The paper packaging industry may usher in a major merger: a potential deal for Smurphy Kappa and Veselok
2023-09-19
In sensational news for the paper packaging industry, Smurfit Kappa and WestRock confirmed their plans to create a company called Smurfit WestRock. The potential deal is significant for the paper packaging industry, which analysts believe may face less resistance than other packaging M & A deals in the past.
According to analysts at Bank of America Securities, the deal would create the world's largest containerboard company, with a total equity value of up to $24.50 billion and sales of $35 billion. They see such deals as generally positive and expect shareholders' collective equity to yield gains of more than 30% over time.
Ryan Fox, corrugated packaging market analyst at Bloomberg, said such a deal would make the new company a global one-stop shop for manufacturing and distribution services for brands in many countries. He added that a single-source mentality could allow brands to achieve two main goals, lower prices and packaging consistency.
According to the Bank of America report, the deal was driven by potential cost synergies effects and opportunities for geographic and product expansion. Smurphy Kappa's operations in the United States are mainly processing operations, but the number of factories is small, while Viselok has no factories or processing facilities in Europe. In addition, Viselok's consumer packaging and cardboard businesses are important to Smurphy Kappa, which has been actively promoting sustainability, but has little exposure to consumer retail shelf packaging.
Michael Rocksland, an analyst, pointed to geographic expansion as an important factor in the deal. He highlighted Smurphy Kappa's growth in the US over the past decade and said the potential merger would make it a well-known player in the US market. He predicted that once the industry passed the destocking phase it experienced last year, it would see strong growth return.
In terms of costs, the report pointed out that if the deal is completed, the price of containerboard in North America will drop by 90 US dollars per ton in the near future, and the price per ton in Europe will drop by 260 euros. The report also mentioned that Viselok is usually a high-cost producer of containerboard in North America, which is one of the reasons why it is still profitable.
Despite these initial observations, sources in the paper packaging industry still have a lot of questions about the next steps of a potential deal. Part of the reason is that the news surprised the industry. If the two sides do reach a formal deal agreement, regulators will need to determine whether the merger will dampen market competition and may require divestitures. Previously, the Department of Justice asked International Paper and Temple-Inland to divest three containerboard mills before approving the $4.30 billion merger.
Mr. Fox believes the Smurphy Viselok deal is less likely to be called for divestitures. He says Smurphy Kappa's US operations are limited to a few states, while Viselok's operations are larger. If divestitures are needed, expect to see some factory consolidation, particularly with carton plants well below capacity.
Notably, after the sale of its remaining stake in RTS Packaging, the company will continue to hold the Veselok paper mill in Chattanooga, Tennessee. According to Bank of America, the combined company has a market share of 35% in Mexico and 16% in Brazil. Regulators are likely to examine whether the business merger will affect competition in southwestern North America.
At the same time, Viselok has also closed a number of factories this year, causing more than 1,000 people to lose their jobs. Fox believes the closures of these factories will help Viselok narrow its portfolio and increase Return on Invested Capital. He also said that these moves coincided with shrinking carton demand and may be in preparation for the merger, accelerating transformation and restructuring.
While there are some doubts, analysts see the potential deal between Smurphy Kappa and Viselok as a cause for concern. Both companies have long histories and growth records, and have expanded through past acquisitions. Although International Paper has twice tried to buy Smurphy Kappa before, Smurphy rejected those offers. In contrast, Smurphy Kappa appears to be trying to buy Viselok and could be the initiator of a merger.
Finally, while there may be other competitors bidding, Bank of America's report states that International Paper may not attempt to acquire Smurphy Kappa or Viselok, given market share and history. However, in some cases, such as multi-substrate or pan-Atlantic strategies, this could increase the opportunity for merger review.
Overall, the paper packaging industry is likely to usher in a major merger. This will bring greater scale and opportunities to Smurphy Kappa and Viselok, while also having an important impact on the market competition landscape. We will continue to monitor and await further decisions from regulators on this potential transaction.