Smurfit ‘sad’ at bid and won’t sell shares

Buyouts have always been at the heart of the Smurfit packaging empire story but the latest chapter could well be its last, writes Fearghal O’Connor

MICHAEL Smurfit would be “very sad” to see the family company he built into a global giant over decades disappear should International Paper’s (IP) hostile takeover attempt for Smurfit Kappa succeed.

Smurfit, whose son Tony is CEO of Smurfit Kappa, told the Sunday Independent he would not sell his own shares for the €36.46 per share bid by the US giant that was rejected by the Irish company.

Asked for his view on the bid, he said: “Obviously it would be very sad to see the family company disappear in its entirety. That’s what this would do if it was a successful takeover. I would be sad about that. But in saying that, you’re a public company, and that’s one of the risks you have [to deal with] in being a public company, that you’re at the mercy of the market.

“I’ve been taking companies over all my life. I’m not surprised that IP decided to have a swing at us because we have been undervalued. The company’s been growing at a tremendous pace, and that looks likely to continue for the next few years. It’s a very opportunistic bid and they’re just trying to take advantage of the future as the board set it out in the medium-term plan,” he said.

Asked if he believed IP would ultimately prevail in its bid, he said: “It’s a very low price. Smurfit shares are now trading at more or less the same price as the market gives to DS Smith without any premium. It’s undervalued by about 15pc by the market. So no, the Smurfit board will reject it out of hand.”

Asked if he had been in contact with his son in relation to the IP effort to acquire the company that was rejected out of hand last week, Smurfit said: “He’s his own man. I’m out of the company over 10 years now. That’s a pretty long time. It’s a fast-moving industry. Things have changed. New regulations are in, all sorts of different things. But I certainly wouldn’t be selling my shares at such a low price.”

THERE’S shelf-ready packaging, says a current Smurfit Kappa Group’s online advertising slogan, “and there’s fly off the shelf ready packaging”. It remains to be seen which category Smurfit Kappa itself will fall into over the coming weeks. Will one of Ireland’s most iconic companies be gobbled up by its huge US competitor International Paper (IP)? Or, having rebuffed an initial offer with a contemptuous sniff, will Smurfit Kappa be left, for now, sitting on the shelf ?

The one thing that almost all analysts and observers agree on is that Smurfit Kappa’s initial rejection of IP’s bid is not the end of the story. The American giant had tabled a cash and share-based offer worth €36.46 a share — a 27pc premium on the pre-bid share price. Most analysts are expecting an improved bid between €40 and €43 per share. That would be much harder for the Smurfit board and management to dismiss out of hand.

“Any board of a publicly-listed company has a fiduciary duty to do what is in the best interest of its shareholders and maximise value for them. It nearly always comes down to the price,” said Investec head of research Gerard Moore.

David Holohan, chief investment officer with Merrion Capital, agreed. It may well have a bright future as a standalone entity and recent performance has been strong, he said: “But would Smurfit Kappa be trading anywhere near €40 without this bid? Not likely.”

An improved IP bid would “bring forward upfront two or three years of good performance from Smurfit”, he said.

And if IP does return with an offer within the range of current speculation it would be “very difficult for the board of Smurfit Kappa to not endorse it because it does provide a phenomenal exit for shareholders”, said Holohan.

“This is a company that in the depths of the financial crisis was trading at €1 a share. So to be able to get out at €40 10 years later is a phenomenal achievement and one I don’t think shareholders would be happy for the board to turn down,” he said.

So what makes Smurfit such a tempting catch? For a long time it — and other packaging companies — were seen as effectively a play on industrial production, with share prices bound tightly to the fortunes of GDP. Europe is enjoying economic growth and, as always, Smurfit has benefited directly from that.

But more and more, there is a new factor driving growth at the company: the digital revolution, specifically online shopping. The retail market is being turned on its head, and big high street chains are struggling to compete with online retailers who deliver a rapidly growing range of items directly to consumers’ doors. More often than not those items are delivered wrapped in cardboard.

About 10pc of European packaging is now generated by e-commerce and that is rising rapidly, fundamentally altering the packaging market. That is good news for Smurfit Kappa, helping it somewhat free itself of purely cyclical growth patterns. What is more, Smurfit Kappa, and its European competitors, appear to have grabbed the e-commerce opportunity much more quickly than some of their bigger American peers.

Bank of America Merrill Lynch in recent days issued its US clients with internal research on the IP bid: “During our US Agriculture and Materials conference last week there was a lot of discussion on the future of the containerboard and box markets,” it said.

“The case was made that European players like Smurfit and DS Smith are in the forefront: Targeting e-commerce customers and focusing on value-add packaging, light-weighting, and customer solutions.

“One argument was that US containerboard and box makers need to invest in their asset base and solutions offering to be able to cater to the future customers given the rise of e-commerce. IP’s move could potentially be a sign that a quick way to ‘catch-up’ would be to buy.”

