(Bloomberg Gadfly) -- Smurfit Kappa Group Plc has so far been able to resist unwanted takeover interest from U.S. packing rival International Paper Co. without doing much. But it needs to open up the cardboard box and show what value lies inside.
The Dublin-based paper group on Monday rejected a sweetened proposal from International Paper worth 8.9 billion euros ($11 billion) for its equity. This is a smidgen higher than an initial approach in February. As before, Smurfit shareholders would get 15 percent of the enlarged company. The value of that part of the proposal has been dragged down by International Paper's falling share price. Offsetting this, and more, is an increased cash element.
On first glance, it looks like International Paper is in a bind. The bidder needs its share price to recover as it can't afford to put much more cash into a deal. The current proposal would mean leverage of about 3.4 times Ebitda for the combined company based on 2018 estimates. While International Paper shareholders are used to such levels, Smurfit's aren't.
But the Irish company's management faces two problems. One, even with all the pressure on International Paper's share price, the value of its proposal is still comfortably above where Smurfit is trading and far higher than where the target shares would be absent the possibility of a takeover.
What's more, International Paper is finally addressing some of the issues weighing on the value of its acquisition currency. It has outlined $450 million of yearly pretax cost-cutting benefits. Conservatively valued, these are worth at least $2.6 billion in today's money, just covering the premium offered. The real figure is likely to be higher. Add the possibility of revenue gains, and there would be something in this deal for International Paper shareholders.
The suitor's promise to generate returns in excess of its cost of capital in three years also looks highly plausible. It wouldn't need to have extracted all of its current cost cuts target to get to a high-single digit return on acquisition in that timescale.
True, Smurfit argues that the implied exit multiple is below comparable transactions. But the gap is closing. International Paper can probably afford more and a further sweetener would provide grounds for Smurfit's approval. If Smurfit thinks otherwise, it's going to have to set out a defense based on what it thinks it's really worth.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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