Jefferson Smurfit Group has strongly defended the merger of its JS Corp associate in the US with Stone Container and said that the logic behind the merger was more compelling now than when it was first announced last May. JS Corp and Stone have lodged the proxy documents on the merger with the Securities and Exchange Commission and shareholders of both companies will vote on the merger on November 17th.
But the reaction from Wall Street to the final confirmation of the merger was lukewarm, at least as far as it applies to JS Corp, with the shares marked down $1/4 to $10 1/2
in sizeable trading. Stone shares were trading marginally higher on $8 3/4. Both shares are well off the $21-22 they reached in the immediate aftermath of the initial merger announcement.
That fall in the share prices means the market value of the merged company has fallen from $4.4 billion (£2.83 billion) at the time of the announcement in May to less than $2.1 billion now.
Yesterday, Smurfit chief operating officer Mr Paddy Wright was insistent that there would be no "firesale" of any Smurfit Stone assets to pay down the merged group's $6.4 billion combined debt. He added that recent transactions in the sector involving Smurfit and Stone had shown that quality assets attracted good prices.
He referred specifically to Stone's recent $250 million sale of its Snowflake operation and the $320 million that Smurfit itself got for its Condat mill in France. Concern that the decline in the packaging sector might make it difficult for Smurfit Stone to realise good prices for the $2 billion of assets it wants to sell is one factor that has led to doubts in some sections of the market about the merger.
"I think there is a market for quality assets. No matter what way the world is going, we don't have to have firesales. We can wait to sell," said Mr Wright. Chief financial officer, Mr Gary McGann added that the assets earmarked for sale were in areas where there were buyers.
"The gameplan allows for a period of time for the sales to take place. There will be adequate finance within Smurfit Stone and there will be no dumping of assets; there is no need for inappropriate sales," he said.
And on the decision by Smurfit to buy 20 million JS Corp shares from Morgan Stanley at $25 each, an integral part of the merger, Mr Wright said: "It is a price that has to be paid to get the deal done."
That $25 price means that Smurfit is paying $500 million for shares that are currently worth little more than $200 million on the market. But Smurfit executive, Mr Mark Ennis said the proceeds of the Condat mill sale and the selloff of the Fernandina Beach machine covered the Morgan Stanley transaction.
Following the purchase of the Morgan Stanley stake, the Smurfit group will be the biggest shareholder in Smurfit Stone, with a 34 per cent stake. The merged group will have sales of $8 billion and 36,000 employees in 350 locations in North and South America and in Europe.
The Smurfit executives reiterated the logic behind a merger. In a statement, Smurfit chairman Dr Michael Smurfit said: "This transaction was courageous when it was first announced; it is even more courageous now. The industrial and financial logic of the proposed merger is even more compelling in as softening product market than in a buoyant one."
The combined entity will be one of the world's largest paper-based packaging companies with 11 per cent of global containerboard sales. "The core business areas of Smurfit Stone will be corrugated containers, folding cartons and industrial bags supported by an integrated mill system with virgin and recycled fibre resources," Smurfit stated.