And buying Smurfit Kappa will not be cheap. The report places an intrinsic value on the company of £30 per share: “Any acquirer would need to pay up with a solid premium,” it said, suggesting that 30pc was not unlikely.

The Smurfit Kappa share price jumped up and down all week with each new twist in the unfolding tale.

Ups and downs are nothing new for Ireland’s original multinational, a company that from the beginning was infused with an entrepreneurial spirit that transcended its role as a box-maker.

It sold its original Clonskeagh paper mill just before the crash to a property developer. The by-then retired figurehead of the company, Michael Smurfit, had turned up at the site for one final farewell before the old factory was torn down. Luxury apartments would replace old-fashioned manufacturing jobs that could not keep pace with global competition and Ireland’s original business tycoon was there to see it happen.

But throughout its history, the company had never stood still and Michael Smurfit had always done the deals that needed doing. After taking over from his father John Jefferson Smurfit in the mid1960s, he was faced with a dilemma that his son Tony, the current CEO, would recognise in the market today.

“Enormous change was on the way,” wrote Smurfit in his autobiography of a looming Ireland/UK trade deal in the 1960s. “I was concerned that we were too small to survive against competition from the big UK packaging companies. I came to the conclusion that the only way for us to survive was to attack.”

Attack he did, consolidating almost the entire Irish packaging sector under the Smurfit name before moving on to Europe. But, as the company is once again learning, acquisitions work both ways and, in 2002, the company was bought out by private-equity group Madison Dearborn.

By that stage, Gary McGann had taken over as CEO, with Smurfit as chairman, and the huge merger with Dutch firm Kappa followed in 2005 to create a true packaging giant.

A new IPO followed but the balance sheet was loaded with debt and McGann was dogged by a poor share price. Yet, by the time McGann passed the baton to Tony Smurfit two years ago the company was again on the up. Shareholders had enjoyed a 30pc hike in the annual dividend leading McGann to declare on his last day: “It’s very nice to be in a position to hand over a company in rude health.”

The positivity has continued under the younger Smurfit but against the backdrop of ongoing consolidation that has left six major players in the sector, three in the US and three in Europe.

“IP does not have much exposure to Europe and Smurfit Kappa is the industry leader in Europe so it is a natural fit,” said Holohan. “There were rumours linking them three years ago but nothing came of it. But it has always been in the back of the minds of analysts that IP would make a move at some stage.”

The catalyst for the move came in January when IP’s US rival WestRock bought packaging group KapStone for $3.5bn, effectively precluding WestRock from other major deals in the near future: “It left the way open for IP,” said Holohan.

Two other factors also aligned. Smurfit’s strong performance makes it a tempting buy and US president Donald Trump’s tax cuts will have significantly benefited US-based IP, giving it more firepower to do international deals.

If the deal does not go through, the options for consolidation for Smurfit Kappa are limited, particularly in Europe and South America where it is already the number one or two player in most countries. Increasing the company’s exposure in the US is the most likely course of action for management if they are successful in fending off IP.

“An alternative if Smurfit wants to remain independent is to seek out a merger with Packaging Corporation of America, which is the fourth US player and of a similar size to Smurfit,” said Holohan. “Combining the two would give significant scale in the US. But that, in my view, is a less likely outcome, provided that IP is willing to pay up.”

Gerard Moore believes Smurfit has already outlined a strong stand-alone medium-term strategy. “If this deal does not happen then I think management and the board will be very confident pursuing the strategy that they have had in place for some time,” he said.

“Smurfit Kappa is telling the markets that it has a plan that will be more value creative and at the same time will ensure that the balance sheet remains disciplined.”

That plan involves capital expenditure of €1.6bn over four years to provide a platform for growth of as much as 35pc in profits. It also aims to boost return on capital employed to 17pc, up from 15pc presently, and to reduce leverage further. By contrast, IP’s return on capital employed has lagged, averaging 10pc over the last five years.

For now, the staring match between the two management teams will continue. Some long-term shareholders will have cashed out, tempted by a soaring share price, replaced by much more strategic investors betting that a new bid will make the share price soar some more.

Corporate Ireland will look on, largely disconnected in any real sense but still emotionally involved. These days Ireland makes up just a very small single-digit percentage of overall group business, with facilities and employees spread throughout the world. Nevertheless, said Holohan, if the Smurfit name is to disappear into IP it would be a somewhat melancholy moment for corporate Ireland, regardless of how eager for a deal are the international funds who now dominate the share register.

“It’s another Iseq company leaving,” he said. “We have had a few go to the UK and this would be a de-listing through acquisition. You are seeing the national heroes picked off one by one.”

The Smurfit story, of course, remains one largely dominated by phenomenal growth and success.

“But,” said Holohan, “it does reach a point where a company like that can go from an Irish hero company to just a smaller part of a larger international conglomerate.”