Shares in Stone fall sharply in US in very heavy trading

Shares in Stone Container, the American packaging group which is due to merge with Jefferson Smurfit Corporation, have fallen sharply in exceptionally heavy trading on Wall Street.

It follows reports that a key $4.8 billion syndicated loan facility, which was part of the merger deal, has been shelved after banks involved in the syndicate demanded too high an interest rate.

Shares in Stone and JS Corp have both fallen heavily since the merger was first announced last April, with Stone falling from $21 to $9, and JS Corp from $22 to a low of $9.87 before yesterday's trading, partly as a result of the problems with linerboard prices and partly due to the slump in equity markets.

However, when reports of the problems with the syndicated loan were reported in the American Banker yesterday, Stone's share came under intense selling pressure and fell as low as $6.75 before eventually closing down $1.06 on $7.94. Over 3.9 million shares traded yesterday, nine times the daily average, as investors took the view that a possible abandonment of the merger is now a real possibility and that this would be far worse news for Stone than JS Corp. JS Corp shares were marginally firmer on $10.32.

Smurfit's chairman, Dr Michael Smurfit, said he was unable to comment on any aspect of the merger ahead of the approval of the merger proxy statement by the Securities and Exchange Commission and the circulation of the document to both sets of shareholders.

American Banker reported that having abandoned the syndicated loan, which was due to be launched next week, Smurfit and Stone are now considering issuing junk bonds as an alternative to the bank loan.

Market sources said, however, that there is little appetite for junk bonds given the current volatility in equity markets. The $4.8 billion loan was planned to refinance the debt in the merged Smurfit Stone after the group had sold off various assets.

The loan was made up of various elements but the main problem was with a $1.5 billion institutional placing which was priced at 3.5 percentage points over London interbank rates. That price was set after an initial price of 2.75 percentage points over the London interbank rate was spurned by institutions.

Whether the collapse of the syndicated loan will be sufficient to scupper the merger will depend on the reaction to any alternative junk bond issue. Banking sources in New York said that it would be very difficult for borrowers with low ratings like Stone in particular and JS Corp to float a junk bond in a market that has been effectively shut down since August. Ultimately Smurfit Stone may have to go back to the syndicated loan market whatever their feelings about the margins that lenders are demanding.

However, the reaction on Wall Street last night suggests that there is a growing view in the market that the merger could collapse. JS Corp shares were actually stronger indicating a view in some quarters that an unravelling of a merger - which has fallen in value from $4.4 billion last April to less than $2 billion now - would not be the end of the world for JS Corp.

Stone, however, with over double the debt of JS Corp, would be in a far more serious position and that was reflected in the selling of the shares.

If both sides agreed to scrap the merger, it would also save Jefferson Smurfit Group - which owns 46 per cent of JS Corp - substantial amounts of money. As part of the merger arrangement with Stone, the Smurfit group agreed to buy 20 million JS Corp shares from Morgan Stanley at $25 a share, or a total of $500 million.

JS Corp shares are currently trading at just over $10 and, if Smurfit was forced to fulfil its arrangement, it would be paying Morgan Stanley $500 million for shares that are currently worth little more than $200 million in the market.

An agreed end to the Stone merger would release Smurfit from any penalty it would have to pay Morgan Stanley from withdrawing from the share purchase agreement.

Meanwhile, Stone has agreed the sale of its Snowflake newsprint operation in Arizona to Abitibi Consolidated for $250 million. Part of the merger arrangement was that Stone would also sell its 25 per cent stake in Abitibi, as part of the programme to sell $2.5 billion worth of assets to bring the merged group's debt down to around $4.8 billion.