By Padraic Halpin and Yadarisa Shabong
DUBLIN (Reuters) -Ireland's Smurfit Kappa is buying U.S. rival WestRock (NYSE:WRK) for an agreed $11 billion to create the world's biggest paper and packaging company and try to better navigate weak economies on both sides of the Atlantic.
The deal will combine Europe's biggest paper and packaging producer with the second largest player in the United States and forge a company worth nearly $20 billion.
Smurfit Kappa shares dropped 10%, while WestRock's were up 7.2% in pre-market trade on Tuesday, as analysts said the premium paid by the Irish company was higher than most of its investors had hoped for.
WestRock stockholders will get one share in the new company, called Smurfit WestRock, and $5 in cash for each share they hold, which works out 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 Sept. 6 closing price - the day before talks were disclosed. JP Morgan said most investors it had spoken to had assumed a 15%-20% premium.
The deal represents a 28% premium to Monday's closing price and Smurfit Kappa finance chief Ken Bowles, who will take the same role in the new company, told Reuters that was a fairly normal market rate but was not the important part of the deal.
"The two companies are coming together at the same multiple, when you add in the $5, of about seven times. That's much less than any transaction that has been done in this sector in the last number of years, most have been double-digit," Bowles said.
"We're not putting this together at the top of the cycle, we're not putting it together at the bottom either. It's in that sweet spot where we feel there are much better times ahead."
Smurfit Kappa CEO Tony Smurfit and chair Irial Finan will also keep their roles in the new company after talks Bowles said kicked off over the last eight months.
Smurfit Kappa shareholders will receive one new Smurfit WestRock share for each share they hold. They are expected to own around 50.4% of the new company following completion of the deal, expected in the second quarter of 2024.
Smurfit said he did not see any antitrust issues given the limited overlap of Smurfit Kappa's European, South and Central America-dominated operations and WestRock U.S. footprint, except for in Mexico which the companies would work to overcome.
COVID HANGOVER
Packaging (NYSE:PKG) firms benefited from a boom in demand for goods and e-commerce during COVID-19 lockdowns, but have struggled to match those volumes since consumers resumed spending on services and producers started cutting back packaged stocks.
Smurfit Kappa reported a fall in first-half core profit last month as it struggled to offset the decline in volumes but predicted inventory reductions by customers were coming to an end with scope to increase box prices again as demand recovers.
While WestRock beat Wall Street expectations for third-quarter profit, it said it remained focused on streamlining its portfolio and further reducing costs.
JP Morgan estimated the combined entity would have market shares 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 would put it clear of nearest rivals International Paper and Ball Corporation (NYSE:BALL)
Smurfit Kappa rejected a takeover proposal worth $9.5 billion in 2018 from International Paper.
The combined entity will target pretax cost savings of more than $400 million at the end of the first full year following completion at a one-off cash cost of around $235 million.
That could make the deal more than 20% accretive to Smurfit Kappa's earnings per share, it said. Bowles said he was confident the synergies would ultimately go beyond that figure.
Smurfit WestRock will be domiciled in low tax Ireland with its global headquarters in Dublin. It will be listed in New York and also have a standard listing on the London Stock Exchange.
Smurfit Kappa will de-list from Euronext Dublin, the latest blow for the Irish bourse as building materials giant CRH (NYSE:CRH) prepares to leave later this month.