Merger talks between Jefferson Smurfit and Dutch firm Kappa Packaging are entering their final phase, with a conclusion now expected within the next week.
A €3.8 billion debt package is understood to be among the current proposals to finance the merger. Such a package would see the debt of both companies refinanced if a deal is concluded.
The talks have been ongoing since May. While some hurdles remain, the prospect of creating an entity with 23 per cent of the European paper packaging industry is a significant incentive for both sides. In addition, analysts believe there would be ample scope to strip out inefficiencies from a merged company before a renewed effort to float or sell off the business.
While a previous plan to refloat Smurfit was pulled amid difficult conditions in the global packaging markets, a combined entity with fewer inefficiencies but greater market share would hold more appeal for investors.
Smurfit is expected to take the largest stake in the merged company, with a 60-40 division of the shares believed to be likely. The prospect of improving its capacity to repay some €2.5 billion debts is a crucial objective for the Dublin-based company.
While some of Smurfit's bonds would stay in place under one of the structures under discussion, the mooted €3.8 billion debt line would be used to refinance Kappa's existing debt of €3 billion.
Banking sources believe that the size of the combined companies, with critical mass in the sector, would make it attractive to lenders. Smurfit is the largest corrugated board maker in Europe and Kappa is the third largest. Smurfit is also the second-largest container board maker while Kappa is the third-largest.
There was no comment last night from Jefferson Smurfit or from London-based advisers of Kappa's owners, the private equity houses Cinven and CVC.
However, Cinven and CVC would take a dividend from Kappa under one of the proposals under discussion. Some sources said this would be financed by Madison Dearborn, the US private equity house that took the company private in 2002.
That deal valued Smurfit at €3.9 billion, althought the group has since sold the speciality paper company Munksjo for €450 million and the K Club in Kildare for €115 million.
In advance of the talks, Kappa's adviser Goldman Sachs held inconclusive discussions with the major European paper-markers SCA and Stora Enso.
Additional reporting by Reuters
