An activist fund has questioned the “strategic rationale” of Smurfit Kappa’s proposed multibillion acquisition of its US packaging rival WestRock, urging the Dublin-listed company to consider a tie-up with the company that led a failed attempt to acquire the Irish cardboard box-maker five years ago.
Primestone Capital, a UK fund that holds about 0.8 per cent of Smurfit Kappa’s issued shares, has written to the company’s board and chief executive Tony Smurfit, outlining a number of its concerns about the acquisition.
Formally agreed in September, the deal is set to create the world’s biggest packaging group with annual revenues of about $34 billion (€31.7 billion). It will also result in its Irish stock market quotation being dropped as it moves its main listing from London to Wall Street.
Primestone, however, has called into question the strategic rationale behind the deal, arguing that WestRock’s long-term exposure to the paper industry “deviates” from the industry’s model, a situation that will require “years and much capital to fix”.
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The fund also said that WestRock’s asset base is of “significantly lower quality” with a “high cost base and generating lower returns” than that of other competitors and also Smurfit Kappa itself.
The value accruing to Smurfit Kappa’s shareholders will be “insignificant”, Primestone said, with WestRock’s shareholders expected to reap the benefit of “the advertised synergies” associated with the proposal. This is “odd”, the fund said, “considering that WestRock has had a hard time finding a buyer for itself as it struggled to deliver on its own plan”.
In September, Smurfit Kappa Kappa’s credit rating – currently Baa3, the lowest investment-grade rating – was put on review for a potential upgrade by Moody’s in light of the WestRock plan. Moody’s said that while the almost 50:50 tie-up would increase the debt burden of Smurfit Kappa – which would be renamed Smurfit WestRock – it would result in a more geographically diversified business.
[ Smurfit Kappa sees 2023 earnings topping estimates amid improving box demandOpens in new window ]
However, Primestone said: “The main financial rationale appears to rest on hopes of a re-rating through a US listing, which appears uncertain as proven by Westrock’s historical rating, which highlights investors’ discernment for its lower asset quality and higher earnings’ volatility.”
Instead, Smurfit Kappa should look again at a combination with International Paper (IP), the company which led an abortive attempt in 2018 to acquire the Dublin-listed group, Primestone argued.
IP is a “much better fit” for Smurfit Kappa, the fund said, given that its assets are “of much better quality and lower cost”, and it offers more synergies, particularly in Europe among other things.
A cash and equity deal for IP could add “immediate upside” of 32 per cent per cent to Smurfit Kappa’s shares with further upside over time.
[ Smurfit shareholders may regret WestRock mergerOpens in new window ]
Traders in Dublin said Primestone’s criticism is unlikely to move either Smurfit Kappa’s board or shareholders at this late juncture. While IP is a bigger player in the US market than WestRock, the Tennessee-based group is currently searching for long-time chairman and chief executive Mark Sutton’s successor and is considered unlikely to want to take on large-scale M&A activity at the moment.
Primestone said it had the “highest regard” for Mr Smurfit and his management team, who have “significantly improved the company” and been “shrewd managers” of Smurfit Kappa’s balance sheet.
However, it said it was “disappointing” that “despite their efforts”, Smurfit Kappa’s total shareholder return had only been 7.7 per cent each year since its initial public offering in 2007 and its stock was “materially undervalued”.
Smurfit Kappa could not be reached for comment.
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