Stone hangs around Smurfit's neck

The suits at Smurfit have mounted a sturdy defence of the planned merger between Jefferson Smurfit Corporation and Stone Container. But Wall Street's reaction to the belated publication of the proxy document was to mark down JS Corp and mark up Stone shares. This simply reinforces the feeling that this is a deal that offers a lot more to Roger Stone than Michael Smurfit and leaves Smurfit shareholders owning a sizeable chunk of a merged company whose future is uncertain.

Quite simply, Roger Stone has been thrown a lifeline that he does not deserve. Apart from 1995, Stone Container has notched up losses of gargantuan proportions in the past five-and-a-half years - no less than $1.6 billion (£1.03 billion). The US packaging industry has had some rocky periods since then but nothing that justifies such a horrendous record of losses.

And for the past year-and-a-half Stone has not been able to generate enough operating profits even to meet its interest expenses, and that deficit will continue for the second half of this year. Smurfit executives said yesterday that the merged group would not be rushed into a firesale of assets to pay down debt, but with the prognosis for prices in the industry so gloomy one can only wonder how soon it will be before Smurfit Stone gets the prices it believes that its assets for sale are worth.

Given its level of debt, its inability to meet interest - never mind capital repayments - out of its operating income, Stone was walking a financial precipice and many in the markets believe that JS Corp could have adopted a more aggressive negotiating position when putting this deal together.

If JS Corp had not arrived as a merger partner, it is conceivable that Stone could at the very least have gone into Chapter 11 protection if not into liquidation. In that situation, a lot of the overcapacity that plagues the US packaging industry could have been eliminated at a stroke and Stone's better quality assets could have come on the market for buyers like JS Corp.

Needless to say, the bankers and the brokers come out best: Merrill Lynch picks up $10 million for advising JS Corp; Salomon gets $7.5 million for advising Stone; and believe it or not, JS Corp pays Morgan Stanley $7.5 million for advising its own leveraged equity fund on the deal which sees the Smurfit group buy 20 million of Morgan Stanley Leveraged Equity Fund shares in JS Corp at 21/2 times the market price. What a deal for the Morgan bankers!

Other nuggets in the proxy document include JS Corp paying Smurfit Group $6.5 million for the transfer of Ray Curran to the merged Smurfit Stone and Mr Curran himself getting what seems to be a signing-on fee of $1.5 million or $2.4 million in pension payments for moving from Beechill to Chicago. Clearly the Bosman ruling doesn't apply here.