425: Smurfit Kappa and WestRock Merger: Shareholder Circular Released Ahead of Key Vote

Sentiment:

Shareholder Circular 14 May 2024 4:50 PM

Smurfit Kappa issues a circular to shareholders outlining the proposed merger with WestRock, urging them to vote in favor of the resolutions at the upcoming shareholder meetings.

Capital raiseOn 3 April 2024, SK Treasury completed an offering in the aggregate principal amount of $2.75 billion of senior unsecured notes in three series.SK Treasury intends to (a) use the proceeds from the Notes Offering (i) to finance the payment of the Cash Consideration; (ii) to finance the payment of fees, commissions, costs and expenses in relation to the Combination and the Notes Offering; and (iii) for general corporate purposes, including the repayment of indebtedness, and (b) use an amount equivalent to the proceeds from the Notes Offering to finance or refinance a portfolio of eligible green projects in accordance with Smurfit Kappas Green Finance Framework (Eligible Green Projects), which Smurfit Kappa may, in the future, update in line with developments in the market.

Summary

Smurfit Kappa has released a circular to shareholders regarding the proposed combination with WestRock to form Smurfit WestRock.
The circular details the terms of the merger, including that Smurfit Kappa shareholders will receive one Smurfit WestRock share for each Smurfit Kappa share they hold.
WestRock shareholders will receive one Smurfit WestRock share and $5.00 in cash for each WestRock share.
The document outlines the reasons for the merger, including the creation of a global leader in sustainable packaging with extensive geographic reach and the potential for significant synergies.
Smurfit WestRock is targeting annual pre-tax run-rate synergies in excess of $400 million by the end of the first full year post-Completion.
The circular also contains risk factors associated with the merger and information on the upcoming shareholder meetings where the merger will be voted on.
The Scheme Meeting is scheduled for 13 June 2024 at 10:00 a.m. and the EGM is scheduled for 13 June 2024 at 10:15 a.m.
The Smurfit Kappa Board unanimously recommends that shareholders vote in favor of the resolutions.
The merger is expected to complete in early July 2024, subject to shareholder approvals, regulatory clearances, and other customary conditions.

Sentiment

Score: 7

Explanation: The document presents a balanced view of the merger, highlighting both the potential benefits and the risks involved. The unanimous recommendation from the Smurfit Kappa Board adds a positive signal, but the numerous risk factors temper the overall sentiment.

Positives

The merger will create a global leader in sustainable packaging with extensive geographic reach.
The Combined Group is targeting annual pre-tax run-rate synergies in excess of $400 million by the end of the first full year post-Completion.
The Combination will provide a substantially broader opportunity set for employees.
The Combined Group will have a disciplined, returns focused approach to capital allocation with a strong focus on cash generation and commitment to maintaining a strong investment grade credit rating.
The Smurfit Kappa Board considers the Combination to be in the best interests of Smurfit Kappa and Smurfit Kappa Shareholders as a whole and unanimously recommends that Smurfit Kappa Shareholders vote in favor of the Resolutions to be proposed at the Shareholder Meetings.

Negatives

The Combined Group may not realise all of the benefits of the Combination or such benefits may take longer than anticipated or may be lower than estimated.
Each of Smurfit Kappa and WestRock and, following Completion, the Combined Group may have difficulty attracting, motivating and retaining executives and other employees in light of the Combination.
Smurfit Kappa may not have discovered certain liabilities or other matters related to WestRock, which may materially adversely affect the future financial performance of the Combined Group.
The Combined Group will incur significant costs as a result of being subject to US regulations and reporting requirements, which will place significant demands on its management team, financial controls and reporting systems, and require a substantial amount of management time.

