In a groundbreaking move, Ireland’s leading paper and packaging company, Smurfit Kappa, has announced its acquisition of U.S. rival WestRock for a substantial $11 billion, with the goal of forming the largest paper and packaging conglomerate globally. This strategic merger aims to navigate challenging economic conditions on both sides of the Atlantic and consolidate their positions in the competitive industry.
The union of Smurfit Kappa, Europe’s foremost paper and packaging producer, with WestRock, the second-largest player in the United States, will result in the birth of a conglomerate valued at nearly $20 billion. However, the announcement witnessed a mixed response from investors. Smurfit Kappa shares experienced a 10% dip, while WestRock’s stock surged by 7.2% in pre-market trading.
Analysts expressed concerns regarding the premium offered by Smurfit Kappa, which exceeded the expectations of most investors. WestRock shareholders will receive one share in the newly formed entity, “Smurfit WestRock,” and $5 in cash for each share they hold, equivalent to $43.51 per share, according to a joint statement released by both companies.
JP Morgan and Jefferies Raise Doubts
JP Morgan and Jefferies, leading financial institutions, raised questions about the 36% premium over WestRock’s closing price on September 6, which was $31.88, the day before the talks became public. It was noted that many investors had anticipated a premium in the range of 15% to 20%.
Smurfit Kappa’s Finance Chief, Ken Bowles, defended the premium, emphasizing that the consolidation was taking place at a multiple of approximately seven times when the cash component was considered. This rate, Bowles asserted, was notably lower than recent transactions in the sector.
Smurfit Kappa Leadership
Smurfit Kappa CEO Tony Smurfit and Chairman Irial Finan will continue to lead the new company, reflecting the ongoing discussions that spanned the last eight months. Post-acquisition, Smurfit Kappa shareholders will hold an approximate 50.4% stake in the new entity. The deal is slated for completion in the second quarter of 2024.
Addressing potential antitrust concerns, Smurfit Kappa expressed confidence in minimal overlap between their European and South/Central American operations and WestRock’s U.S. footprint, with the exception of Mexico, which will be addressed collaboratively.
While both companies experienced a surge in demand for packaging during the COVID-19 lockdowns, they encountered challenges as consumption patterns shifted. Smurfit Kappa reported a decline in first-half core profits but anticipates a rebound in box prices as demand normalizes.
The combined entity is expected to hold a significant market share of approximately 20% in the corrugated packaging market across Europe and North America, surpassing competitors like International Paper and Ball Corporation.
In 2018, Smurfit Kappa turned down a $9.5 billion takeover offer from International Paper. The merger is projected to generate pre-tax cost savings exceeding $400 million in the first year after completion, with one-time cash costs of approximately $235 million.