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Smurfit Kappa shares are bottom of the UK Index this morning, -3.1%, after management’s formal rejection of a circa 3% boost to the cash and share offer from International Paper. Having jumped 26% in response to the early March news, hitting fresh record highs, the shares have since eased almost 10% from their peak. This is in part due to the decline in IP’s share price (-15%), which has steadily eroded the value of the offer’s share component (0.3028 new IP shares), although GBP’s continued rally has played a small part too.
Today’s reaction suggests concern among SKG holders (sitting on still handsome 20% profits vs 2018’s average) that IP’s new 15% higher cash component is merely aimed at offsetting the now lower valued share component, and that the meagre 3% boost to the aggregate offer means it is unprepared to go much if any higher. The other worry is that SKG will continue to hold out for improved terms which may never materialise. In which case, shareholders are cashing out as close to the top as they can.
Those hanging on may be expecting a second revision from IP before it gives up. And history tells us this could well happen. The second bid does, after all, show willingness to maintain the bid’s 67% cash value to SKG shareholders. However, given SKG’s second rejection, and unless any third offer is for something closer to recent record highs (10% higher), it may not prove enough to convince management and shareholders alike to agree to tender. Especially given the risk that the value of the 32% share component worsens further, assuming the deal requires at least come anti-trust approval.
Mike van Dulken, Head of Research, 26 Mar 2018
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