A proposed merger between Jefferson Smurfit Corporation and Stone Container would create a new $3.7 billion market value company, with current sales of $8 billion and 18 per cent of the American market in containerboard.

Yesterday, Smurfit confirmed the market's worst-kept secret when it announced that JS Corp - in which Smurfit has 46 per cent - is in talks with Stone Container "on a possible stock-for-stock business combination" - a merger in plain language. Smurfit cautioned that the talks will not necessarily lead to a merger, but the view in the market is that the logic behind a merger between the two groups is compelling.

Confirmation of the merger talks generated continued heavy trading in both JS Corp and Stone shares, although price changes yesterday were insignificant. Dealers said that investors are reluctant to push the share prices ahead until they see the structure of the merged company, the potential for cost savings and rationalisation and whatever mechanism is introduced to allow Morgan Stanley to sell or reduce its current 36 per cent stake in JS Corp.

At their closing levels last night, JS Corp has a market capitalisation of $2.25 billion, while Stone is worth $1.57 billion. Analysts believe, however, that if the merger goes ahead, Stone and JS Corp shareholders may have roughly equal shareholdings in the merged company

Stone's lower market value mainly reflects its $4.2 billion debt, the Chicago-based group being substantially larger than JS Corp in terms of assets and sales. Stone had sales of $4.85 billion last year, compared to JS Corp's $3.2 billion, although both packaging groups suffered severely from the cyclical downturn in the industry.

The bulk of both groups' sales come from containerboard and corrugated containers, although both have newsprint interests which are likely to be sold after a merger, as the new company concentrates on its core North American packaging business. JS Corp has already indicated, prior to the merger discussions, that it aimed to sell its newsprint and forestry businesses for $1.4 billion with the proceeds reinvested in the packaging business.

Stone also has non-core businesses, and analysts believe that its stake in the Canadian newsprint manufacturer Abitibi Consolidated will undoubtedly be sold if the merger goes ahead - possibly for as much as $1 billion - with other Canadian assets possibly being sold for $500 million. Stone's European packaging interests could conceivably be sold to the Smurfit group, said one US analyst.

The proposed merger is founded on the savings that can be generated and as one analyst put it: "It only makes sense if they can wring hefty savings from the merged company."

NCB analyst Mr John Conroy put the estimated cost savings at $400-450 million but added: "It could be higher". Those sort of savings have the potential to add 8-9p to the Smurfit group forecast peak cycle earnings per share of 28-29p, he said. Mr Conroy has said previously that the savings that the merger could generate could push Smurfit shares towards 300p. The shares were 3p higher yesterday on 256p. / If JS Corp and Stone shareholders do approve merger proposals that may emerge from the current discussions, it is likely that a new company will be created in which each group of shareholders will be offered shares in proportion to their holdings in JS Corp and Stone. Analysts said last night that they believe that JS Corp and Stone shareholders may have roughly equal shareholdings in the new company.

This would mean that Jefferson Smurfit's current 46 per cent stake in JS Corpo would shrink to 23 per cent in the merged company. Analysts believe that Smurfit is unlikely to be content with this shareholding and would be keen to increase its stake to 35-40 per cent by buying shares in the market.

Likewise, Morgan Stanley - which is a reluctant 37 per cent shareholder in JS Corp - would see its stake fall to around 18 per cent of the merged company. Morgan Stanley has been keen to exit JS Corp for some time, but has been unable to get the price it wanted for its stake, which is currently worth around $800 million (£570 million). One solution could be for Smurfit to buy enough of the Morgan Stanley stake to bring its stake up to around 40 per cent of the merged company. Mr Conroy has suggested that Smurfit could spend up to £600 million to rebuild its stake in the merged company to a level where it would have a sizeable input into the management of the group. If this option is pursued by Smurfit, it would put paid to any hopes of a share buy-back by the group