Smurfit suitor warned on debt

INTERNATIONAL Paper risks a ratings downgrade if it boosts borrowings to greater than 3.5 times earnings on a “sustained basis”, the ratings agency Standard & Poor’s, has warned.

But in a note to clients the agency also flagged a prospective ratings upgrade if the packaging giant and Smurfit Kappa’s unwanted suitor, “further expanded its geographic or product diversity” and strengthened profits.

Investors in Smurfit, which has rebuffed two unsolicited offers from International Paper, have seized on the analysis to highlight the Memphis-based group’s strong reputation in managing it balance sheet.

S&P said it expects International Paper to generate “annual free operating cash flow of about $1.5bn to $2bn over the next two years, supported by increased prices for its containerboard and boxes”. It also predicted the group would maintain an adjusted debt to earnings ratio of about three times.

However borrowings are tipped to surge to 3.8 times or more if International Paper tables a bid for Smurfit Kappa at closer to €40 a share, which is regarded by the market as the valuation floor. Prior to the US heavyweight’s approach, unveiled on March 6, Smurfit Kappa shares were trading at closer to €28 a share.

Since a second, sweetened offer, a stalemate has held sway, with International Paper arguing it “cannot see a way forward”.

It’s understood Smurfit wants the same earnings multiple WestRock applied to its proposed KapStone takeover, which is due to conclude in September. That would represent a price far above €40 a share and potentially result in a sharp spike in International Paper’s borrowings.