Jefferson Smurfit's difficulties in Europe underscore the rationale for its dialogue with Kappa Packaging, its Eindhoven-based competitor. The two companies are discussing a merger process, although little by way of firm information has surfaced so far.
While Smurfit is not prepared to say whether it had hired corporate finance advisers, the group made it clear in its quarterly results yesterday that conditions in the corrugated, recycled container board and kraftliner segments are not good.
Such difficulties mean that tentative plans for a return to the stock market are already off the agenda. Analysts now believe Smurfit and its owners, Madison Dearborn, are assessing an alignment with Kappa to strip out inefficiencies before a renewed effort to float or sell the business.
A key objective would be improving the prospects of debt repayment, a major concern for a group whose net debt is €2.62 billion.
Smurfit's interests may tally with those of Kappa Packaging's venture capital owners, Cinven and CVC, who put the company on the block last October.
Kappa's advisers, Goldman Sachs, are said to have held inconclusive discussions with paper-markers SCA and Stora Enso, which are among the biggest players in Europe. The ball has now passed to Smurfit, which is the largest corrugated board maker in Europe and Kappa is the third largest.
Smurfit is also the second-largest container board maker and Kappa is the third largest.
The pan-European paper analyst at Deutsche Bank in London, Mathias Carlson, said it was far from certain that the merger would go ahead, but said there was a clear case for further consolidation in the industry.
"By creating the largest container and corrugated board producer in Europe, you could have a strong company, which hopefully could phase out a lot of unprofitable, old mills."
This was more important given new capacity in the industry, putting pressure on older plants.
While financial conditions of a merger are unclear, analysts believe neither Madison Dearborn nor Kappa would be likely to use a merger to exit the scene. Rather, they would wait to take a return on their investment from hoped-for efficiencies.
Still, rating agency Standard & Poor's warned that a deal would be subject to regulatory approval as a merged group would have dominant positions in certain markets.
"As the two groups are leveraged buyout structures, it is likely that a potential combined entity would also be highly leveraged and thus exposed to high financial risk," it said.
