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Smurfit shareholders await further offers

The packaging giant has received a hostile takeover approach
March 7, 2018

Smurfit Kappa (SKG) may have spent the past year fighting the effects of cost inflation, but management doesn’t think the packaging group needs outside help. Chairman Liam O’Mahony described a cash-and-shares offer from Memphis-based paper group International Paper as “highly opportunistic” in a response issued ahead of the bidder making the terms of its offer public. Regardless, it sent the shares up more than a fifth on the day of the news to an all-time high.

IC TIP: Hold at 3134p

International Paper’s offer values Smurfit at €8.6bn (£7.7bn), or €36.46 a share. Under the terms, shareholders in the Dublin-based group would receive €22.00 in cash and 0.3028 new International Paper shares, giving them a 15 per cent holding in the enlarged group. The offer represents a 27 per cent premium to Smurfit’s share price the day prior to the offer being mooted.  

However, Mr O’Mahony said the proposal did “not reflect the group’s true intrinsic business worth or its prospects”, and criticised the timing of the offer. But International Paper reckoned that by submitting its proposal after the release of Smurfit’s full-year results and medium-term outlook, it could take better account of that information and the market’s reaction to it. The deal would allow shareholders to crystallise value in the near term, as well as retain some skin in the game, it said.

In February, Smurfit's management issued a range of medium-term targets, including a return on capital expenditure of 17 per cent and plans to invest €1.6bn, in addition to routine operational expenditure between 2018 and 2021. That was alongside a mixed set of full-year results. Rising corrugated fibre costs, or rather the lag time in passing through price increases to customers, eroded its cash profit margin by 60 basis points to 14.5 per cent and caused a decline in profits. However, during the fourth quarter both metrics had started to move back in the right direction.

There is little overlap between both packaging groups in terms of geographical coverage. Smurfit has a share of around 18 per cent of the fragmented European box market, while its would-be acquirer has just 4 per cent. However, the latter has almost a third of the US market, in comparison to Smurfit’s 1 per cent.