US equity firm bids €3.7bn for Smurfit

Madison Dearborn, the Chicago-based private equity firm, has unveiled a €3.7 billion bid to take Jefferson Smurfit Group private. The deal is backed by the company management including Dr Michael Smurfit, the driving force behind the business, who will get some €159 million in cash for his 7 per cent stake.

He will also get shares worth €82 million in Smurfit's US subsidiary. Other family members and directors will also benefit from the sale.

Dr Smurfit, who will remain as chairman of the group, will reinvest a third of the proceeds in the company and, along with other senior management, will own 10 per cent of the company. Other members of the management participating at this stage include chief operating officer Mr Gary McGann, who will become chief executive, but up to 200 senior managers will be invited to participate. They will also have options over another 10 per cent of the company.

The management has given an irrevocable undertaking to support the Madison Dearborn bid and this may prove critical as it transpired yesterday that a rival bid may yet emerge. A second, unnamed buy-out firm is in preliminary discussions with the Smurfit board.

Mr McGann said yesterday that management would support the Madison Dearborn offer "unless and until it either lapsed of failed". Mr McGann and other executive directors of the company are precluded from recommending the offer to shareholders because of conflicts of interest that arise from their participation in the deal. The other conflicted directors are Dr Smurfit, his two brothers Dermot and Alan and his son Tony. Two other directors, Mr James Dwyer and Dr Mary Redmond, also had to exclude themselves because they work for Arthur Cox which advises Madison Dearborn.

It was left to the remaining "independent" directors, led by senior non-executive director Mr Martin Rafferty, to review the approach which was made formally at the start of May. Yesterday, Mr Rafferty said the independent directors had unanimously recommended the deal after taking independent advice.

However, he stressed it was still possible for other interested parties to make a rival bid, which the directors would be obliged to consider under Irish takeover panel rules. He said the only other approach "remains preliminary" and there was no certainty that it would be at a higher price.

Mr Rafferty said the independent directors had arrived at their position after a review of all the options for returning value to shareholders.

He said the company had restructured itself since 2000 but the share price had continued to underperform. Smurfit had also looked at a merger in 2001 with its US associate, Smurfit Stone Container Corporation, but no suitable structure could be agreed. Smurfit owns 29.3 per cent of Smurfit Stone and, under the Madison Dearborn proposal, these shares will be distributed to exiting Smurfit shareholders. They will receive one Smurfit Stone share for every 16 Smurfit shares they hold. Madision Dearbon puts a value of €1.11 per Smurfit share on this part of the deal . When this is added to the €2.15 per share in cash it is offering, the bid figure of €3.26 per share or €3.7 billion put on the deal by Madison Dearborn is reached.

Mr Rafferty said the price being offered was in line with prices paid for similar assets in similar transactions. It also had to be seen in the context of an approach last year from one of Smurfit's competitors. It was unable to offer more than €1.90 in cash plus the distribution of the Smurfit Stone shares and the talks were terminated last June, said Mr Rafferty. The company had also looked at either selling off its Smurfit Stone stake or else distributing directly to shareholders. An analysis of both options indicated that value would not be created for shareholders, he said. He added that there was no immediate prospect of an improvement in the industry as demand in Europe for corrugated boxes - Smurfit's main product - remained weak.

Madison Dearborn has given an indication that it would not dispose of the K-Club - the group's golf and country club business in Kildare - for the foreseeable future. The club is due to host the Ryder Cup in 2006, at which point the value of the property will be maximised.

But Madison Dearborn did intend to raise €125 million through unspecified asset disposals, he said.

Details of the offer will be sent to shareholders in coming weeks.