Smurfit Kappa shares fell 10% after the WestRock merger announcement

Shares in Dublin-based packaging group Smurfit Kappa fell 10% at the market open on Tuesday in London after it announced it would merge with US peer WestRock to create an industry giant.

The two companies will form Smurfit WestRock – which is set to be one of the world’s largest packaging companies – which will be managed through a holding company established and headquartered in Ireland.

It will seek to list in New York with a standard listing on the London Stock Exchange.

WestRock shareholders will receive one Smurfit WestRock share and $5 in cash, equivalent to $43.51 per share, while Smurfit Kappa shareholders will receive one new share.

Smurfit Kappa investors will own approximately 50.4% of the new company.

FTSE 100 company Smurfit Kappa said the deal was expected to deliver “high single-digit accretion” to its current earnings per share, and more than 20% by the end of the first full year.

The paper packaging company has been a beneficiary of the pandemic, buoyed by a rise in e-commerce, and revenue and profits declined in the first half of 2023. results.

“We’ve always said we had too big a gap in our portfolio because we weren’t as involved in the US. We’ve looked over many years for a way to get there in a way that would reward our shareholders in the long term,” said Tony Smurfit, CEO. Smurfit Kappa, who will lead the combined company, told CNBC’s “Squawk Box Europe.”

“We have determined [WestRock] As an asset that we can develop and integrate to become better assets. So, after a series of negotiations, we finally reached an agreement at 7:15 [a.m. London time] “This morning to finally close this transaction, which I think will be great for our shareholders in the long, medium and short term.”

The combined company will choose an initial listing in New York because about 65% of revenues are planned to be in the United States and Latin America, and because “the multiples and pool of capital there are greater for companies like ours,” Smurfit said.

Asked if the deal was an acquisition rather than a merger, Smurfit said: “It’s a combination… We think the two companies have amazing opportunities in their respective businesses. We’re clearly paying a premium so the positions reflect that.”

The two companies had combined revenues of about $34 billion in the year to July, making Smurfit WestRock the largest listed global packaging company by that measure.

Susannah Streeter, head of finance and markets at Hargreaves Lansdowne, said: “Although management has stressed the unparalleled geographic scale of the combined group, investors appear to have a fair number of concerns about the risks ahead.” This may involve significant upfront costs, although efficiency savings will ultimately be achieved, she said.

“There have also been some headwinds across the sector, since the pandemic e-commerce boom with customers reducing stock and the uncertain economic backdrop ahead has become a bit worrying.”

Analysts at JP Morgan and Jefferies said the bonus was higher than many Smurfit shareholders had expected, Reuters reported.

Smurfit Kappa shares were down 8.6% at 10:05 a.m. London time.