- International Paper has made a € 8.65 billion offer for Smurfit Kappa, Europe’s leading corrugated packaging company.
- Smurfit Kappa has rather summarily rejected the offer; however, its defense, at least to date, is not terribly convincing.
- The share price action of both companies suggest that Smurfit Kappa’s rejection of the offer is not the final word on the transaction.
- Competition authorities are unlikely to be excessively concerned about the deal, although some concessions may be extracted from the companies.
Smurfit Kappa (OTCPK:SMFKY) has roundly rejected what it calls an “unsolicited and highly opportunistic” acquisition proposal that it has received from International Paper (NYSE:IP). Considering Smurfit’s relative performance, a description of International Paper’s approach as ‘opportunistic’ seems a little odd:
Granted, twenty-eight percentage points of Smurfit’s performance in the period shown resulted from Euro appreciation. But even neglecting the sharp price increase that accompanied the news of International Paper’s approach, Smurfit Kappa’s performance suggests that, if anything, it was an opportunity missed well over a year ago. The day before the news came out, Smurfit was trading at 12.1X consensus 2018 earnings, while International Paper was trading at 12.5X consensus. This hardly indicates that International Paper was bottom-fishing. Yet its dividend yield was slightly lower than International Paper’s.
Admittedly, Smurfit’s flat earnings and decreased margins in 2017 compare unfavorably with International Paper’s healthy improvement in both metrics. It is very much the burden of Smurfit Kappa’s rejection of International Paper that improvement is on the way, thanks in part to an acceleration in planned investment. It is not a case of an acquirer picking off a company that has invested but has yet to benefit from the sunk expenditure.
International Paper has revealed that its offer for Smurfit consisted of € 22.00 in cash and 0.3028 of its shares for each share of Smurfit Kappa. Despite Smurfit’s objections, this does not strike me as a derisory offer.
Based on International Paper’s closing price on March 5, its offer valued Smurfit Kappa at € 8.65 billion ($10.7 billion) or € 36.47 per share, a 27.4% premium over its closing price that day. That is 15.4X consensus 2018 earnings, 325X Smurfit’s Shareholders’ Equity and 136.6% of its € 9.0 billion assets less its € 2.7 billion of long-term debt. Note that Smurfit Kappa is an aggressively acquisitive company: 30% of those assets consist of goodwill and intangibles.
Investors’ response to the prospect of a formalized bid was enthusiastic, but not unreasonably demanding of price improvement. At the close on March 6, Smurfit Kappa remained at a 6.6% discount to the value offered. International Paper’s share price declined 2.1% on the news, which indicates reasonably strong shareholder support for its actions. After all: as structured, the deal would dilute shares outstanding by 17.4%, require International Paper to find € 5.2 billion in additional purchase consideration as well as take on Smurfit Kappa’s € 2.7 billion of long-term debt.
The logic of the deal is that, despite its name, International Paper does relatively little business outside the U.S., while Smurfit Kappa is strongly exposed in Europe. While competition authorities here or there might insist on some asset sales, they probably would not be very great, and it is arguable whether they would be so demanding. International Paper’s Shareholders’ Equity accounts for only 19.3% of its balance sheet total. So financing for the transaction would probably be rather expensive, and obviously would create risks for the combination should the acquisition proceed.
The companies’ price action strongly suggests that Smurfit Kappa’s rejection of the offer is not the last of what we will hear about this deal. Investors who bid up Smurfit Kappa’s share price by 18.3% in a single trading session obviously do not expect Sigma Kappa’s press release is the last word. Yet with the discount to International Paper’s offer remaining at 6.6%, they are not, apparently, certain that the offer will be improved. The decline in International Paper’s price does not suggest a shareholder rebellion against the idea. An improvement in International Paper’s offer is predictable, but it is unlikely to be large. So far Smurfit Kappa’s management has not made a very convincing bid defense: it looks as though it will have to do better to retain its independence.
This article was written by
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