Smurfit Kappa rejects bid approach from International Paper

Smurfit Kappa has rejected an "unsolicited and highly opportunistic" takeover approach for Europe's biggest cardboard box maker from International Paper of the US.

The proposed acquisition would have meant International Paper, the world's largest pulp and paper company, paying cash and shares for Smurfit Kappa, leaving shareholders of the Dublin-based company with a minority stake in the combined business.

The news sent Smurfit Kappa's shares up 19% on Tuesday morning to 3,020p and pushed up shares of other packaging companies. Sector peers Mondi rose 4.3% to 1,987p and DS Smith gained 3.7% to 496.20p.

Basing its rejection largely on price, Smurfit Kappa said the proposal failed to reflect its strong growth prospects as Europe’s biggest producer of paper-based packaging – or the healthy outlook for the industry.

The proposal shows International Paper rekindling interest in Smurfit Kappa after reportedly considering a £6bn approach in 2015. Smurfit Kappa’s market value was £6bn before it revealed the approach, indicating an offer would have to be substantially higher.

Smurfit Kappa, which operates in Europe and the Americas and has about 46,000 employees, did not reveal the value of the approach. Its share price has risen strongly in recent years as the trend for internet shopping has fuelled demand for cardboard packaging, pushing the company into the FTSE 100 in 2016. The company, listed in London and Dublin, could also gain from a reaction against plastic packaging.

Liam O’Mahony, Smurfit Kappa’s chairman, said: “The board of Smurfit Kappa has unanimously rejected this unsolicited and highly opportunistic proposal. It does not reflect the group’s true intrinsic business worth or its prospects. We strongly advise shareholders to take no action.”

O’Mahony pointed to Smurfit Kappa’s strong recent results when it announced record earnings for 2017. Europe contributed 75% of earnings and demand in Europe is forecast to grow strongly over the next few years, the company said. Along with its large Latin American business Smurfit Kappa is in a unique position to capitalise on growth in the industry, it added.

Analysts at broker Olivetree said there were good strategic reasons for International Paper, which has said it wants to expand in Europe, to buy Smurfit Kappa. The European packaging market is growing strongly, Smurfit Kappa has technology that International Paper can use in the US and there are big opportunities for revenue gains and cost cuts.

A deal valued at more than €40 a share would probably make financial sense for International Paper, Olivetree said. Before Smurfit Kappa revealed the approach its shares were trading at less than €30, giving International Paper considerable scope to do a deal.

The analysts said: "For International Paper, the acquisition would bring growth outside of the US, which is approaching peak cycle. By rolling its European assets into those of Smurfit, IP would be able to transform the profitability of its assets … On top of this, Smurfit’s more sophisticated shelf packaging offering to its European customers could be rolled out across IP’s extensive US network, transforming the pricing and margins of the US market."

"Despite many years of rumours of a tie up between Smurfit and International Paper, today’s announcement has come somewhat out of the blue …The rejection announcement itself focuses on value and consideration mix rather than deliverability. This is likely to boil down to a price discussion."