JS Corp and Stone shareholders back paper group merger

Jefferson Smurfit Corporation and Stone Container Corporation are expected to move ahead quickly with asset disposals and cost-cutting measures following the approval by shareholders of the merger of the two paper industry groups.

The merger deal is expected to close today with the signing of legal agreements between the parties involved. At simultaneous shareholder meetings in St Louis (JS Corp) and Chicago (Stone) yesterday, shareholders of both groups formally approved the $2 billion merger. Some 95 per cent of JS Corp shareholders and 85 per cent of Stone shareholders voted in favour of the deal.

The merged operation will be one of the world's largest paper base packaging companies with 11 per cent of global container-board sales. It will have between 17 and 18 per cent of annual US paperboard capacity and annual proforma revenue of more than $8 billion (£5.3 billion).

But the deal comes with high financial risks because the merged operation will have very high borrowing levels - estimated at between $61/2 billion and $7 billion. Cost-cutting and asset disposals to reduce borrowings are now essential to the success of the merger between the two groups which are operating in difficult market conditions. Jefferson Smurfit Group, which owns 44 per cent of JS Corp, will own 33 per cent of Smurfit-Stone Container. With JS Corp shares now trading around $127/8, the deal is seen as expensive for the group because, as part of the deal, it agreed last April to pay $25 per share to Morgan Stanley for its 20 million JS Corp shares. At 10.30 a.m. US time yesterday, a small number of JS Corp shareholders met in the Renaissance Hotel in St Louis. Less than 40 shareholders attended the meeting and all but one or two of those were employee shareholders. It was all over in about three minutes.

But the outcome was a foregone conclusion. Shareholders accounting for 83 per cent of the shares - Jefferson Smurfit Group and Morgan Stanley - were already pledged to vote in favour of the deal.

At the same time the Stone shareholders meeting got under way at the Mid-America Club in Chicago. Stone shares are more widely held but the outcome was never in doubt because the deal was seen by many as a lifeline to the heavily indebted group in a difficult trading environment. The merger takes place against the background of an industry with excess production capacity, weak export demand and high levels of stock. While the logic in favour of mergers in the US paper sector is strong - removing capacity and cutting costs - the risks of this deal increased after the merger conditions were agreed. Industry conditions deteriorated further as the Asian crisis hit exports and inventories or stocks in the US increased putting pressure on product prices. Third quarter results released last month by JS Corp showed flat profits of $8 million reflecting a combination of lower liner-board and corrugated box prices and increased downtime to reduce stock levels. Stone shares were upgraded on Monday by analysts at JP Morgan in anticipation of merger agreement. The announcement brought the shares to almost par with the JS Corp share price. Without the merger, Stone Container's financial outlook would be very weak, they said.

Stone traded up to $121/2 coming near to the JS Corp share close at $127/8. The shares were expected to move close to parity when the deal was announced given the near one-for-one share swap involved.

Just two weeks ago ratings agency Moody's lowered its JS Corp rating and left its Stone ratings unchanged reinforcing a view in the markets that the deal was better for Stone than for JS Corp.