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New Packaging Giant: Smurfit Kappa's Merger with WestRock

On September 12, 2023, Irish packaging powerhouse Smurfit Kappa announced their merger with US packaging company WestRock, to create the world’s largest paper and packaging company in the form of Smurfit WestRock. The deal is being financially advised by Evercore, Lazard, Goldman Sachs for WestRock, and Citi and PJT partners for Smurfit Kappa. Considering that the respective firms are already Europe’s largest and the USA’s second-largest paper and packaging producers, the merged entity seeks to dominate market share in the global packaging market. The deal was agreed at $11 billion, creating a firm with EBITDA of $5.5 billion and combined adjusted revenue of $34 billion.

The power of this merger lies in the fact that the two companies have practically no operational overlap, creating massive geographical diversification for the merged entity. Specifically, the combined business will operate across 42 countries with 67 mills. The combined product portfolio will allow Smurfit WestRock to thrive in corrugated packaging, consumer packaging, and machinery and automation as industry niches within global paper and packaging. A large priority of the newly formed Smurfit WestRock is an ambition for sustainability and their packaging solutions have been adjusted accordingly: there will be a focus on renewable, recyclable, and biodegradable packaging, and a movement towards paper-based solutions in corrugated and consumer packaging.

However, some market speculators have called for caution around the deal, and the initial market reaction following the deal also suggests this. Some speculators have little faith in a successful synergy being created, with costs being too large to operate efficiently. Instead, it is suggested that WestRock should have focused more on tuck-in acquisitions (where WestRock completely absorbs another smaller company into their own platform) with adequate focus placed on cost containment. After the announcement of the deal, Smurfit Kappa’s share price plunged by nearly 10%, justified by the fact that the premium that Smurfit Kappa paid was higher than what most investors were expecting. JP Morgan and Jefferies analysts said that most investors expected a 15-20% premium, and questioned the actual 36% that was implemented. Nonetheless, CEO Tony Smurfit still maintains optimism regarding the merger and argues that investors will soon see the potential benefits.

Since the market slowdown since the pandemic e-commerce boom and the uncertain economic environment for the next quarter, the deal will facilitate easier navigation of the global packaging market for the merged entity. The deal is expected to close in the second quarter of 2024.

Written by Siddh Patel

Sources: Reuters, Financial Times, WestRock press release

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