The proposed merger of JS Corp and Stone Container may have been one of corporate America's worst-kept secrets, but its confirmation still had a galvanising effect on packaging companies' share prices on the American markets yesterday.
The rise in the sector might not have matched the 15 per cent jump in Stone shares, but industry analysts believe that the JS Corp/Stone will be the first in a series of rationalisations and mergers in an industry that consistently has had to cope with over-capacity. As Smurfit director Mr Tony Smurfit commented yesterday: "It has never been a question of demand for our products, but a question of too much capacity."
That over-capacity is still dogging the industry.
The immediately earnings-enhancing merger between Stone and JS Corp is likely to produce a merged group much better equipped to cope with the peaks and troughs of the notoriously cyclical packaging industry. The merger received the immediate approval of analysts, with Bear Stearns immediately slapping "buy" recommendations on both JS Corp and Stone.
The sort of savings that SSCC will generate between synergies, plant closures and other savings will put strong pressure on SSCC's competitors to take similar steps towards rationalisation. "I would hope that this is a clear statement for this industry," said Smurfit chairman Mr Michael Smurfit, who added that the sector "badly needs" further consolidation. Where that consolidation will come from is another question but SSCC's peer group - Georgia Pacific, International Paper, Tenneco, Union Camp, Willamette and Weyerhaeuser - will all come under the spotlight.
Analysts in Dublin and New York also took comfort that the management of SSCC is heavily biased towards JS Corp, with Smurfit's Mr Ray Curran and Mr Pat Moore playing key roles in pushing through the rationalisation and asset dispoisal programme. Stone's reputation in the market had become tarnished by some less-than-timely acquisitions which had left the Chicago-based group with debt of $4.5 billion. In contrast, JS Corp's debt of just over $2 billion almost pale into irrelevance. For Jefferson Smurfit Group, which will have 34 per cent of SSCC equity, the merger is the biggest corporate development since the $1.2 billion takeover of Container Corporation of America 10 years ago and the flotation of JS Corp four years ago. One important element of the merger agreement is that Smurfit will manage SSCC's European assets, and NCB believes that this is likely to be a precursor to a sale of these assets by SSCC to Smurfit.
Smurfit's £240 million net outlay in buying in half of the Morgan Stanley shares in JS Corp and selling the Fernandina Beach machine to JS Corp will leave its end-year net debt at £750800 million, gearing of around 50 per cent and comfortable interest cover.
This means that Smurfit could spend another £700-800 million and still keep its gearing under 100 per cent and without putting pressure on its interest cover.
Even excluding the impact of SSCC asset sales, NCB estimates that the merger will increase Smurfit earnings by six per cent next year, and will really kick in the following year with a revised earnings per share forecast of 36.5p.
NCB's near-term target share price for Smurfit is 280-290p, suggesting that the share price is unlikely to rise further in the short-term. In the longer term over the industry's cycle, NCB has a target share price of 330-340p.
