The management of the Jefferson Smurfit Group is likely to have only a small equity stake in the group if a leveraged buy-out by Chicago-based Madison Dearborn Partners is successful.
Suggestions that the Smurfit family and other senior members of the group management could have a stake of up to 20 per cent in the LBO vehicle are wide of the mark and any management equity stake is likely to well into single figures, market sources have told The Irish Times.
Sources in the private equity industry have said that Madison Dearborn's usual strategy is to offer management of companies that are being bought a few per cent.
While the situation in Smurfit is somewhat different, with family and management owning about 10 per cent of the company, the sources said that Madison Dearborn was unlikely to depart radically from its own tried and trusted formula.
While the Madison Dearborn approach has been portrayed in some reports as a management buy-out by Dr Michael Smurfit and other senior Smurfit directors, the reality is that the approach by the Chicago private equity house is more a traditional leveraged buyout.
If Dr Smurfit does end up with a relatively small holding in the privatised Jefferson Smurfit then it is likely that he will be required to reinvest only a small portion of the €250 million he stands to realise if Smurfit is sold at the sort of prices being suggested in the market.
Jefferson Smurfit is currently capitalised at €3.49 billion - split between the €1.29 billion value of its 29.5 per cent stake in Smurfit Stone Container Corporation and the €2.2 billion value the market is attributing to the group excluding the Smurfit Stone stake.
If one assumes that this stake will be distributed directly to Smurfit shareholders before the completion of the buyout, then it would seem that the minimum value of the LBO of Smurfit will be €2.2 billion.
But instititutional shareholders have told The Irish Times that they would not support a leveraged buy-out at the suggested €3.50 a share and that Madison Dearborn and the managment will have to think of a price significantly higher than that figure.
If, however, Madison Dearborn ends up as the only bidder for Smurfit - a rival bid from another private equity house is unlikely - then institutional shareholders will have to decide whether they should take the money run or reject the offer and run the risk of the Smurfit share price collapsing to the €2.60-€2.70 a share range before the approach being made public.
Unlike a trade buyer like Stora or International Paper which could probably table a higher offer, in the knowledge that it could generate substantial savings and synergies by merging its own and the Smurfit operations, private equity houses have much more limited scope to reduce costs.
"The likes of Madison Dearborn could sell off some of its luxuries like the K Club and the jet, but they are negligible savings in the overall context. They will do their sums, make an assessment of future cash flow generation and then decide there is a price beyond which they cannot go," said one source.
