Rock-Tenn Marriage to MeadWestvaco a Good Move for Both

The deal is expected to close in the second quarter, at which time MeadWestvaco shareholders will own 50.1% of the combined company and Rock-Tenn shareholders the remaining 49.9%. The board will consist of eight Rock-Tenn directors and six from MeadWestvaco. The CEO will be current Rock-Tenn CEO Steve Voorhees, and current MeadWestvaco CEO John Luke will serve as non-executive chairman. We consider Voorhees a solid choice to run the new company, as he brings a good capital allocation track record and extensive integration experience having overseen Rock-Tenn's 2011 acquisition of Smurfit-Stone and other bolt-on deals.

We think this is a good deal for both companies and expect to raise our fair value estimates. We do not anticipate changing either company's no-moat rating.

The companies expect to achieve $300 million in synergies over three years from supply-chain optimization, infrastructure/corporate combinations, and mill and plant optimizations. We think this figure is achievable given the companies' overlapping paper-based packaging grades in North America and mill and plant footprints. The deal will make the combined company the #1 or #2 producer of North American SBS (e.g. cigarettes, cosmetics packaging), CNK (e.g. frozen food packaging), CRB (e.g. tissue boxes), and containerboard (e.g. corrugated boxes).

MeadWestvaco's announced spin-off of the specialty chemicals business is expected to go on as planned.

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