Risks

Due to potential fluctuations in the market value of Smurfit Kappa Shares, Smurfit Kappa Shareholders cannot be sure of the market value of the Scheme Consideration that they will receive in the Combination.
If the Combination is not completed by the End Date, either Smurfit Kappa or WestRock may have the right to terminate the Transaction Agreement.
Completion is subject to a number of conditions which may not be satisfied or waived, or which may not be capable of satisfaction without the imposition of undertakings, conditions, or divestments, which could be material.
The Transaction Agreement contains restrictions on the ability of Smurfit Kappa to pursue alternatives to the Combination.
Smurfit Kappa, WestRock or Smurfit WestRock may be subject to litigation in relation to the Combination, which could lead to additional expenditures of money and resources, and may delay or prevent the Combination from being completed.
While the Transaction Agreement is in effect, Smurfit Kappa and WestRock are subject to restrictions on their business activities.
The business relationships, results of operations and financial conditions of Smurfit Kappa, WestRock and, following Completion, the Combined Group may be subject to disruption due to uncertainty associated with the Combination.
The IRS may not agree with the conclusion that Smurfit WestRock is to be treated as a foreign corporation for US federal income tax purposes following the Combination or may assert that Smurfit WestRock is subject to certain adverse consequences for US federal income tax purposes.

Future Outlook

Smurfit WestRock believes that dividends are a central component of its objective to deliver value for Smurfit WestRock Shareholders and recognises the importance of dividends to Smurfit WestRock Shareholders. While there can be no assurance that Smurfit WestRock Shareholders will receive or be entitled to dividends that are equivalent to the historic dividends of Smurfit Kappa or WestRock, Smurfit WestRock intends to pay dividends to Smurfit WestRock Shareholders in line with Smurfit Kappas current attractive dividend policy.

Management Comments

The Smurfit Kappa Board considers the Combination and the Resolutions to be in the best interests of Smurfit Kappa and Smurfit Kappa Shareholders as a whole and, accordingly, unanimously recommends that Smurfit Kappa Shareholders vote in favour of each of the Resolutions to be proposed at the Shareholder Meetings.

Industry Context

The combination of Smurfit Kappa and WestRock marks the creation of a global leader with vast scale, quality, product diversity and geographic reach, spanning six continents and 40 countries, with 63 mills, approximately 450 converting operations and a team of approximately 100,000 people.

Comparison to Industry Standards

Smurfit Kappa is one of the leading integrated corrugated packaging manufacturers in Europe, with a large-scale pan-regional presence in Latin America.
WestRock is a multinational provider of sustainable fibre-based paper and packaging solutions with operations in North America, South America, Europe, Asia and Australia.
In each of the financial years ended 31 December 2023, 2022 and 2021, Smurfit Kappa delivered consistent mid to high teens Adjusted EBITDA margins, while undertaking a significant capital expenditure programme (with capital expenditure amounting to $929 million, $930 million and $715 million in the financial years ended 31 December 2023, 2022 and 2021, respectively) as well as a number of acquisitions during the period.
In each of the financial years ended 30 September 2023, 2022 and 2021, WestRock delivered consistent mid teens Consolidated Adjusted EBITDA margins, while undertaking capital expenditures of $1,142.1 million, $862.6 million and $815.5 million, respectively.

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Board Composition	The Smurfit WestRock Board will consist of 14 directors, eight of whom will be Smurfit Kappa Designees and six of whom will be WestRock Designees.	Completion	Ensures representation from both companies on the board of the combined entity.
Committee Structure	There will be four standing committees of the Smurfit WestRock Board: the audit committee, the compensation committee, the nomination committee and the sustainability committee.	Completion	Establishes key committees to oversee critical aspects of the Combined Groups operations.
Committee Leadership	One of the WestRock Designees will be chair of the compensation committee, and one of the Smurfit Kappa Designees will be chair of the nomination committee.	Merger Effective Time	Ensures balanced leadership across key committees.
Corporate Governance Guidelines and Code of Ethics	Smurfit WestRock will adopt Corporate Governance Guidelines and a Code of Business Conduct and Ethics compliant with NYSE rules.	Following the Combination	Ensures compliance with US regulations and ethical standards.

Legal Proceedings

WestRock is challenging claims by the Brazil Federal Revenue Department that WestRock underpaid tax, penalties and interest associated with a claim that a subsidiary of MeadWestvaco Corporation (the predecessor of MWV) had reduced its tax liability related to the goodwill generated by the 2002 merger of two of its Brazilian subsidiaries.
In July 2021, the PIUMPF filed suit against WestRock in the US District Court for the Northern District of Georgia claiming the right to recover WestRocks pro rata share of the pension funds accumulated funding deficiency, along with interest, liquidated damages and attorneys fees.

