Constructing a Corrugated Giant

In late January, Norcross, Ga.-based RockTenn surprised the paper industry with its announced plan to acquire the assets of Smurfit-Stone Container Corp., with headquarters in Creve Coeur, Mo., and Chicago, for $3.5 billion. As of mid-February, the proposed deal has yet to be voted on by shareholders, though the Federal Trade Commission has granted early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976.

The acquisition faces a number of lawsuits that claim the deal does not provide a fair market price for Smurfit-Stone. Several of the suits allege that Smurfit-Stone could have achieved a higher price if a competitive bidding process had occurred rather than the one-on-one negotiations that the claimants say took place.

According to published reports, three hedge funds—Third Point, Royal Capital Management and Monarch Alternative Capital—which combined own nearly a 9 percent share in Smurfit-Stone, say they will vote against the deal, claiming that RockTenn’s offer was far lower than the price that open negotiations would have yielded.

Several industry observers say they are surprised that another paper company didn’t extend a counter offer for Smurfit-Stone, which was able to eliminate several billion dollars in debt when it emerged from Chapter 11 bankruptcy protection in the summer of 2010.

BY THE NUMBERS
In the deal announced Jan. 23, 2011, RockTenn said it would acquire Smurfit-Stone Container Corp., creating a $9 billion forest products company with assets including mills, box plants and recycling facilities.

If the deal is completed, RockTenn would own 56 percent of the combined company, while Smurfit-Stone would own 44 percent.

RockTenn’s James Rubright would serve as chairman and CEO of the company, while Steven Voorhees would serve as executive vice president and CFO. RockTenn’s James Porter III would serve as executive vice president of corrugated packaging.

Smurfit-Stone, which emerged from Chapter 11 bankruptcy in June 2010, has 7 million tons of manufacturing capacity throughout its network of 12 mills. When added to RockTenn’s paperboard capacity, the combined company’s total production capacity would be roughly 9.4 million tons.

Assuming the deal is completed, the combined company would be the second largest paperboard producer in the United States.

This is a significant increase in production capacity for RockTenn, which has been a smaller player in the paperboard market.

The proposed deal also has shaken up the North American paper industry, which has been struggling with significant overcapacity and the resultant closure of dozens of mills recently.

In its move to acquire Smurfit-Stone, top executives at RockTenn have signaled that they feel the North American containerboard industry is set for healthy growth going forward.

While many of the top officials at RockTenn and Smurfit-Stone Container Corp. have been reluctant to discuss the pending deal at this time, a number of industry observers, who requested anonymity, say they feel the deal is a great move for RockTenn. Many also express surprise that a much larger rival, such as International Paper or Georgia-Pacific Corp., did not make a move to acquire Smurfit-Stone. 

While there have been some questions as to Smurfit-Stone’s overall assets, it holds the advantage of recently having come out of bankruptcy protection, allowing RockTenn to acquire a company with very little debt.

As Smurfit-Stone struggled with its debt, it closed a significant amount of high-production capacity. Since 2005, the company has closed eight paperboard mills that it deemed high-cost operations. Therefore, Smurfit-Stone is operating lower-cost assets currently, which has made it an enticing asset to RockTenn.

In the press release announcing the merger, Smurfit-Stone’s Chief Executive Officer Patrick J. Moore says, “The Smurfit-Stone management team and the board of directors are sharply focused on creating value for shareholders. This transaction immediately achieves this objective, creating a stronger combined company that is well positioned to deliver long-term value to shareholders and high-quality, innovative packaging solutions to its valued customers.”

STRATEGIC DEAL
During the Jan. 24, 2011, conference call discussing the proposed deal, RockTenn’s senior management said it saw Smurfit-Stone as an excellent fit that offered a diverse end market mix. In fact, James Rubright, RockTenn CEO, said Smurfit’s customer base was more diversified than RockTenn’s.

Smurfit-Stone has invested $514 million in its box plants since 2007. These investments and others have resulted in a 29 percent increase in plant throughput since 2005, according to the company. Smurfit also has closed 53 plants and reduced its staff by 42 percent. As a result, the company has seen a 10 percent decline in its total conversion cost per ton since 2009.

