Rock-Tenn Marriage to MeadWestvaco a Good Move for Both
We expect to raise our fair value estimates but don't anticipate changing either company's no-moat rating following news of the deal.
Commentary
MeadWestvaco's recent corporate actions--including an announced spin-off of the specialty chemicals division and the sale of its European tobacco packaging operations--suggested to us that it was pruning itself to be acquired by or merged with another paper-based packaging company. On Jan. 26, we got our answer when the company announced it was merging with Rock-Tenn (RKT).
The deal is expected to close in the second quarter, at which time MeadWestvaco shareholders will own 50.1% of the combined company and Rock-Tenn shareholders the remaining 49.9%. The board will consist of eight Rock-Tenn directors and six from MeadWestvaco. The CEO will be current Rock-Tenn CEO Steve Voorhees, and current MeadWestvaco CEO John Luke will serve as non-executive chairman. We consider Voorhees a solid choice to run the new company, as he brings a good capital allocation track record and extensive integration experience having overseen Rock-Tenn's 2011 acquisition of Smurfit-Stone and other bolt-on deals.
We think this is a good deal for both companies and expect to raise our fair value estimates. We do not anticipate changing either company's no-moat rating.
The companies expect to achieve $300 million in synergies over three years from supply-chain optimization, infrastructure/corporate combinations, and mill and plant optimizations. We think this figure is achievable given the companies' overlapping paper-based packaging grades in North America and mill and plant footprints. The deal will make the combined company the #1 or #2 producer of North American SBS (e.g. cigarettes, cosmetics packaging), CNK (e.g. frozen food packaging), CRB (e.g. tissue boxes), and containerboard (e.g. corrugated boxes).
MeadWestvaco's announced spin-off of the specialty chemicals business is expected to go on as planned.
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Todd Wenning does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.