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DUBLIN, Sept 12 (Reuters) – Ireland’s Smurfette Kappa ( SKG.I ) is buying U.S. rival Westrock ( WRK.N ) for $11 billion, creating the world’s biggest paper and packaging company and trying to better navigate the weak economies on both sides. Atlantic.
The deal would combine Europe’s largest paper and packaging maker with the United States’ second largest to create a company valued at nearly $20 billion.
Smurfit Kappa shares fell 10% in pre-market trading on Tuesday, while shares of WestRock rose 7.2%, as analysts said the premium the Irish company paid was more than its investors had expected.
WestRock shareholders will receive one share in the new company, called Smurfit WestRock, and $5 in cash for each share they hold, amounting to $43.51 per share, the companies said in a statement.
Analysts at JP Morgan and Jefferies questioned the 36% premium to Westrock’s $31.88 closing price on Sept. 6 — the day before the talks were released. JP Morgan said most investors it spoke to took a 15%-20% premium.
The deal represents a 28% premium to Monday’s closing price and Smurfit Kappa finance chief Ken Bowles, who will hold the same role in the new company, told Reuters it was a more normal market rate but not a key part of the deal.
“The two companies come together at a multiple, which if you add $5, is about seven times more. That’s far less than any transaction in the industry in years past, most of which were in the double digits,” Bowles said.
“We’re not putting it together at the top of the cycle, we’re not putting it together at the bottom. It’s in that sweet spot, where we feel there are more great times to come.”
Smurfit Kappa CEO Tony Smurfit and chairman Irial Finan will also retain their roles in the new company, which Bowles said began talks over the past eight months.
Smurfit Kappa shareholders will receive one new Smurfit WestRock share for each share they hold. They are expected to own 50.4% of the new company following the deal’s completion, which is expected in the second quarter of 2024.
He doesn’t see any reliability issues with the limited overlap between Smurfit Kappa’s European, South and Central America-dominated operations and WestRock’s US footprint, except for Mexico, which the companies will work to overcome.
A covid hangover
Packaging companies benefited from a surge in demand for goods and e-commerce during the Covid-19 lockdowns, but struggled to match those volumes as consumers resumed spending on services and producers began reducing packaged stocks.
Smurfit Kappa last month reported a fall in first-half core profit as it struggled to offset a decline in volumes, but forecast customer inventory cuts will end up pushing up box prices again as demand recovers.
Westrock beat Wall Street expectations for third-quarter profit, but said it would focus on streamlining its portfolio and further cutting costs.
JP Morgan estimates that the combined entity will have a market share of around 20% in the corrugated packaging market in Europe and North America.
The companies’ combined adjusted core profit of $5.5 billion and revenue of about $34 billion for the year ended June 30 clearly outstrips nearest rivals International Paper ( IP.N ) and Ball Corp ( BALL.N ).
Smurfette rejected a $9.5 billion takeover offer from Kappa International Paper in 2018.
The combined company will target pre-tax cost savings of more than $400 million by the end of the first full year following completion of approximately $235 million in one-time cash costs.
It said the deal could generate more than 20% of Smurfit Kappa’s earnings per share. Bowles said he believes the synergies will eventually exceed that figure.
Smurfette Westrock will be based in low-tax Ireland with its global headquarters in Dublin. It will be listed in New York and will have a permanent listing on the London Stock Exchange.
Smurfit Kappa has been delisted from Euronext Dublin, the latest blow to the Irish stock market as construction materials giant CRH prepares to exit later this month.
Reporting by Padraic Halp in Dublin, Yatarisa Shabong, Juveria Tabasum and Ananya Mariam Rajesh in Bengaluru Editing by Jason Neely and Mark Potter
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