UK companies shifting their listing to the US markets hope for a share price bump and ultimately a higher valuation. But when boxmaker Smurfit Kappa announced a tie-up with US peer WestRock last September, and a move of its main listing, its share price crumpled like kraft paper.
Much has changed since, including more rumblings about departures from London and a flurry of sector consolidation sparked by the deal. When the new Smurfit-WestRock arrives stateside next month, bolstered by its inclusion in the S&P 500 index, the deal’s logic should unpack nicely.
Whereas the pandemic meant booming demand for packaging, 2023 was a bust as customers ran down existing inventories. Against that backdrop, the deal was seen as defensive and a sign the market would deteriorate. Instead, things have picked up; the timing now looks favourable. After all, US rival International Paper came up with its own cardboard cut-out version offering to buy the UK’s DS Smith.
Despite the prospect of cost savings, last year’s deal resulted in the worst day for Smurfit shares since 2008. As demand has recovered, price increases in the pulp and paper markets are supporting a rally in these stocks. Smurfit and WestRock shares are up by a quarter this year.
Smurfit’s chief executive Tony Smurfit will be charged with delivering on the deal’s promised benefits. Top of that list are the $400mn in annual cost savings promised by the end of next year.
But capital expenditure at Smurfit has risen and as a share of revenues has been 1.5 percentage points higher than WestRock in the past five years. Those investments seem to have better insulated Smurfit from the industry cycle, something that could benefit WestRock too. Smurfit’s group margins have risen since a 2017 programme to boost efficiency at the group’s factories. Operating margins are 2 percentage points higher on average since.
The promised cost savings from the deal should get combined operating margins to about 12.5 per cent by 2025 on consensus forecasts. That equates to just under a 9 times multiple of enterprise value to operating profit, well below the 11 times multiple that Smurfit shares have traded at over the past five years. International Paper and Packaging Corporation of America have traded at an average 13 times multiple over that period too.
The fortunes of companies that have chosen to leave London for the US are distinctly mixed. Perhaps to the City’s chagrin, Smurfit-WestRock could manage to pull off the American dream.
