US associate Smurfit Stone would be sold ahead of any takeoverdeal, netting €1.3 billion in stock for the group's 16,500 shareholders, writes Brendan McGrath
Jefferson Smurfit's 29.5 per cent stake in US associate Smurfit Stone (SSCC) will be distributed among the group's 16,500 shareholders, ahead of any takeover bid, informed sources have told The Irish Times.
The stake, worth €1.3 billion, will be distributed as shares. It is understood that the approach to Smurfit has come from a European or US private equity group and a bid for the firm from another packaging company is unlikely.
Private equity companies are unlikely to have any interest in the SSCC stake, so a spin-off of this stake to Smurfit shareholders would remove one potential complication to a deal, say the sources.
While European private equity firms like Cinven and CVC, which have extensive packaging interests through ownership of Dutch group Kappa, have been mentioned as potential bidders for Smurfit, informed sources said US investors like Kohlberg Kravis Roberts and Hicks Muse should not be excluded from consideration.
The statement from Smurfit that it has received an approach which might lead to an offer for all or part of the company had a dramatic impact on trading in the group's shares.
On the Dublin market, Smurfit rose as high as €3.45 on the Dublin market before closing up 46 cents on €3.13, a rise of more than 17 per cent on the day.
While the Irish Stock Exchange turnover figure of 49.5 million shares includes an element of double-counting, dealers said there was huge trading in the shares by Irish and overseas investors, as well as clear evidence of arbitrage activity by hedge funds.
Initially, there was speculation that one of the big international packaging firms, particularly International Paper, might be the "third party" referred to by Smurfit, and this speculation on a trade buyer was largely responsible for the early surge to €3.45.
But the market subsequently revised its thinking and adopted the view that most of the major potential trade buyers would be hard pressed to meet the sort of valuations being put on the company.
As a result, the focus shifted to US and European private equity houses, which are far less likely to pay the sort of premium that a trade buyer might pay.
Analysts have estimated that, including the €1.3 billion SSCC stake, Smurfit has a fair value in the order of €3.25 to €3.30 a share and this is as much as a private equity house would pay, given the cost of capital and the likely cash flow from the group's operations over the next few years.
Whether the Smurfit board would lend its support to an offer at this level is an altogether different matter and, in that regard, the Smurfit family interests, who control almost 10 per cent of the company, will have a major say.
There has been on-off speculation in recent months that Smurfit was planning to sell the SSCC stake to institutional investors or spin out the SSCC shares to its own shareholders. But sources say the SSCC shares will now be spun out to shareholders if an agreement is made for the subsequent sale of the group to a private equity house.
This would mean that €113 million worth of SSCC shares would be distributed directly to Smurfit's small shareholders, who own 9 per cent of the company.
Another €200 million in SSCC shares would be distributed to Smurfit's Irish institutional investors who own 15 per cent of the firm. The main Irish institutional shareholders are understood to be Bank of Ireland Asset Management, Irish Life, KBC and Standard Life.
But ultimately, the destiny of the Smurfit group will be decided by the group's US institutional investors, who now own 55 per cent of the shares.
Market sources believe these shareholders, headed by Wellington Management, Capital and Franklin, are likely to be supportive of an offer for the company at a price of €3.20 or upwards.
"The institutions know that if no offer emerges, then the share price is going to go all the way back to the €2.60/€2.70 level. Irish institutions would bite your hand off for €3.30 given the way the share has performed over the past 10 years."
Investors who bought into Smurfit in the past decade will make little profit and many will nurse heavy losses. However, investors who bought shares in the past year, when they outperformed the Irish market by more than 40 per cent, will make a hefty profit.
