
As building materials juggernaut CRH is ready to depart later this month, Smurfit Kappa will delist from Euronext Dublin, dealing the Irish exchange its latest blow.
