Smurfit Kappa (LON: SKG) has announced the terms on which they’re buying WestRock (NYSE: WRK). Or more accurately, according to the companies, the terms upon which the agreed merger will take place. The market, in its wisdom, thinks that Smufit is overpaying - that’s why SKG shares are down 10% on the announcement. They’re also down more than 20% from their price when the deal was first publicly mooted.
Yes, yes, there’s all that about global colossus and so on. But there are those who don’t think that’s all that much of a reason: “ "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.” That thing about synergies. The more market power you have the more you can control prices and fatten margins. But the way that packaging works is that it’s a series of national markets, not a single global one. So having power in more national markets doesn’t really aid - and they’ll not be allowed to consolidate national markets to where they’re gaining significantly more power.
It’s thus possible to muse that this is about the Smurfit family being able to propel the family business up into the stratosphere - not something that necessarily benefits shareholders.
Smurfit Kappa share price from Google Finance
It’s fair to say that the terms do look a little rich: “The Transaction will involve the creation of a new holding company for the combined Smurfit WestRock. Smurfit WestRock will be incorporated and domiciled in Ireland with global headquarters in Dublin, Ireland and its North and South American operations will be headquartered in Atlanta, Georgia. Subject to shareholder approvals, regulatory approvals and other customary closing conditions, the Combination is expected to close in the second quarter of calendar year 2024. Under the terms of the Agreement, for each share of common stock of WestRock (a “WestRock Share”) the common stockholders of WestRock will receive one new Smurfit WestRock share (a “New Share”) and $5.00 in cash.”
It’s normal for the price of the bidding company to fall, of the biden for to rise. But the joint movements here would indicate that the market at least thinks Smurfit Kappa is overpaying.
