IP - Potential Smurfit Kappa WestRock $20 billion deal gets mixed reviews

2023-09-10 09:22:28 ET

A potential $20 billion merger between containerboard giants Smurfit Kappa and Westrock received mixed reviews after talks about a potential deal were confirmed this week.

Shares of Smurfit Kappa in Ireland fell 7% in the two days following a WSJ story that broke news of the merger talks between the Irish and U.S. companies. WestRock shares climbed 8.3% amid the disclosure.

WestRock ( NYSE: WRK ) and Smurfit Kappa ( OTCPK:SMFTF ) confirmed Thursday that the boards of both companies are discussing key terms of a potential combination to create Smurfit WestRock. The potential deal would be effected through an Irish scheme of arrangement involving Smurfit Kappa and a merger of a subsidiary with WestRock.

"With fundamentals under pressure for WRK, SKG is stepping in at a time with WRK's multiple under pressure and earnings approaching a bottom," Jefferies analyst Philip Ng wrote in a note on Thursday.  "The combination would accelerate SKG's expansion into the Americas as well, given the company's corrugated-packaging plant acquisitions in Argentina and Brazil last year."

Jefferies Ng pointed out that International Paper ( IP ) has shown historically that there are "limited synergies" to having a global footprint in the paper packaging industry.

"Few details are available on what a transaction may look like, but we think a combination could bring together two complementary systems, with breadth across the Americas and Europe," RBC analyst Matthew McKellar, who has a sector perform and $36 price target on WestRock ( WRK ) wrote in a note on Thursday.

The companies estimated in their release confirming the deal talks that a potential combination could create $400 million in annual pre-tax run-rate cost synergies.

"I'm highly skeptical on this being a successful merger," Randal Kenworthy, a senior partner in West Monroe's Consumer & Industrial Products practice, told Seeking Alpha in an interview on Friday. "This is a major distraction from what companies should be doing, which is more around cost containment."

West Monroe's Kenworthy argued that instead of large mergers between the two companies, WestRock ( WRK ) should focus on tuck-in acquisitions.

International Paper ( IP ), which made an unsolicited $10.7 billion bid to acquire Smurfit Kappa in 2018 that was rejected, will likely relish in the operational distraction created by a merger, according to Kenworthy.

"At the end of the day, this is going to be dilutive from a financial perspective, just in terms of the cost," Kenworthy said. "The cost to drive this integration is going to outweigh the synergies and benefits that they're going to get from it. I anticipate that International Paper is viewing this as a positive."

While Jefferies NG sees "limited pushback" on the regulatory front as the businesses have "little overlap," West Monroe's Kenworthy expects the deal may raise some antitrust concerns.

"This is just going to tie up their management team and their legal team for the next eight months, and I think it's a distraction," Kenworthy added.

More on Smurfit Kappa Group PLC, WestRock, etc.

• WestRock Company: Buying Low And Selling High
• Smurfit Kappa: Improving Trends, Reiterate Buy
• Smurfit Kappa Group Plc 2023 Q2 - Results - Earnings Call Presentation
• WestRock Company: 69% Upside But Poor Profitability Comps Vs. Peers
• Smurfit Kappa: Resilient Margin, A Strong Buy Now

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