During the conference call, Rubright said he had a fairly bullish outlook concerning the North American paperboard business throughout the next several years. “The containerboard and corrugated packaging industry is a very good business, and U.S. virgin containerboard is a highly strategic global asset,” he said.

In fact, Rubright said the greatest upside for RockTenn going forward would be virgin containerboard. “With the acquisition of Smurfit-Stone, RockTenn’s fiber input ratio will be 55 percent virgin and 45 percent recycled,” Rubright said.

While a significant amount of new recycled-content containerboard capacity has been created, especially in China, the recycled fiber stream has to be supplemented by virgin containerboard, Rubright said. This should boost the company’s business going forward.

This is a sharp change from 2004, when RockTenn’s fiber mix was 100 percent recycled content. In fact, as recently as last year, recycled fiber comprised 82 percent of RockTenn’s fiber mix, while virgin fiber accounted for 18 percent.

According to RockTenn, with the acquisition of Smurfit-Stone, which would become a wholly owned subsidiary of the company, it would become the second largest producer of containerboard in North America and the second largest producer of coated recycled paperboard. The combined company also would have a stronger geographic footprint in the Midwest and West Coast than RockTenn has currently.

During the conference call, Rubright noted, “We look at lots of transactions. For the ones we have done there was a compelling, strategic rationale for the acquisition.” He added, “We think RockTenn could create significant value with this transaction.”

EFFICIENCY OF OPERATIONS
A key advantage that should benefit the combined company is the manufacturing cost advantage that North American producers hold in the global market. Despite the perception that U.S. manufacturing is high cost and at a distinct disadvantage to manufacturing operations in Asia, RockTenn executives said that, with the exception of Oceania, which is only a small overall producer of containerboard, the per-ton containerboard production cost in North America is far less than in Europe and Asia. Rubright noted that the price difference between North American containerboard costs and those costs in Asia is about $90 per ton. In addition, analysis shows that, with only a few exceptions, most of Smurfit’s containerboard mills have a production cost below the average of $293 per ton.

“With respect to Smurfit, we want to make it a good asset,” Rubright said. “We believe Smurfit is underappreciated. We estimate transaction synergies of $150 million,” he added.

If the merger is completed, 57 percent of the combined company’s paperboard capacity would be virgin containerboard, 22 percent would be recycled containerboard, coated recycled board would account for 7 percent, SBS (solid bleached sulfate) board would make up 5 percent, uncoated recycled board and pulp would each account for 4 percent, while kraft would comprise 1 percent, according to RockTenn.

Currently, Smurfit-Stone has 103 container plants, 30 recycling facilities and 12 mills. Upon completion of the acquisition, the combined company would have 45 paper machines across 25 mills.

While the company’s total paperboard production would be roughly 9.4 million tons, about half—or 4.7 million tons—would be linerboard. Of that amount, 4.17 million tons would be virgin fiber. The combined company’s corrugated medium production would be 2.78 million tons, with 1.58 million tons being recycled content. SBS board would comprise 475,000 tons; coated recycled board would comprise 620,000 tons; uncoated recycled board would comprise 380,000 tons; pulp would comprise 375,000 tons; and kraft would comprise 79,000 tons of the company’s production capacity.

THE NEW ROCKTENN
If RockTenn and Smurfit-Stone are given the OK to combine their assets, slightly more than 75 percent of the company’s sales would come from corrugated packaging, 16 percent would come from consumer packaging, while specialty paperboard and merchandise display business would each account for 4 percent of sales.

If the deal passes a shareholder vote, RockTenn says its corrugated assets would operate with a four-pronged strategy:

• Completing the box plant consolidation and optimization strategy initiated by Smurfit-Stone Container Corp. management.
• Creating opportunities to invest capital in the mill system and optimize the footprint to reduce cost and maximize production efficiency.
• Applying the RockTenn management model to the box plant system, which is designed to drive product innovation, customer satisfaction and low-cost manufacturing while maximizing sales.
• Consolidating the divisional entity into a single headquarters in Norcross, Ga.

The author is senior and Internet editor of Recycling Today and can be contacted at dsandoval@gie.net.