Examining the Smurfit Kappa, WestRock merger

The paper and packaging industry experienced a major shakeup in early September when it was revealed Irish paperboard and packaging company Smurfit Kappa was in talks to acquire Atlanta-based WestRock.

The companies officially announced the merger Sept. 12 in a deal worth $11.2 billion to create what is expected to be the largest paper company in the world—Smurfit WestRock—pending closure of the deal, which the companies expect to happen in the second quarter of 2024.

“This combination will enable WestRock to advance its key growth initiatives on a global scale while providing our shareholders with the opportunity to participate meaningfully in the combined company’s significant upside value potential,” WestRock Chair Alan Wilson said at the time of the announcement.

The companies’ combined 12-month adjusted annual revenue as of June 30 is approximately $34 billion, and they are targeting annual pretax run-rate synergies in excess of $400 million at the end of the first full year following completion of the merger.

After the terms of the merger were revealed, Smurfit Kappa stock fell about 10 percent, but CEO Tony Smurfit was not discouraged. “We will come back strongly [when investors see] the potential benefit.”

Smurfit, speaking to The Irish Times, adds that if the deal moves forward, most of Smurfit WestRock’s business will be in the Americas.

Market concern has emerged, however, as investors have been mixed on the merger.

Bloomberg analyst Chris Hughes says the defense of the arrangement, in which Smurfit Kappa and WestRock shareholders own 50.4 percent and 49.6 percent of Smurfit WestRock, respectively, is that it values both companies at the same multiple of profit as measured by earnings before interest, taxes, depreciation and amortization.

“WestRock has been trading at a lower valuation than Smurfit; the deal treats them equally,” he writes in mid-September.

Matthew McKellar, an analyst with Royal Bank of Canada, also expresses cautious optimism in a report for Seeking Alpha, saying, “We think a combination could bring together two complimentary systems, with breadth across the Americas and Europe.”

Also speaking with Seeking Alpha, West Monroe Senior Partner Randal Kenworthy expresses skepticism around the merger, calling the deal a “distraction” and arguing WestRock should instead focus on tuck-in acquisitions.

“I’m highly skeptical on this being a successful merger,” he tells Seeking Alpha. “This is a major distraction from what companies should be doing, which is more around cost containment.”

This is not Smurfit Kappa’s first merger consideration.

In 2018, Smurfit Kappa effectively rejected a bid to be sold to Memphis, Tennessee-based International Paper (IP) worth approximately $10.4 billion at the time. IP blamed a “lack of engagement” by Smurfit Kappa’s board of directors and management, while Smurfit Kappa said it had “superior prospects as a standalone business.”

At least one local union has turned out in support of the merger.

Speaking to local news outlet RRspin.com, USW Local 9-0425 President Billy Smith, whose union represents WestRock employees, says, “Usually an acquisition or merger in the paper industry is a cause for concern as it often results in the sale or closure of overlapping assets.

“The merger of WestRock and Smurfit Kappa is unique because the footprints of the two companies have almost no overlap. The combined assets of Smurfit WestRock will create the largest paper company in the world. We expect the transaction to be seamless for our mill and we look forward to operating under the proven leadership of the Smurfit Kappa management team.”

“Obviously, some mergers do work,” Irish Times contributor Proinsias O’Mahony says. “This may be one of them, but investors have yet to be convinced.”