Smurfit and WestRock Announce Merger
Earlier this month, news circulated that there was a potential merger on its way between two major players in the paper and packaging industries. Irish Smurfit Kappa, a well-known provider of paperboard and packing materials, had entered negotiations with Atlanta’s WestRock regarding an acquisition.
The Smurfit and WestRock organizations jointly stated On September 12th, that they had reached a merger agreement valued at $11.2 billion. When finalized, this will form what is anticipated to be one of biggest paper corporations globally, Smurfit WestRock, in early 2024.
“This combination will enable WestRock to advance its key growth initiatives on a global scale while providing our shareholders with the opportunity to participate meaningfully in the combined company’s significant upside value potential,” Alan Wilson, WestRock’s Chair, stated during the announcement.
Merger Details
At end of June, both companies had a combined 12-month adjusted annual revenue of about $34 billion. Following completion of the merger, the firms expect to surge past $400 million in annual pre-tax run-rate synergies within one year.
The news of the merger caused Smurfit Kappa stock to drop around 10 percent, but CEO Tony Smurfit remained optimistic. He declared that the company “will come back strongly [when investors see] the potential benefit.”
In an interview with The Irish Times, Smurfit discussed the potential ramifications of the deal going through. It is expected that most of WestRock’s operations will be concentrated in the Americas, yet there appears to be some hesitation amongst investors regarding the union.
Mixed Reactions to the News
Chris Hughes, a renowned analyst from Bloomberg, has provided his opinion on the agreement between Smurfit Kappa and WestRock. The two companies will share ownership in Smurfit WestRock, with shareholders from both companies holding a majority stake of 50.4 percent and 49.6 percent, respectively. After careful observation, Hughes determined that this arrangement values both participating firms at an equal profit multiple as calculated through earnings before interest, taxes, depreciation, and amortization (EBITDA).
“WestRock has been trading at a lower valuation than Smurfit; the deal treats them equally,” he noted in mid-September.
Royal Bank of Canada analyst, Mathew McKellar, also recently released a report for Seeking Alpha also outlining his observed potential outlook stating, “We think a combination could bring together two complimentary systems, with breadth across the Americas and Europe.”
In contrast to the enthusiasm around WestRock’s merger, Randal Kenworthy, Senior Partner of West Monroe, believes that it would be more beneficial for the company to focus on tuck-in acquisitions. During a conversation with Seeking Alpha, he referred to this move as a “distraction.”
“I’m highly skeptical on this being a successful merger,” he explains to Seeking Alpha. “This is a major distraction from what companies should be doing, which is more around cost containment.”
Smurfit Rejects other Offers
In the past, Smurfit Kappa has contemplated merger possibilities.
But, at the beginning of 2018, Smurfit Kappa refused to accept an offer from International Paper (IP), which is based out of Memphis, Tennessee. The bid proposed was worth around $10.4 billion. IP accused the Smurfit Kappa board and management of not communicating enough, although Smurfit Kappa claimed it had “superior prospects as a standalone business.”
“The Largest Paper Company in the World”
One local union has expressed its support for the proposed merger.
When contacted by RRspin.com, USW Local 9-0425 President Billy Smith discussed the impacts of an acquisition or merger in the paper industry on his union’s members at WestRock. He noted that “Usually an acquisition or merger in the paper industry is a cause for concern as it often results in the sale or closure of overlapping assets.”
“The merger of WestRock and Smurfit Kappa is unique because the footprints of the two companies have almost no overlap. The combined assets of Smurfit WestRock will create the largest paper company in the world. We expect the transaction to be seamless for our mill and we look forward to operating under the proven leadership of the Smurfit Kappa management team.”
“Obviously, some mergers do work,” Proinsias O’Mahony, an Irish Times contributor comments. “This may be one of them, but investors have yet to be convinced.”
