The consolidation of two global producers might mean less choice for food processors in the paper packaging market. The proposed new entity would hold 23 per cent of the European paper packagingmarket, giving it significant price negotiating power with its customers, including those in the food sector.
Both companies have been facing difficult conditions in Europe, with demand falling for their products and rising energy costs eating into their margins.
Kappa Packaging produces containerboard, solid board, corrugated and solid board packaging, graphic and specialty board. The company has annual sales of about €3bn. Jefferson Smurfit, a privatecompany, has sales of almost €5bn and produces both paper and packaging materials.
The merger talks were first confirmed by the two companies in May this year. The Irish Times says a €3.8bn debt package is understood to be one of the proposals being considered asnegotiations reach a crucial stage this week.
The package would involve the refinancing of both companies' debts if the deal goes through. Smurfit taking a dominant shareholding in the new entity, the Irish Time stated.
Kappa was valued at €4.5bn when it was put on the market last year by Cinven and CVC. The two UK private equity firms bought Kappa in 1998. Smurfit was bought out for €3.9bn in 2002 by MadisonDearborn.
On 9 August Smurfit said the European packaging market continued to be difficult on both the supply and the demand side in the second quarter.
"Europe is a market characterised by capacity growth which significantly exceeds demand growth," Smurfit's chief executive, Gary McGann, said. "We expect that theseconditions will prevail unless there is a significant and sustained increase in demand for corrugated or structural change in the European containerboard industry."
In its financial results the company said there some volume improvement in certain corrugated markets towards the end of the second quarter, but continuing pressure on containerboard prices wasputting pressure on corrugated prices.
The company reported stagnant sales growth from continuing operations in the second quarter 2005 compared to the same quarter 2005. Margins fell to 11.8 per cent from 12.2 per cent.
In the first half of the year sales fell by one per cent, while margins fell to 11.2 per cent from 11.9 per cent when compared to the first half a year ago. At the end of the second quarter thecompany had a net debt of €2.5bn, a fall of 19 per cent from a year earlier.
Kappa has debts of about €3bn. In the company's 2004 annual report it described market conditions as "challenging" due to pressure on sales prices and margins in its packaging division.
Increased sales volumes or 2.4 per cent in its paper and board segment and by 1.2 per cent in the packaging segment could not offset the falling prices and margins.
Sales for the year decreased by €55.5m, or 2 per cent, to € 2,786.2m. Operating profit fell by eight per cent to €406.1m. Margins decreased to 14.6 per cent from 15.5 per cent.