RockTenn Poised to Become #2 Consumer of Recovered Paper

When RockTenn announced at the end of January that it would acquire Smurfit-Stone, the balance of power in the industry shifted. Once the acquisition is complete—pending shareholder approval—the combined company will be the second largest producer of containerboard in North America. The company will also be the second largest consumer of recovered paper, second only to International Paper. RockTenn’s annual consumption of recovered paper will be approximately 4.5 million tons, just marginally below International Paper’s. Of that 4.5 million, roughly 3.3 million will be OCC.

RockTenn had several objectives when it moved on the Smurfit-Stone acquisition. Strategically, the company recognized that containerboard has become a solid business, and that the outlook for the global market for virgin containerboard was strong. The company also wanted to rebalance its fiber mix and expand its geographic footprint.

If the acquisition goes through, RockTenn will have accomplished many of its goals. From 2008-2010, for instance, the company’s fiber mix was heavily weighted on the recycled side, with 82 percent recycled and 18 percent virgin fiber. In 2011, the RockTenn projects the acquisition will provide a more balanced mix—55 percent virgin fiber and 45 percent recycled across all lines of business.

For containerboard, RockTenn will have 27 paper machines with a capacity of 2.1 million tons of recycled and 5.4 million tons of virgin production, for a total of 7.5 million tons. The acquisition of Smurfit-Stone will not only significantly increase their containerboard presence in the East and Midwest, it will also have a presence on the West Coast for the first time.

The big question right now is whether Smurfit-Stone’s shareholders will approve the sale. Having emerged from bankruptcy, Smurfit-Stone’s cost structure has improved significantly. RockTenn’s initial offer was $32 share, half in cash and half in stock. They later upped their offer to $35 a share. The Federal Trade Commission has approved the sale, issuing anti-trust clearance in early February.

Some Smurfit-Stone shareholders are unhappy with the offer, however. The biggest opposition has come from three hedge funds with 9 percent ownership of Smurfit-Stone Container Corp. In a letter to Smurfit-Stone's board of directors on Feb. 2, Third Point LLC, Royal Capital Management LLC and Monarch Alternative Capital LP said they would not approve the sale because the $35-a-share price undervalued the company. The broader market may agree: at noon on March 3, shares of Smurfit-Stone were trading above $39. While the objection of these funds is probably not enough to stop the sale, it may be a harbinger that other shareholders are not going to be satisfied by the price either.