When a takeover is mooted, investors normally get a say. Not in the case of Smurfit Kappa. Europe’s biggest box maker did not hesitate before sending US suitor International Paper packing. Nor did management engage with the bidder. That irked some investors, who might have assented to a deal. A rising dollar had left only a paper thin gap between the offer and the minimum €40 a share desired.
Even so, investors responded calmly to International Paper’s decision to fold its bid. While Smurfit’s shares have fallen 6 per cent since Friday, they are still 16 per cent higher than before the March offer. That owes little to lingering takeover hopes. Rather, better packaging prices have boosted the sector as a whole. Shares in some of Smurfit’s European peers have risen by over a fifth since March. The Irish company’s shares are trading a notch below the sector mean, on 13 times forward earnings.
Smurfit is used to trading at a discount of as much as 25 per cent to the likes of Mondi and DS Smith. Relatively high debt and volatile Latin American earnings are blamed for that. Smurfit has a chance to close that gap. It plans to invest €1.6bn by 2021 in a bid to increase its return on capital by 2 points to 17 per cent.
That will be a stretch, even if the boom in ecommerce and the war on plastics boosts demand for packaging. Good times attract capital and competition. A cyclical downturn in the next few years is possible. Those risks aside, there is money to be made by consolidating the fragmented European packaging market. Smurfit’s recent €460m purchase of Reparenco, a Dutch paper and recycling business, was a good start. Earnings should be boosted by a relatively cheap deal — priced at 6.4 times 2018 ebitda (a cash earnings measure).
Offered the choice, shareholders tend to say yes to bids. But International Paper lacked the finances to come up with an attractive package. Smurfit was right to argue the proposed bid undervalued its business. It now has an opportunity to prove it.
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