Smurfit Kappa investors bet on fresh bid amid revolt risk

Smurfit Kappa shares spiked at a record high on Monday as investors wagered that International Paper (IP) will make a third takeover bid, as the board of Ireland's first multinational faces the prospect of a shareholder revolt if it did not engage with its US suitor.

The Irish company’s board rejected takeover proposals from Memphis-based IP in February and March as failing to value its “intrinsic business worth and future prospects”.

Market sources said that holders of almost 20 per cent of Smurfit Kappa’s shares have indicated to top-three shareholder, Janus Henderson, that they are supportive of the UK-based asset manager, which owns 4.2 per cent of the stock and has publicly called on the cardboard box maker to engage in talks with IP.

However, it is not clear how many would back Janus if the firm, as it has hinted, breached the 5 per cent level and called for an extraordinary general meeting (egm) to propose the removal of Smurfit Kappa directors. The cardboard box maker would be obliged to convene an egm if holders of at least 5 per cent of voting rights sought one.

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Showdown

“The pressure is increasing on the Smurfit Kappa board, but we hope it won’t come to [an egm] showdown,” said a fund manager who holds the stock.

A spokesman for IP said: “We have been consistent in our view that engagement is the path to unlock value and that the board of SKG has nothing to lose from such engagement.” He declined to say if the company was planning another bid.

A spokesman for Smurfit Kappa declined to comment.

Smurfit Kappa shares surged as much as 4.8 per cent in Dublin to €37.14 on Monday, valuing the group at €8.8 billion, before ending the session up 3.4 per cent at an all-time closing record of €36.64. Sources said that the spike had been underpinned as investors that track stock-market indices are being forced to buy shares ahead of the company being added to the MSCI Standard Index Series from Friday.

Takeover proposal

Janus Henderson's head of European equities, John Bennett, publicly called on Smurfit Kappa, through an interview last week with the Financial Times, to engage with Memphis-based IP or explain why it is not willing to do so. He said that his firm has told IP it would not support an offer below €40 per share but would urge both sides to work towards an agreed offer above that level.

IP’s most recent cash-and-stock takeover proposal, made on March 22nd and subsequently rejected by the Liam O’Mahony-chaired Smurfit Kappa board, currently values the company at €38.57 per share. That’s based on IP’s current share price on Wall Street, prevailing exchange rates, and fact that Smurfit Kappa’s final dividend on 2017 earnings, which was part of the bid, is no longer a consideration as it was paid out earlier this month.

‘Put up, or shut up’

Two weeks’ ago, IP, which made an initial takeover approach in February, signalled that it was ready to improve the terms and value of its proposal for Smurfit Kappa, after the Irish Takeover Panel gave it until June 6th to make a binding bid. If no such offer was forthcoming before the so-called “put up, or shut up” deadline, the US company faces being banned from making another approach for 12 months.

IP said on May 16th that it was willing to offer Smurfit Kappa shareholders a “mix and match” facility, allowing them a greater or lesser proportion of cash or IP shares that were offered in March.

In addition, IP said it believed both companies should discuss potential synergies from a combination to “gain a better understanding of each company’s current outlook, in order to explore a path forward to a recommended transaction”. Market sources read this as a clear signal that IP sees upside potential to its current $450 million (€387 million) synergies estimate, which would pave the way for a higher offer.