In a cash/stock deal, for each share of Smurfit-Stone common stock, Smurfit-Stone stockholders will be entitled to receive 0.30605 shares of RockTenn common stock and $17.50 in cash, representing 50% cash and 50% stock. The aggregate consideration is $35 per Smurfit- Stone common share. The consideration represents a 27% premium to Smurfit-Stone�s closing stock price on January 21, 2011.
When finalized, Smurfit-Stone will become a wholly owned subsidiary of RockTenn. Ownership of the new company will see RockTenn shareholders at 56% and Smurfit- Stone shareholders at 44%.
The new company will have 45 paper machines producing containerboard and paperboard in 25 mills.
So why did Jim Rubright and his team make the play for Smurfit-Stone? For one thing, �North American containerboard has become a very, very good business,� Rubright said in his conference call on Jan 24. �...we�re not fixerupers. We really want to buy good assets ...� He noted that Smurfit-Stone has invested $550 million in capital in its corrugated box plant system since 2007.
On the mill side, Rubright noted that although Smurfit-Stone has done a good job maintaining its mills over the past three years, it hasn�t been in the position to optimize mill systems through capital investment and there remains a lot of opportunity to remove cost from Smurfit�s mill system.
However, Rubright emphasized that RockTenn doesn�t intend to go out and spend massive amounts of capital but instead, over time, look at opportunities to make incremental capital expenditures and ultimately lower the cost curve of those mills.
Another attractive aspect of the acquisition involved reducing RockTenn�s exposure to the recycled market.
�The fact is, United States virgin containerboard is a highly strategic global asset,� Rubright said. �The world has created enormous amounts of recycled capacity over the last ten years, particularly in China, and that recycled fiber stream into their mills has to be supplemented with virgin containerboard.�
Importantly, the acquisition of Smurfit-Stone will reduce RockTenn�s fiber sourcing from 82% recycled in 2010 to 45% recycled after the transaction.
Ultimately, Rubright contends that implementing RockTenn�s customer-focused approach will prove the key to future operational gains. �We�re very focused on customer satisfaction and we�ve got data that suggests we�ve got extremely high customer satisfaction,� Rubright said. �Our mantra is �We want to be the one the customer chooses at any given pricing point on the pricing scale.� We don�t want to be the one to lower the price to get the business.�
On the mill side of the deal the pluses appear to outweigh the minuses for both RockTenn and Smurfit-Stone, and the U.S. containerboard industry as a whole.
However, box plant capacity in the U.S., or I should say overcapacity, has been a thorn in the industry�s side and an area to be addressed. Smurfit-Stone comes with at least 80 or so box plants (my estimate from counting them on a map) even after shutting down 53 plants over the past few years in a cost cutting program.
There�s a ways to go before this deal shakes itself out, but I like the odds with Jim Rubright and his team calling the shots.
John O'Brien can be reached at: email@example.com
by John O'Brien, Managing Editor
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