(The author is a Reuters Breakingviews columnist. The opinionsexpressed are her own.)
By Carol Ryan
LONDON, March 6 (Reuters Breakingviews) - A proposedtakeover of Smurfit Kappa needs a better wrapper. TheIrish paper company on Tuesday revealed it had rejected anunspecified offer from U.S. rival International Paper.Similar deals suggest the buyer will have to pay up to get ahearing. But a cash deal would stretch leverage, while Smurfitinvestors are wary of U.S. stock.
The 8 billion euro ($10 billion) Dublin group, whichsupplies packaging to consumer goods giants like Nestléand Unilever , said its board snubbed atakeover proposal from its larger U.S. rival two weeks ago. TheMemphis-based company probably has its eye on boosting exposureto the European market, where an uptick in e-commerce and a moveaway from plastic is boosting demand for paper. Smurfit did notdisclose the details, but said the mixture of cash and stock“significantly undervalues” the company. Its shares jumped byalmost a fifth to 34 euros on Tuesday morning.
If the $24 billion International Paper wants to press ahead,it will need to clear two hurdles. First, it must make acredible offer. U.S. packaging group WestRock recentlypaid about 10 times historical EBITDA for rival KapStone.On a similar multiple Smurfit’s equity would be worth roughly9.6 billion euros, after deducting net debt of 2.8 billioneuros. That’s equivalent to around 40 euros a share – a hefty 40percent premium to the Irish group’s closing share price onMonday.
The other problem is that many of Smurfit’s Irishshareholders will be reluctant to hold the enlarged company’sNew York-listed stock. But upping the cash component willstretch its leverage. If International Paper offered 40 euros ashare in cash, the combined group’s net debt would rise toalmost five times EBITDA, according to Breakingviewscalculations based on 2017 numbers.
The prospect of sharing in hefty cost savings might promptSmurfit’s board and shareholders to reconsider. On the face ofit, though, International Paper will have trouble presentingthem with a sufficiently attractive package.
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CONTEXT NEWS
- Irish packaging company Smurfit Kappa said on March 6 thatit had rejected an unsolicited offer from U.S. rivalInternational Paper. The company did not disclose the terms ofthe proposed offer but said that the offer of cash and aminority holding in the combined business was “fundamentallyopportunistic and conditional” and “significantly undervalues”the company.
- Shares in Smurfit Kappa jumped 18 percent to 33.8 euros by0900 on March 6, valuing the company at around 8 billion euros.Memphis-based International Paper's market capitalisation is$24.1 billion, based on its closing share price on March 5.
- Smurfit Kappa is Europe’s largest producer of paper-basedpackaging.
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(Editing by Peter Thal Larsen and Bob Cervi)
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