Related Party Transactions

Details of the related party transactions that Smurfit Kappa has entered into during the years ended 31 December 2021, 31 December 2022 and 31 December 2023 are described in the audited consolidated financial statements of Smurfit Kappa as at and for the financial years ended 31 December 2021, 31 December 2022 and 31 December 2023, prepared in accordance with US GAAP, which have been published by Smurfit Kappa on or around the date of this Circular.

Stakeholder Impact

Smurfit Kappa Shareholders will receive one Smurfit WestRock Share for each Smurfit Kappa Share (excluding any Designated Smurfit Kappa Shares).
WestRock Shareholders will receive one Smurfit WestRock Share and $5.00 in cash for each WestRock Share.
The Combined Group will provide a substantially broader opportunity set for employees, combining the best talent of Smurfit Kappa and WestRock to unlock the Combined Groups true operating potential as a highly dynamic, innovation-driven, and successful company.

Next Steps

Smurfit Kappa Shareholders to vote on the Scheme at the Scheme Meeting on 13 June 2024.
Smurfit Kappa Shareholders to vote on the EGM Resolutions at the EGM on 13 June 2024.
WestRock Shareholders to vote on the Transaction Agreement at the WestRock Special Meeting on 13 June 2024.
If approved, Smurfit Kappa will apply to the Irish High Court to sanction the Scheme.
Subject to satisfaction of all conditions, the merger is expected to complete in early July 2024.

Key Dates

Date	Description
12 September 2023	Smurfit Kappa and WestRock announced they had reached agreement on the terms of the proposed Combination.
26 April 2024	US Registration Statement declared effective.
1 May 2024	WestRock commenced mailing of the US Proxy Statement to WestRock Shareholders on or about this date.
14 May 2024	Publication of this Circular and the Prospectus.
9 June 2024	Voting Record Time for the Scheme Meeting and EGM at 6:00 p.m.
11 June 2024	Latest time and date for receipt of Forms of Proxy from Smurfit Kappa Shareholders for the Scheme Meeting at 10:00 a.m. and for the EGM at 10:15 a.m.
13 June 2024	Scheme Meeting at 10:00 a.m., EGM at 10:15 a.m., and WestRock Special Meeting at 9:00 a.m. (New York City Time).
2 July 2024	Last day of trading in Smurfit Kappa Shares on Euronext Dublin and Irish Court Hearing in respect of Court Order and Court Order obtained at 11:00 a.m.
2 July 2024	Suspension of trading in Smurfit Kappa Shares on Euronext Dublin at 5:00 p.m.
4 July 2024	Last day for settlement of final trades placed on Euronext Dublin.
5 July 2024	Scheme Record Time at 5:00 p.m. (New York City Time) and Scheme Effective Date, Completion.
5 July 2024	Smurfit WestRock Shares issued to Smurfit Kappa Shareholders and WestRock Shareholders in connection with the Combination after 5:00 p.m. (New York City Time).
8 July 2024	Delisting of Smurfit Kappa Shares from the Official List of Euronext Dublin and cancellation of admission to trading on the Euronext Dublin Market at 8:00 a.m.
8 July 2024	Delisting of Smurfit Kappa Shares from the Official List of the FCA and cancellation of admission to trading on the LSEs main market for listed securities at 8:00 a.m.
8 July 2024	Expected admission and commencement of dealings in Smurfit WestRock Shares on the LSE at 8:00 a.m.
8 July 2024	Expected admission and commencement of dealings in Smurfit WestRock Shares on the NYSE at 9:30 a.m. (New York City Time).
8 July 2024	Expected crediting of Depositary Interests to CREST Participant accounts by or around 2:00 p.m.
12 September 2024	End Date (subject to extension until 12 March 2025).

Disclaimer:The information provided here is for general informational purposes only and does not constitute financial advice, recommendation, or endorsement of any kind. It may contain errors or omissions. You should not rely on this information to make financial decisions. Always seek the advice of a qualified financial professional before making any investment or financial decisions. Use of this information is at your own risk.