Jefferson Smurfit Group has confirmed it is has started talks with its Dutch rival Kappa that "may or may not lead to a transaction".
Kappa, which is valued at around €4.5 billion was effectively put on the market last October by Cinven and CVC, the two UK private equity firms which bought it in 1998.
Goldman Sachs was appointed to review strategic options, but the expectation was that a sale was the most likely outcome.
A spokesman for Smurfit confirmed the talks yesterday, but refused to give any details.
Smurfit was taken private in 2002 by US private equity firm Madison Dearborn for €3.9 billion in 2002. It is thought unlikely that Madison Dearborn would be seeking an exit at this stage.
A flotation of Jefferson Smurfit sometime this year was mooted, but was ruled out for the immediate future by Gary McGann, the Smurfit chief executive, in February. Mr McGann cited the sluggish performance of the main European markets as the primary obstacle.
Smurfit remains highly leveraged, despite a refinancing in January, as a result of the 2002 deal. It had debts of just under €3 billion at year end, but that was prior to the €450 million sale of its Munksjo speciality paper company in March.
Analysts believe that Smurfit could support debts of €3.4 billion and that any takeover of Kappa would be highly leveraged and might involve some form of fundraising or coinvestment with its parent Madison Dearborn.
Smurfit has an history of ambitious deals, buying the French group Cellulose Du Pin in 1994 for £684 million in a move that doubled the size of the business.
Madison Dearborn, which owns 90 per cent of Smurfit, has been an active acquirer of print and packaging assets in recent years spending around $15.5 million acquiring business including Smurfit, Packaging Corporation of America, Graphic Packaging Corp and Bay State Paper.
Last year it bought the paper, forest product and timberland assets operation of Boise Cascade for $3.7 million.
It subsequently sold before selling on the timberland assets for $1.65 million and floating the the paper and forest products in a €575 million initial public offering.
Smurfit reported losses of €35.5 million last year, down from €67.3 million last year, but reported an increase in free cash flow as a result of aggressive cost cutting.
Operating profits were €606 million on sales of €4.8 billion. It has around 30,000 employees and operates 300 plants in 20 counties, mostly in Europe and Latin America.
Kappa has sales of around €3 billion and made an operating profits of €206 million in 2003, but reported a net loss of just under €30 million.
It employs around 16,000 people at 115 sites across 18 European countries.
Dr Michael Smurfit, the chairman of the company retains a 7.7 per cent stake, while Mr McGann and other management own another 2.3 per cent.
