Jefferson Smurfit is believed to be close to agreeing a multi-billion merger with Dutch firm, Kappa Packaging, that will see Smurfit taking a dominant shareholding in the new entity.
Sources said yesterday that discussions had reached the final stages of negotiations on a stock-based merger. The two parties entered talks some months ago.
The deal most likely to emerge from talks would see Dublin-based Smurfit taking the largest equity stake in the combined company. Speculation yesterday centred on a 60/40 division of shares in the enlarged entity.
Smurfit could also be expected to hold the balance of executive power in a merged group, with the majority of senior roles likely to be held by its executives.
One source yesterday described the most likely outcome as "a merger of unequals".
Analysts have found it difficult to value a merged entity, but the enlarged group could have annual sales of at least €7 billion. Kappa was valued at €4.5 billion when it was put on the market last year by Cinven and CVC, the UK private equity firms that bought it in 1998.
The last valuation of Smurfit was in 2002, when it was taken private by Madison Dearborn in a €3.9 billion deal. Smurfit has subsequently undertaken a number of divestments, most recently selling speciality paper company Munksjo for €450 million and the K Club in Kildare for €115 million.
Both firms carry significant burdens, with Kappa having debts of just less than €3 billion at the end of 2004 and Smurfit's debts reaching €2.5 billion at the end of June this year.
Second-quarter results issued by Smurfit yesterday underline the rationale for consolidation in the paper and packaging industry.
The company said while group sales from continuing operations had been flat year-on-year at €1.085 billion, business had been strong in Latin America and weak in Europe. Pretax profits from all operations for the quarter amounted to almost €13 million, down 37 per cent on the same period of 2004.
Business in Europe was "extremely challenging" in the second quarter, said Smurfit chief executive, Gary McGann.
"Europe is a market characterised by capacity growth which significantly exceeds demand growth," said Mr McGann.
"We expect that these conditions will prevail unless there is a significant and sustained increase in demand for corrugated or structural change in the European containerboard industry," he added.
Shareholders were told that the firm's focus is on "delivering improved financial performance at all points of the industry".
Mr McGann pointed out that the firm made "significant progress on debt paydown" over the quarter. Net borrowing at the end of June was €2.499 billion, down €121 million on March levels, mostly due to the K-Club sale. Mr McGann said the "intensive focus" of management was on managing the company's cost base "and those elements of the business within our control".
Most analysts expect Smurfit or any enlarged company to return to the stock market over the next year. A combination of Smurfit with Kappa would hold more appeal for investors.
An initial public offering would provide a means of cutting debt levels by injecting equity.
A spokesman for Smurfit declined to comment on the negotiations yesterday. A spokeswoman for Kappa also said she was unable to discuss the matter.
