Smurfit plans merger with Stone Container

IRISH-BASED Jefferson Smurfit yesterday triggered a major rationalisation in the paperboard and packaging industries. Jefferson Smurfit Group (JSG) will merge its 46 per cent-owned US subsidiary Jefferson Smurfit Corporation (JSC) with the loss-making Chicago-based Stone Container Corporation to form Smurfit-Stone Container Corporation, a listed US company with a market capitalisation of $4.3bn (pounds 2.6bn), in which Jefferson Smurfit will own a 34 per cent stake.

The combined company would create one of the world's largest manufacturers of paperboard and paper-based packaging products, with annual sales of around $8bn and operations in the US and Europe, the chairman and CEO of JSG, Michael Smurfit, said yesterday. Dr Smurfit will become non-executive chairman of the new company, Roger Stone will be chief executive officer, while JSC will provide the deputy chief executive and chief financial officer.

It also starts life with massive combined debts of $6.4bn. After shouldering heavy interest charges of $650m, JSC barely broke even and Stone Container lost $593m last year. The merger will create operational savings of $350m a year. The group also intended to sell $2.5bn worth of assets, including the Canadian newsprint and pulp mills, within the next 18 months, Mr Smurfit said yesterday. He expects to realise assets at a reasonable price, on the grounds that the depressed market in paper and packaging industries caused by the creation of excess capacity has ended and the value of assets is beginning to rise.

The newly merged company made a good strategic fit, and was expected to be "earnings-accretive and cash-flow positive" in 1999, the company's statement said. The North American container board operations of JSC and Stone are complementary, and the merged company has substantial manufacturing capacity in Germany and Belgium where JSG is weak, and is less important in France and Spain, where JSG has substantial operations.

The deal will focus the business on packaging materials, its core competence, the company said yesterday. Together, JSG and the new company will be the market leader in North America, Latin America, and Europe, with 11 per cent of global container board sales.

As part of the deal Jefferson Smurfit will buy in 20 million shares in its subsidiary from a leveraged fund for $500m, at an average price of $25 a share, a substantial premium to the market price, reducing the fund's stake from 30 per cent of JSC to 9 per cent in the enlarged company. Existing investors in JSC and Stone Container will hold roughly equal stakes in the remaining 57 per cent of the enlarged company.

Shares in Jefferson Smurfit Corporation rose $3 to $22 yesterday, Stone Container sharesclimbed $1 to $21 and Jefferson Smurfit Group shares in London also rose 14.5p to a new peak of 238.5p.

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