Smurfit Kappa shares slump as investors digest owning 50.4% of group after WestRock merger

Smurfit Kappa’s shares slumped on Tuesday as investors digested news that they will end up with 50.4 per cent of a $20 billion-plus ($10.7 billion) merged group it has agreed to create with US peer WestRock.

The Dublin-based company said that the deal to create the world’s largest packaging group by revenue would see WestRock investors receive the equivalent of $43.51 per share, mainly by way of new stock in the enlarged group, to be known as Smurfit WestRock, but also including $5 in cash.

The two groups had combined annual sales of $34 billion for the 12 months to June.

The transaction is expected to close in the second quarter of next year, subject to approvals from shareholders and regulatory authorities.

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The price marks a premium to the $31.88 level at which WestRock shares closed last Wednesday, before news of the tie-up talks emerged. Smurfit Kappa had a market value of €9.73 billion (€10.4 billion) before news of the discussions leaked, compared with WestRock’s $8.17 billion market capitalisation.

While the US group was the larger of the two by revenues and earnings before interest, tax, depreciation and amortisation (EBITDA), it also has a much bigger debt level, which weighed on its stock’s valuation at a time of heightened interest rates.

Shares in Smurfit Kappa closed 10.2 per cent lower in Dublin on Tuesday evening, while WestRock’s shares were, at the same time, trading up 3.7 per cent.

[ Smurfit Kappa’s Irish stock market exit compounds existential crisis ]

“This incredibly exciting coming together of our two great companies is a defining moment within the global packaging industry. Smurfit WestRock will be the ‘go-to’ packaging partner of choice for customers, employees and shareholders,” said Smurfit Kappa chief executive Tony Smurfit, who is set to lead the merged group.

“We will have the leading assets, a unique global footprint in both paper and corrugated, a superb consumer and speciality packaging business, significant synergies, and enhanced scale to deliver value in the short, medium and long term.”

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Smurfit Kappa chairman Irial Finan will also chair Smurfit WestRock, according to the statement. The future plans of WestRock CEO David Sewell are not yet known.

Citigroup, the lead financial adviser to Smurfit Kappa on the deal, has committed to give Smurfit Kappa a bridging loan to finance the cash portion of the deal – amounting to $1.28 billion. The Irish group said it expects that this will subsequently be refinanced in the bond markets or “other financing sources”.

Smurfit Kappa said last week that it expected that more than $400 million of annual pretax cost synergies is expected to be delivered by the end of the first full year following completion. One-off restructuring costs are estimated at $235 million.

It said on Tuesday that the deal would boost the group’s earnings per share by a “high-single digit” percentage before synergies, rising to more than 20 per cent after the savings are scraped out.

[ Smurfit Kappa sales fall as cardboard box sales dip in weakening economy ]

The group also confirmed that the merged entity would drop its listing in Dublin and move its premium listing from London to New York. This would also see it fall out of the FTSE 100 in London.

If WestRock’s board backs away from the deal, it must pay Smurfit Kappa $147 million. The Irish company would have to pay $100 million to WestRock if it reversed out of a transaction.

Termination fees of €57 million and €50 million would have to be paid by WestRock and Smurfit Kappa, respectively, if either failed to secure necessary approval from its own shareholders.

Davy analyst Justin Jordan estimates the initial net debt burden of Smurfit WestRock on completion of the deal would be 2.4 times EBITDA, before falling to 2.1 times by the end of next year, including expected synergies and restructuring costs. Smurfit Kappa’s debt ratio stood at 1.4 times at the end of June.