One of Ireland's largest companies Smurfit Kappa - which employs around 46,000 people worldwide - this week completed its acquisition of Netherlands-based paper and recycling business Reparenco for €460m. The company said it expected to see savings of more than €30m with the integration of the recycling firm into its businesses. Earlier this year, Smurfit Kappa rejected two takeover bids by US firm International Paper. IP made two takeover proposals in February and March. The second valued Smurfit Kappa at €37.54 a share, or €8.9 billion.
Smurfit Kappa's chief financial officer Ken Bowles said the two offers from International Paper undervalued the company. "As a public company you always accept that you are technically for sale. As a management team and for your shareholder base, the idea is that if you are for sale, that you should be able to extract fair value and full value for whatever offer comes your way," he said.
"Both the board at Smurfit Kappa and indeed the management team felt that neither proposal really properly valued Smurfit Kappa against its current valuation which has always been slightly less than our peer group and against our future valuation which is based on our medium term plan in particular. It was also lower when compared to benchmark valuations and deals done in the sector over the last two or three years - most recently the acquisition of DS Smith of Eurapak for almost 12 times EBITDA."
Mr Bowles said that across that range of metrics, and a number of other metrics, the board never felt that either proposal valued Smurfit Kappa fairly. He said from the start of the process, management had actively engaged with their shareholder base, and most shareholders were complimentary about that process. "Through newspaper reports, we felt that there was a level of shareholder that might have felt there was a deal to be done," Mr Bowles said, "but that never raised itself to more than 15%-20%. I suppose you could say that 80% were happy with the outcome," he added.
At the time of the IP bids, shareholder advisory groups said €40 would have been a fair valuation. The CFO said Smurfit Kappa never put a number on the valuation. "I think €40 per share became the number that was slightly higher than the €38 that was in their proposal. It certainly doesn't reflect what we would consider to be fair valuation for the group. It was never a number that we focused on, or even had any discussion necessarily with shareholders around, and we certainly never put forward a number that we would be happy with," he said.
"The reality was that International Paper put two proposals in front of us, we took both on their merits and discussed it internally at the board, and rejected both, as neither hit the mark," the CFO said. He said the paper and packaging company was always open to any proposal that IP put in front of it, but they never came back with a third one.
Under takeover rules, International Paper cannot make another bid for 12 months and Ken Bowles said that he was not sure if Smurfit Kappa will ever be amenable to another approach. "I think in reality after 12 months, we'd hopefully be in a better state than we currently are in terms of where the share price is, in terms of how we've executed our medium term plan. Indeed, whether it's International Paper or anybody else, or Smurfit Kappa as the acquirer, it's an interesting space for paper packaging," he added.
The acquisition of Reparenco in the Netherlands was an obvious one for the group. It is the only private equity owned paper mill in Europe - a significant reason due to the fact that in the last number of years, there has been a level of consolidation in the European paper packaging space, somewhat akin to what happened in the US during the 1980s and 1990s.
"Consolidation is good for the sector because it means less players coming into the market building capacity on the idea of cheap cost of capital, it keeps the supply chains tight," Mr Bowles explained. "Reparenco is very much in the heartland of our European operations as we operate in 23 countries in Europe - we've a very large papermill system. We're the number one producer of containerboard, and the number one producer of kraftliner, and Reparenco really fits into our profile. Reparenco fulfils our ambition as to how we see growth happening, whether it is discount retailers, e-commerce or plastic substitution, you need paper for all of those things."
"So when we looked across the piece, Reparenco really fits that idea. At the moment it makes around 400,000 tonnes of paper, it has the capacity to go higher than that in time, and we need the paper quite simply if we are going to make the boxes we want to make," he concluded.
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