It ain't over until Michael Smurfit sings

BUSINESS OPINION: One of the more curious aspects of the Smurfit leveraged buy-out is the silence of Dr Michael Smurfit. The chairman and chief executive of the company has yet to voice an opinion on the merits of the €3.7 billion offer tabled by Madison Dearborn Partners last week.

When quizzed on the matter the Smurfit camp put forward the argument that it did not want to personalise the issue, claiming that that if Dr Smurfit became involved the debate would move away from the merits of the offer and focus on him.

The breathtaking arrogance of this assertion should not come as a surprise to anyone who has followed the life and times of Dr Smurfit. He is after all famed for quaffing Chateau Petrus at banquets in the K-Club while his guests make do with a lesser vintage.

But there is a serious point in what the Smurfit people are saying. The deal put forward by Madison Dearborn is a leveraged buy-out that is supported by Smurfit management. This is a subtly different creature from a management buy-out supported by a private equity firm. The difference presumably is in where the axis of power lies.

The logic seems to be that if Dr Smurfit were to take a prominent role in selling the deal, then it would be seen as a management buy-out that he was putting together for his benefit, rather than something being done to put the hapless Smurfit shareholders out of their misery.

Anyone trying to make this point would not be short of ammunition. Dr Smurfit is the biggest non-institutional beneficiary of the deal. He will get €159 million in cash and €82 million in shares in Smurfit Stone Container Corporation - the group's US associate - in exchange for his 7 per cent shareholding. He will also be able to buy a similar size stake in the restructured business by re-investing one-third of his proceeds. He also retains his job which currently pays him €5 million a year.

Presumably what makes this different from a management buy-out is that Dr Smurfit's vice-like grip over the company and its board will be broken. It is something he has maintained for more than 30 years despite having seen his stake diluted to 7 per cent.

There is a certain amount of sense in what the Smurfit people say, but notwithstanding that, you do have to ask yourself the following question: If Dr Smurfit came out and enthusiastically endorsed the deal saying there was no other viable option would it make the Madison Dearborn bid more or less likely to succeed? The answer has to be that it would make it more likely to succeed.

This in turn suggests some other explanation for his silence. One of course is that he sees himself as being above the mundane task of going around selling the deal and that such things are best left to the hired help, such as chief executive designate Mr Gary McGann.

It is not beyond the bounds of possibility. but something of a strange stance to adopt when what is at stake is your life's work and a very considerable part of your fortune.

ANOTHER possibility is that he is less than enthusiastic about the Madison Dearborn deal and has been pushed into supporting it by the other directors and management. There is no doubt that the decision of the independent directors to go ahead and recommend the Madison Dearborn offer last Monday while Texas Pacific was waiting in the wings was a strange one. Sources close to the company have indicated that the decision was only made over the previous weekend and was driven by the view that a bird in the hand was worth two in the bush.

Perhaps Dr Smurfit did not agree with this tactic. All the same it is hard to see him having a fit of the sulks when so much is at stake. It is also hard to see him being bounced into something by a board and management that has been so accommodating of his desires in the past.

No, it is much more probable that Dr Smurfit's silence is part of a calculated plan on the part of a very experienced dealmaker. The objective is to flush out a rival bid or at least a higher price from Madison Dearborn.

If you were Texas Pacific or any other potential rival bidder you would realise that you would be going nowhere if you could not prise the support of the board and management away from Madison Dearborn.

The independent directors do not appear to be a problem and have been at pains to show that they are more than willing to consider any rival proposals. On Friday they went to the trouble of making a Stock Exchange announcement in response to reports that rival bidders were not getting access to management.

There has been a lot of talk about the management giving an irrevocable commitment to support the Madison Dearborn bid, but that is not much of an obstacle to the rival bidder. The same is true of the commitment of Dr Smurfit and his family to sell their shares.

Both these irrevocable commitments can be revoked if the Madison Dearborn bid either fails or is withdrawn. Both of these things are certain to happen if a higher bid is made by Texas Pacific or some other party because the Madison Dearborn offer requires the support of 80 per cent of the shareholders.

What would present a much larger obstacle to a rival bidder would be if there was some sort of relationship between Madison Dearborn and Smurfit that could not be broken. They would be facing a much more difficult task if there was some personal investment in the Madison Dearborn proposal by Smurfit management and Dr Smurfit in particular. It is hard to think of a better way to signal that this is not the case than for Dr Smurfit to give what amounts to a lukewarm endorsement to Madison Dearborn.

There is nothing about his actions to date to suggest that he would not bite the hand of anyone who offered him more money and more attractive terms than Madison Dearborn.

Whatever happens now, it will not be over until Dr Smurfit sings.