WestRock: Merger With Smurfit Kappa Creates Containerboard Giant; Shares Remain Attractive

WestRock WRK and Smurfit Kappa announced they have agreed to terms of a merger after news of a potential deal was reported last week. This comes as little surprise to us because both companies issued a statement last week confirming they were engaged in merger discussions. The deal would create a global packaging behemoth, combining the containerboard operations of both companies across North America, South America, and Europe. The new entity will be known as Smurfit WestRock and will be led by Smurfit’s current CEO, Tony Smurfit. WestRock shareholders would receive one share of the new entity for every share of WestRock they own and an additional $5 cash payment per share, which will be financed with debt. Barring any issues, management expects the deal to close in the second quarter of 2024. We are maintaining our $55 per share fair value estimate for WestRock as a 2% decline from incorporating the merger was offset by the time value of money. Based on our analysis, if the company achieves its $400 million synergy target, we think the deal would be value neutral, but we are taking a more conservative stance and expect roughly 85% will be achieved.

We think the genesis for the merger is likely from the side of Smurfit Kappa, who saw an undervalued containerboard producer that could provide value to their company. The companies have very little regional overlap, which is usually important in containerboard-related deals to consolidate operations and streamline production, which is likely why targeted synergies only represent 1.2% of pro-forma revenue.

As explained in our Sept. 7 analyst note, the new entity’s geographic diverse operations give us greater confidence that the deal will receive the necessary regulatory approvals. While the merger could improve the new company’s ability to service global customers, it could also create a larger containerboard company that is unable to fully leverage its global scale due to the regional limits of containerboard production.