Smurfit Kappa shareholder expresses ‘reservations’ with WestRock deal

A London-based activist fund has sent a public letter to the Smurfit Kappa board of directors expressing its “reservations” about the company’s pending merger with Atlanta-based paper and packaging company WestRock Co. and asks Smurfit Kappa to consider “strategic alternatives.”

PrimeStone Capital, which owns approximately 0.8 percent of Smurfit Kappa’s issue shares, penned the letter Dec. 21 to the Smurfit Kappa Group board of directors as well as the Dublin-based packaging producer’s CEO, Tony Smurfit, and Chief Financial Officer Ken Bowles.

The companies officially struck a deal Sept. 12 in which Smurfit Kappa is to purchase WestRock for $11.2 billion to create what is expected to be the largest paper company in the world—Smurfit WestRock—with a combined adjusted annual revenue of approximately $34 billion. At the time of the announcement, the deal was expected to close in the second quarter of 2024.

But PrimeStone has questioned the “strategic rationale” of the merger and says, “The proposed transaction presents insignificant financial benefits to [Smurfit Kappa Group’s] shareholders.”

RELATED: Examining the Smurfit Kappa, WestRock merger

The group lists “paper exposure” as flaw in the WestRock deal, stating, “WestRock has a massive long paper exposure, which deviates from the industry’s proven ‘integrated model,’ a model [Smurfit Kappa] and other successful companies like [Packaging Corp. of America] have been following for decades. It will take years and much capital to fix this.”

PrimeStone also says WestRock’s asset base is of “significantly lower quality” than that of Smurfit Kappa’s competitors, noting it has been “underinvested for a decade” and that its upgrade will require large sums of capital. The group also claims WestRock management has “not been effective in creating value” and questions its business composition and opportunity for synergy with minimal geographic overlap.

“Overall, the WestRock transaction risks deteriorating [Smurfit Kappa’s] business profile by creating a higher-cost, less integrated company, [while] increasing leverage for modest financial benefits for [Smurfit Kappa’s] shareholders,” the group writes.

Most importantly, PrimeStone says, it believes there may be “attractive alternatives” available to Smurfit Kappa, including remaining as a standalone company or a merger with International Paper (IP), a deal that first was on the table in 2018. Smurfit Kappa rejected a bid to be sold to the Memphis, Tennessee-based paper company, saying at the time it had “superior prospects as a standalone business.”

“IP-[Smurfit Kappa] would be a true uncontested global leader with a leading position both in the U.S. and Europe,” PrimeStone writes.

The group lists several factors that make what it considers to be a more attractive deal with IP, including that 90 percent of IP’s business is in corrugated or containerboard; its assets are of “much better quality and lower cost;” it is “more integrated than WestRock, a crucial characteristic;” it offers more synergies, notably in Europe; and it has “a proven record of better returns and a much better valuation.”

According to a report by The Irish Times, traders in Dublin say PrimeStone’s criticism is unlikely to have an effect on Smurfit Kappa’s board or shareholders this late in the process, noting that IP currently is looking for a successor to CEO Mark Sutton, who in September requested the company move forward with the next phase of its CEO succession plan, making it unlikely that IP would “want to take on large-scale M&A activity at the moment.”

PrimeStone does emphasize its regard for Smurfit Kappa’s leadership team, including Tony Smurfit, saying management has significantly improved the company, deploying what it calls a consistent strategy of high integration with low-cost paper production and strong local market shares in corrugated board.

“Finally, we commend them for their sustainability track record,” the group says. “We have no doubt that they can manage WestRock better. … While we initially approached the WestRock transaction with an open mind, our findings have been mixed.”

The full letter can be read here.