Shares in Jefferson Smurfit and its American associate Smurfit Stone have risen sharply after Smurfit Stone confirmed that it has put in place a rationalisation programme that will eliminate 17 per cent of its containerboard capacity and generate annual savings of $350 million (£241 million). The restructuring will involve the loss of 3,600 jobs, 10 per cent of the group's total workforce.
But the real boost for shares all across the packaging sector came with the announcement that International Paper has made an agreed $6.6 billion takeover bid for Union Camp, a move that should result in further rationalisation in the industry and ease the downward pressure in containerboard prices. The galvanising effect of the IP/Union Camp deal sent Smurfit shares up 10p to 135p in Dublin while Smurfit Stone was trading over $1 1/2 higher above $14 on Nasdaq.
The announcement from Smurfit Stone did not contain any surprises and most of the detail of the various plant closures and rationalisations in its operations in the US has still be to be revealed. But Smurfit Stone will shut down 1.1 million tons of containerboard production - 17 per cent of its capacity - and 400,000 tons of market pulp capacity. This is in addition to the 500,000 ton capacity of half-owned Port St Joe mill in Florida which is currently idle.
The restructuring will reduce Smurfit Stone's annual containerboard capacity from 6.8 million to 5.7 million tons. But it will mean that 90 per cent of this capacity will be used in the group's own plants and will reduce the exposure to the open market for containerboard.
The restructuring will involve as once-off charge of $350 million which Smurfit Stone will take into its fourth quarter results. Jefferson Smurfit, which owns 33 per cent of Smurfit Stone, will bear its share of the restructuring costs in its own accounts, but this will be more than covered by Smurfit's own recent asset sales particularly the Condat mill in France.
The statement from Smurfit Stone makes no mention of asset sales, but the merged group has a target of $2 billion from such disposals. These are likely to be the sale of the group's newsprint and timberland, although there is some scepticism about the saleability of these assets at the prices that Smurfit Stone is likely to demand. Analysts have stressed that selling off assets quickly is essential if Smurfit Stone is make a dent in its huge $6.8 billion debt mountain.
The International Paper/Union Camp transaction is an all-paper deal worth $6.6 billion. Union Camp shareholders will receive $71 per share in stock for each outstanding share of Union Camp under the merger agreement, which has been unanimously approved by both companies' boards.
The merger is expected to result in $300 million in cost savings through a combination of reductions in overhead, process improvements, facility rationalisation, purchasing and logistics savings.
Union Camp and International Paper are diversified forest products companies with $4.4 billion and $20.1 billion respectively in 1997 net sales. The transaction is expected to close at the end of the first quarter of next year.
"This is a unique opportunity to combine two great companies with low-cost, high-quality assets and long traditions of customer service. In addition, cost savings resulting from this combination will create significant value for shareowners. Union Camp's expertise in marketing and manufacturing quality products will add value to the combined enterprise - offering substantial opportunities for growth and success," said Mr Craig McClelland, Union Camp's chairman and chief executive Officer.
"It's a perfect fit," stated Mr John T Dillon, chairman and chief executive officer of International Paper. "By merging, we're teaming two world-class companies in the paper, packaging, and related forest products businesses. This combination will allow us to be even more competitive in the global marketplace and better serve our customers."
