Madison Dearborn unlikely to be the sole potential suitor for packaging group

Chicago-based private equity house Madison Dearborn is unlikely to be the only party interested in Jefferson Smurfit, and industry sources believe other private equity houses will run the rule over Smurfit now that the company is apparently in play.

Smurfit would not comment on whether Madison Dearborn was the company which has made the approach, but it is understood that the Chicago group is involved in preliminary discussions on a possible offer. No spokesman for Madison Dearborn was available for comment at the group's Chicago headquarters.

Now that Madison Dearborn is in the open as a potential bidder, industry sources believe bigger American private equity houses such as Kohlberg Kravis Roberts and European groups like CVC and Cinven will be flushed out.

Sources said it was hardly conceivable that just one private equity house would consider bidding for Smurfit.

But they added that, with any private equity bid involving heavy levels of debt, it is unlikely that a highly leveraged bid could be priced at much beyond €3.60-3.70 a share.

A trade buyer - International Paper and Sotra have been mentioned as potential interested parties - could probably afford to pay more given the synergies and savings they could generate. But International Paper is already highly geared after the €7 billion acquisition of Champion last year. The Finnish group Stora, like any other European trade buyer, could run into competition difficulties with the EU.

In a comment on Smurfit yesterday, ratings agency Moody's said that, while there is still room for consolidation in the paper-based packaging industry in Europe, "we feel it is unlikely that two leading European packaging companies could be merged without material divestments imposed by the regulatory authorities".

This could pose problems for a trade buyer like Stora or even private equity groups CVC and Cinven who already jointly own Kappa Packaging.

Moody's also warned that, if a bid emerged from a private equity group, Smurfit's ratings might fall below investment grade.

Smurfit shares continued to be the focus of very heavy trading on the Dublin and London markets yesterday, although volumes were down on the record turnover on Thursday.

In Dublin, more than 34 million Smurfit shares traded in a range between €3.05 and €3.22, before closing up eight cent on the day at €3.21. In London, more than 11 million shares traded as the stock gained 9p to 200p sterling.

Dealers said much of the trading involved arbitrage activity with investors buying and then selling quickly for an immediate profit.

This activity was not simply confined to hedge funds. AIB was just one of the institutions active in both buying and selling Smurfit shares.

But judging by the prices at which both Bank of Ireland Asset Management and AIB were buying Smurfit shares, it would seem that any buyer - trade or private equity - will have to pay substantially more than €3.40 a share.

AIB disclosed yesterday that it bought 2.6 million Smurfit shares at prices between €3.07 and €3.40 on Thursday but also sold almost 1.5 million shares at various prices between €3.08 and €3.25. Market sources believe that if AIB is prepared to pay up to €3.40 for Smurfit shares then it believes that any take-out price will be substantially above that price. AIB's shareholding in Smurfit is now 1.89 per cent.

The other Rule 8 disclosure yesterday came from BIAM, which bought 1.3 million Smurfit shares on Thursday, most of them at €3.30, to bring its interest in the group up to 6.53 per cent.

Irish fund managers were reluctant to comment publicly on a likely take-out price for Smurfit. But one said any deal involving a spin-out of the Smurfit Stone Container Corp shares and hard cash for Smurfit shares would probably need to be above €3.50 to have any hope of success.

This would value Smurfit at €3.8 billion, although the cost to a purchaser would be closer to €5 billion when allowance is made for Smurfit's debt.