A £2.5 billion merger of Jefferson Smurfit Corporation - the Smurfit group's 46 per cent-owned associate in the US - with another American packaging group may once again be in the pipeline. Smurfit shares rose strongly on the Dublin market in anticipation of a deal.

Various rumours swept the market yesterday morning after the 13p rise in the Smurfit share price to 249p, as brokers and investors tried to explain the sudden share price increase, was largely due to aggressive early bidding by one Dublin stockbroking company.

The most consistent and logical speculation was on a merger between JS Corp and the American group Stone Container, to create an enlarged packaging group with a stock market value of $3.5 billion.

Temple Inland was also mentioned as a possible merger partner for JS Corp, but analysts believe a link-up with Stone - about three-quarters the size of JS Corp - is far more likely than a merger with Temple Inland which has a stock market value of $3.6 billion compared to JSC's $2 billion. "If there is a deal out there, Smurfit would want to be the majority partner," said one analyst.

But Smurfit vice-president, Mr Dermot Smurfit, would neither confirm nor deny the merger speculation. "For a significant number of months now there have been numerous rumours about Smurfit and JS Corp. That situation remains as it ever has been, a fluid situation," he said. Mr Smurfit emphatically denied one of the other rumours around the Dublin market yesterday - that Smurfit is the target of a takeover bid by a Scandinavian company. That rumour had been dismissed by most in the market.

JS Corp shares rose to a recent high of $215/8 towards the end of 1997 in anticipation of a merger with Stone, but drifted back to $15 as prospects of a merger faded in the early part of the new year. Since then, JS Corp shares have traded up to $19 in line with the recent strength in the sector, which values the company at over $2 billion.

The company was floated on NASDAQ in 1994 at $12 a share, reached a high of $22 shortly afterwards but has performed poorly since them, reaching a low of less than $10 at the end of 1996 before the merger speculation drove the shares above $20 late last year.

But the speculation in Dublin of a merger involving JS Corp failed to have much impact on Wall Street, and there was little movement or volume in any of the stocks suggested as merger candidates - JS Corp, Stone and Temple Inland. Wall Street analysts said they would not be surprised if a deal is in the offing, but that a merger is already largely priced into JS Corp shares.

Any deal, they said, is almost certain to be an all-paper transaction with no cash payment to shareholders, although any merger involving JS Corp may include some mechanism that would allow Morgan Stanley to reduce or sell its 37 per cent stake in JS Corp.

Smurfit owns 46 per cent and the rest is held by investors. Morgan Stanley has been keen to sell its stake in JS Corp for some time but has failed to get an acceptable price.

Any merger deal which values JS Corp shares at $20 or above might be enough to satisfy Morgan Stanley, although the American bank failed to take advantage of the $215/8 price last October to unwind part of its stake.

There has also been periodic speculation that JS Corp is to sell its newsprint and forestry businesses to concentrate, and use the likely $1.4 billion proceeds to buy more assets, for the core packaging business. It remains to be seen whether any merger with another American packaging group will be accompanied by any such disposal of non-core assets. Smurfit has already said the proceeds of any such disposal will be used to buy packaging assets and not to pay down JS Corp's $2 billion debt.

It has been suggested in the past that Smurfit might buy out the outstanding 54 per cent of JS Corp, but this is seen as highly unlikely, given the size of the debt the Smurfit group would have to take on to its own balance sheet. But a solution to the impasse with Morgan Stanley is seen as crucial to the long-term development of JS Corp, thus the expectation in the market that any merger will provide Morgan Stanley with some sort of exit mechanism.

However, if a merger is forged between JS Corp and another publicly-quoted American packaging group, Smurfit will be faced with a severe dilution of its stake. If JS Corp was to merge with Stone at current market valuations, Smurfit would have less than 27 per cent, not a level with which Smurfit would be content.

NCB analyst Mr John Conroy has already said that to maintain a significant holding of between 35 per cent 45 per cent in a merged company, Smurfit would have to make an equity injection of up to £600 million into the deal. However, he has also estimated that a merger with a company like Stone could generate savings of $150 million to $200 million through cost reduction.