Value put on share price of US associate Smurfit Stone Container Corp may raise a few eyebrows given the turbulence in the American market. John McManus reports
The mere 3 per cent jump in Smurfit shares yesterday to €3.16 cent indicates the market is unconvinced that a rival bid is on the way. Alternatively, it is very sceptical about the €3.26 per share value put on its bid yesterday by Madison Dearborn Partners (MDP).
In addition to €2.15 in cash, the US group has put a price of €1.11 per Smurfit share on the Smurfit Stone Container Corp equity that will be distributed as part of the deal. This is based on the average price of the US company over the last 20 days, which is 29.3 per cent owned by Smurfit. Given the turbulence in the US market and the cyclical problems in the paper industry, valuing Smurfit Stone is problematic and institutions are likely to take a more cautious view than Madison Dearborn.
Mr Martin Rafferty - who leads the non-executive directors backing the bid - was careful yesterday to leave the door open for any rival bid. This raises the question as to why the board was in such a rush to recommend the Madison Dearborn offer when a rival bid from the unnamed private equity house, mentioned by Mr Rafferty, appears to be very much in frame.
The decision to proceed with the recommended bid seems all the harder to understand given that Mr John Canning, Madison Dearborn president, said yesterday it had not imposed a deadline for its offer.
The response of Mr Rafferty and the other independent directors to this point was best summed up as a bird in the hand being worth two in the bush, and of course they are right. There is no certainty that a rival offer would emerge and, in reality, the announcement of the Madison Dearborn bid is likely to focus the minds of anyone waiting in the wings. It was not surprising all the same to see the independent directors go to great lengths to show that they have indeed acted independently in recommending the deal at this stage and have not been bounced along in some sweetheart deal between Madison Dearborn and the Smurfit management.
A two-year process during which all the main methods of unlocking shareholder value were explored was recounted yesterday. It amounted to a strong argument for taking the company private.
The subject of the independence of the board's advisers was also addressed. The issue here is that SG Warburg were advisers to the company when the Madison Dearborn deal was first mooted in December. Some have questioned whether they should continue to advise the committee of independent directors set up to review the bid on May 6th. Such an arrangement is normal in public to private transactions of this sort, according to Mr Peter Crowley of Investment Bank of Ireland, who are also advising the board
It is clear Meadison Dearborn is prepared for a fight. It has signalled it is prepared to increase its offer if a rival bid emerges. If such a situation does arise then Madison Dearborn's ace will be the deal it has done with Dr Smurfit and senior management.
They have signed an agreement to support the Madison Dearborn deal, but as is the case with most "irrevocable" commitments it can be revoked in certain circumstances. The main one being if the Madison Dearborn offer fails, which would probably require the board to change its recommendation to a rival bid.
In return for reinvesting €75 million, the management is to get 10 per cent of the company. This suggests a total equity investment of €750 million with the remainder of the €2.3 billion cash purchase price being financed by debt. Servicing this and the company's existing €1.1 billion debt will no doubt be costly, but clearly has not put off Madison Dearborn and its backer Deutsche Bank.It also suggests that there may be some room for a rival bidder to prise the board's recommendation away from Madison Dearborn.
