Receive Free Smurfit Kappa Group PLC Updates
we will send you myFT Daily Digest Email summary of the latest information Smurfite Kappa Group Ltd. Every morning there is news.
Recycling has contributed to the success of the cardboard box industry. This also applies to packaging producers. Consider the partnership between Ireland’s Smurfit Kappa and US-based WestRock announced Thursday.
WestRock’s origins can be traced back to Smurfit-Stone, once part of the Smurfit Group. Financial details of any transaction were not disclosed. But both groups, especially Smurfit, will see an opportunity to rebrand themselves in U.S. stocks at higher valuations. Smurfit is leaving London, following the lead of another Dublin-based group, CRH.
This combination will have scale. Smurfit WestRock would become the world’s largest paper and packaging group by sales, worth $30 billion. The big U.S. paper producer is trading at a valuation a third or more higher than Smurfit.
The timing looked astute. Concerns over weakening consumer demand have sent shares of the U.S. paper and packaging group to their lowest levels since the worst of the pandemic. Something similar happened when Smurfit first entered the United States in the 1970s.
WestRock shares have fallen since it went public in 2015, trailing its largest U.S. peers and the only company with a negative total return in that period. Its own acquisitions have left its net debt load at $9.4 billion. This partly explains why WestRock trades at 6 times EBITDA, while International Paper and American Packaging trade at 8 and 10 times, respectively.
There is limited business overlap between Smurfit and WestRock. Their investment ratios in each other’s main European and US markets are below 10%. Still, Smurfit expects to save $400 million in annual pre-tax costs by the end of the first year. WestRock is already looking to reduce its own costs.
At current market values, the full share consolidation means Smurfit shareholders own 56% of the new group. However, on an EBITDA basis, Smurfit contributes only 43%, so the conversion rate is expected to drop to 51%. Net debt climbed to 2.5 times this year’s projected EBITDA.
The proposed cost savings alone could add $2.4 billion in value, or 8 percent of the total. The valuation boost comes from a decision to move the main listing location from London to New York. While a re-rating is indeed a possibility, such a shift would only reinforce the perception of London’s own valuation panic.
Svlook
