Smurfit shareholders say offer too low

Smurfit-Stone Container Corp. shareholders may have a chance at getting a premium on the $3.5 billion that suitor Rock-Tenn Co. is offering after large investors and an analyst said the bid undervalues the company.

Third Point LLC, Royal Capital Management LLC and Monarch Alternative Capital LP, which collectively own about 9 percent of the company's common stock, sent a letter to directors yesterday announcing their displeasure with the deal and intent to vote against the proposed merger. Also yesterday, a shareholder sued in Delaware court claiming the cash-stock buyout offer is less than the Chicago-based company is worth.

“We believe that the acquisition by Rock-Tenn substantially undervalues the company and we are acutely disappointed that the board of directors is so willing to throw in the towel” on the company's upside, the group of shareholders said in the letter.

Rock-Tenn, based in Norcross, Georgia, agreed last month to buy Smurfit-Stone for about $35 a share, half in cash and half in Rock-Tenn stock, according to court papers. Smurfit shares were trading above $38 today.

In the lawsuit, Smurfit-Stone stock owner John M. Marks said the buyout offer is “inadequate” in part because the company “had emerged from bankruptcy in 2010, and appeared poised to capitalize on its strengthened financial condition,” according to his complaint filed in Delaware Chancery Court.

Lisa A. Esneault, a spokeswoman for Smurfit-Stone, said in an e-mailed statement that the company will defend the suit.

‘Without Merit'

“The shareholder class action lawsuits filed against the company, Rock-Tenn and the members of the company's board of directors in connection with the Rock-Tenn transaction are without merit,” Smurfit-Stone's Esneault said.

Rock-Tenn's investor-relations department didn't immediately return a call seeking comment today.

Smurfit-Stone rose 64 cents, or 1.7 percent, to $38.36 at 1:28 p.m. in New York Stock Exchange composite trading. Rock- Tenn fell 89 cents, or 1.3 percent, to $66.50, and earlier dropped as much as 4 percent.

The Third Point group said a flawed valuation that didn't account for $500 million of net operating losses, and potentially another $650 million if the Internal Revenue Service allows its “Black Liquor tax credits,” resulted in the decision to reject the sale. The group said those assets could add about $1.88 and about $2.45 a share, respectively.

‘Better Off'

“On the company's current course, Smurfit shareholders would be better off on a stand-alone basis than we would if we were to accept the terms of the Rock-Tenn transaction,” the group said in its letter.

Another factor was the lack of a sale process. Rock-Tenn Chief Executive Officer James A. Rubright said on a conference call discussing the merger that “this transaction was exclusively negotiated on a one-on-one basis,” according to the stockholders' letter. They say the pending retirement of Smurfit-Stone's chief executive officer, Patrick J. Moore, may have precipitated the deal.

“We cannot help but wonder whether Mr. Patrick Moore's employment contract,” which expires March 31, “played any part in pushing for this sale, given that he personally stands to earn a windfall in excess of $15 million as a result of this merger,” the Third Point group said in the letter.

Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York, said the suing shareholders have valid claims, echoing arguments raised by the Third Point group.

Company's Value

Smurfit-Stone is “leaving approximately $7/share plus on the table or 20 percent from the current implied deal value,” Shah said in an e-mail. A sale with Rock-Tenn or another company could be worth from $43 to $46.50 a share, he said.

The company, which makes paper-based packaging and corrugated containers, has 12 paper mills, 110 container plants and 29 reclamation plants, according to court documents. It has operations in Canada, Mexico, China, Puerto Rico and the U.S.

The combination with Rock-Tenn would form North America's second-largest containerboard producer after Memphis, Tennessee- based International Paper Co.

Smurfit-Stone exited bankruptcy after a dispute with shareholders over its reorganization plan.

Smurfit-Stone had been battling over whether the company would be worth enough once it left bankruptcy to give shareholders anything. The company settled the disagreement by giving common and preferred shareholders 4.5 percent of the reorganized company.

Under the company's reorganization proposal, unsecured creditors were to receive stock in return for canceling as much as $3.1 billion in debt.

The chancery case is Marks v. Smurfit-Stone, CA6164, Delaware Chancery Court (Wilmington). The bankruptcy case was Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).