WestRock: Potential Merger With Smurfit Kappa Would Create Global Packaging Behemoth

Smurfit Kappa Group and WestRock WRK confirmed on Sept. 7 that the two parties are engaged in merger discussions. Smurfit Kappa is one of the largest containerboard producers in Europe in addition to operations in the United States and Latin America. The potential merger would combine WestRock’s robust North American operations with Smurfit’s substantial European portfolio. We are maintaining our $55 per share fair value estimate for shares of WestRock for now, but we’ll revisit our valuation assumptions once the merger is officially announced and more details are disclosed.

Based on our pro forma analysis, the merger would create a company with almost $35 billion in revenue with a roughly 24% gross margin. The new company would be one of the largest containerboard producers in the world, surpassing WestRock’s closest competitor, International Paper, which recorded $21 billion in revenue last year. The companies would also target almost $400 million in pretax synergies from the deal but have yet to disclose how those will be achieved.

It’s important to note that International Paper attempted to purchase Smurfit in 2018, but Smurfit’s management team, believing the company was better off operating as its own entity, ultimately declined the deal. We think antitrust concerns for the proposed merger are minimal, as the two companies primarily operate in different regions. Over 80% of WestRock’s sales in 2022 were in the U.S., while less than 10% were in Europe and Latin America. Conversely, Europe accounted for over 70% of Smurfit’s revenue, while the Americas accounted for only 13%. As such, we think the merger would likely receive regulatory approval, but the companies still need to finalize a potential deal, which could take time. While the geographic diversity of both companies might limit potential synergies, a merger could improve the new company’s ability to service global customers.