Jefferson Smurfit Group has announced plans to merge with the Dutch group, Kappa Packaging, in a deal that will create the biggest paper packaging group in Europe.
The merged entity, which will boast annual sales of more than €7.6 billion, will be 58.3 per cent owned by Smurfit shareholders.
Of this, the lion's share will be held by Madison Dearborn, the Chicago-based private equity group, which took Smurfit private in a €3.9 billion deal three years ago. It will own 52.5 per cent of the combined company, while Kappa's owners, the private equity groups Cinven and CVC Capital Partners, will hold a 41.7 per cent stake.
Under the terms of the deal, JSG will also make a cash payment of around €300 million to Kappa's two shareholders. They will also receive a €75 million promissory note along with the shares of the new company. The deal is believed to value Kappa at around €2.6 billion. The merged group, to be called Smurfit Kappa, plans to finance the €300 million cash consideration, as well as refinancing Kappa's existing debt and Smurfit's credit facility by way of a new credit facility.
A number of banks have agreed to underwrite the proposed financing, which is expected to be in the region of €3 billion.
JSG executives will occupy four of the five top positions in the merged entity, including those of chief executive, chief financial officer and chief operating officer. The new board will comprise five directors from Madison Dearborn, while Cinven and CVC Capital Partners will each have two directors.
The merger, which JSG hopes to complete by the end of the year, is subject to European Union competition approval as well as consultation with relevant employee representative organisations.
Analysts welcomed the deal, which follows a tough period for the industry as lacklustre growth in Europe combined with overcapacity to hit profitability.
The deal will see Smurfit Kappa overtake Sweden's SCA as the market leader in the European paper packaging sector with a market share of 23 per cent, nearly twice that of SCA.
"It's a landmark deal in the European industry," said Merrion analyst John Mattimoe. "The move has a lot of logic. The combination should result in a bigger company and efficiencies, in overheads and operations, while both companies have a good geographic spread."
Jefferson Smurfit has strong market positions in western and southern Europe, whereas Kappa's strength is in the northern and eastern part of the continent.
JSG bondholders also welcomed the deal, which they believe will not add significantly to the debt burden already carried by the two companies.
While the companies provided little detail on the cost savings and benefits from the merger, analysts believe significant savings can be extracted in areas such as logistics, transport, purchasing and administration.
