Smurfit Kappa: paper money

If it makes sense to buy a European package delivery service, why not buy the packaging, too? After FedEx bought TNT this week, anything seems possible. So perhaps the market has been anticipating that a weak euro, and a faint hope of an economic recovery in Europe, would make Smurfit Kappa, the Irish corrugated packaging company, an acquisition target for a US group. That would be a neat explanation for the furious rally in the shares, which have returned 60 per cent year to date.

The ascent has pushed the valuation of the shares, at 15 times this year's earnings, past pre-crisis highs (paper is a commoditised industry; it does not, and should not, attract high valuations). The US industry has consolidated, with the RockTenn/MeadWestvaco deal announced in January. Transatlantic consolidation could make sense for an industry that has struggled with overcapacity. And a quarter of Smurfit's sales are in the Americas.

There are a number of problems with the buyout scenario. First, Smurfit Kappa outperformed its European peers - which would, in theory, be targets too. Returns at Finland's UPM and Stora Enso, for example, trail the Irish company by 20 percentage points or more this year. That may be down to the simple fact that Smurfit Kappa looks like a better target: the Finns have similar valuations, but lower top-line growth and returns on capital. The company's efforts to cut costs over the past few years have borne fruit.

Then there is the question of the natural buyer. The new RockTenn-Mead will be busy, presumably, leaving International Paper and privately held Georgia Pacific as the US players with the heft to pay for a company with €9bn enterprise value.

Speculating on buyouts in an industry as economically sensitive as packaging is dangerous. Here's the simplest explanation for Smurfit Kappa's rally: simple momentum. That is sensitive too.

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