Jefferson Smurfit's strategic review of its American paper and packaging operations is understood to be virtually complete, and may involve either the sale of JS Corporation's newsprint operations or the merger of JS Corporation with another American packaging group.

JS Corporation is 46 per cent owned by Smurfit and 34 per cent by a Morgan Stanley leveraged equity fund.

There is speculation that part of the strategic review has been devoted to finding a way for the American investment bank to disengage from JS Corp without Smurfit being required to buy the 34 per cent shareholding.

Details of the strategic review of the American operations were first disclosed by The Irish Times in May when it was reported that Smurfit might sell newsprint and forest assets worth up to $1.4 billion and concentrate on its core packaging activities and convert JS Corp into a "value-added" packaging company, producing corrugated containers, folding cartons and labels.

No Smurfit spokesman was available for comment yesterday, but industry sources believe that one option mooted - the merger of Smurfit and JS Corp - is unlikely to take place, with a variety of tax and financial hurdles militating against such a merger.

In a review, Smurfit's London broker, UBS, concluded that a merger between Smurfit and JS Corp is unlikely as both organisations already co-operate closely and a merger would not necessarily generate substantial synergies.

Likewise, Smurfit digging deep into its resources to actually buy the Morgan Stanley shareholding is seen as unlikely, as it would involve Smurfit taking JS Corp's $2 billion debt onto its own balance sheet. Such a move would push Smurfit's gearing to untenable levels, say analysts.

As an alternative, UBS has suggested that another option would be to merge JS Corp with another American packaging group, in a move that would create a merged group with greater economies of scale and able to generate substantial synergies. It is understood that this is one option being seriously explored by Smurfit and JS Corp.

The other major question mark is over the minority shareholding in JS Corp held by the Morgan Stanley Leveraged Equity Fund.

Morgan Stanley has long had a policy of holding onto investments for no more than five years, and it is no secret that the American investment bank would be happy to sell its stake in JS Corp, especially as the JS Corp share price is moving back to a level where Morgan Stanley might make a substantial net gain on its investment.

In recent weeks, the packaging sector has staged a strong improvement based on a belief that liner board prices have finally turned the corner. That has led to speculation that Morgan Stanley may soon liquidate its investment in JS Corp, possibly through an offering of its 34 per cent stake to American investors or a distribution of its JS Corp shares to the investors in the leveraged equity fund that actually owns the shares for Morgan Stanley.

Smurfit's share price has risen strongly in recent weeks and closed on 209p last Friday, while JS Corp shares were also well-bid last week, closing up $1/2 on $18 3/4.