Smurfit’s snubbed US suitor may have to bid €11bn to succeed

Shares in Irish packaging company set to rise again as International Paper reveals details of initial approach

Smurfit Kappa Group, led by Tony Smurfit, grandson of its founder, pledged to proceed with its own plan, outlined last month, to invest €1.6bn over the next four years in expanding its business and buying smaller rivals. File photograph: Brenda Fitzsimons

Smurfit Kappa Group, led by Tony Smurfit, grandson of its founder, pledged to proceed with its own plan, outlined last month, to invest €1.6bn over the next four years in expanding its business and buying smaller rivals. File photograph: Brenda Fitzsimons

 

Shares in paper packaging giant Smurfit Kappa are set to rise again on Wednesday after it emerged that US rival International Paper’s rejected bid for the group was valued at €8.6 billion.

The value of the Irish company soared 18.3 per cent on Tuesday to €8.02 billion after it revealed that it had received and rebuffed and unsolicited and “highly opportunistic” approach from Memphis-based International Paper. Financial details of the bid were only disclosed by the US company after European markets closed.

Still, analysts estimate that International Paper – or any other party that may emerge – will have to come up with an offer of up to €11 billion to win the hand of Europe’s largest paper packaging group.

Smurfit Kappa, which traces its roots back to 1934 and recorded €8.5 billion of sales last year, has dismissed International Paper’s offer, saying it “significantly undervalues the group’s asset, franchise and replacement value”.

The company, led by Tony Smurfit, grandson of its founder, pledged to proceed with its own plan, outlined last month, to invest €1.6 billion over the next four years in expanding its business and buying smaller rivals.

Higher bid

International Paper said that it made its initial approach on February 14th and delivered its cash and stock proposal on February 23rd. Deutsche Bank is understood to be advising the US company, while Citigroup and Davy are working with Smurfit Kappa. The indicative bid comprises €22 in cash and 0.3 new International Paper stock for each Smurfit Kappa ordinary share – valued, as of Monday, at €36.46 per unit of the Irish company.

“International Paper remains ready to engage with Smurfit Kappa’s board and shareholders to discuss the merits of its proposal,” it said on Tuesday night.

David Holohan, chief investment officer at Merrion Capital, said that it is likely International Paper will ultimately improve its offer to secure the FTSE 100-listed company.

“Given Smurfit Kappa’s significant market leadership positions across Europe and International Paper’s more limited exposure, a combination would be a great strategic fit,” Mr Holohan said. “The paper and packaging sector has undergone significant consolidation over the last decade, particularly in the US, so it is natural for the focus to now move towards Europe.”

Bank of America Merrill Lynch analyst Alexander Berglund indicated that a successful bid may have to be as high as €44.80 per share. That equates to a market value of €10.6 billion - almost 57 per cent above where Smurfit Kappa closed on Monday evening, before news of the approach was revealed.

UBS analyst Mark Field put an equity value of between €9 billion and €11 billion on the Dublin-based company, depending on the cost savings that International Paper can calculate from combining both groups.

Smurfit Kappa was subject to unfounded market speculation almost three years ago that International Paper was planning a bid for the Irish company at the time.

Dealmaking

The recent approach comes amid a surge in dealmaking in the industry on the back of robust global economic growth and the rise of internet shopping. US group WestRock, South Africa’s Mondi and the UK’s DS Smith are among industry players to unveil purchases in the past nine months.

However, Smurfit Kappa chairman Liam O’Mahony said on Tuesday that his board’s unanimous decision to reject the International Paper bid was down to it not reflecting the “the group’s true intrinsic business worth or its prospects”.

Smurfit Kappa recently announced record earnings before interest, tax, depreciation and amortisation for 2017 of €1.2 billion. It said the underlying positive trading conditions have continued into 2018.

“The proposal fails entirely to reflect the group’s strong growth prospects and attractive industry outlook,” the company said.