Rock-Tenn deal shows faith in economic rebound

Rock-Tenn's growth stamps Atlanta as a leader in the packaging industry – from the cereal boxes found on local grocery store shelves to the cardboard boxes they’re delivered in. The merged company will rank No. 2, behind International Paper, in the industry. Georgia Pacific, based in Atlanta, and Graphic Packaging, of Marietta bolster the region’s packaging prowess.

“A $9 billion company is going to be a larger, more influential player in their sector, which has implications for the broader economy,” said Alex Idichandy, an executive vice president with Wells Fargo corporate banking division in Atlanta. “You wouldn’t do a deal like this unless you believed the overall economy is going to grow.”

Rock-Tenn is betting consumers will continue to loosen purse strings as the economy leaves the recession behind. Analysts and economists consider packaging a leading economic indicator, as manufacturers and consumer-product companies ship more goods.

“The business really is going to perform closely to GDP, which means it will grow and be much more stable,” said Rock-Tenn CEO James Rubright, on a Monday morning call with analysts.

Rock-Tenn makes paperboard, containerboard and corrugated packaging and notched sales of $3 billion last year. Its 10,000 employees operate 90 mills and other packaging plants in the U.S., Canada, Mexico, Chile and Argentina. In addition to the headquarters, Rock-Tenn also employs 50 people in Hartwell, Ga.

Smurfit is Rock-Tenn’s latest acquisition. In 2008, it bought Southern Containers for $1 billion. Last year, Rock-Tenn gobbled up Innerpac Holding Co. for $24 million.

Smurfit seemed an obvious choice for expansion. The Chicago company filed for bankruptcy in January 2009 as rising raw material costs, less demand and tight credit strangled the company.

It has closed 53 facilities and slashed 42 percent of its workforce since 2006, according to the company. It emerged from bankruptcy last June after wiping out more than $3 billion in debt. Smurfit earned $1.43 billion last year. Two years earlier it lost $2.82 billion.

Smurfit will bring the Midwest and West Coast to Rock-Tenn’s east coast network and create a network of 194 manufacturing facilities, 12 paper mills and 30 recycling operations throughout North America. The newly merged company will use a balance of recycled paper (45 percent) and virgin wood (55 percent) in its products.

More important, analysts say, is the marriage of companies that manufactured the Cheerios cereal box (Rock-Tenn), for example, and the big cardboard box that 50 Cheerios boxes were shipped in to the grocery store (Smurfit). The companies’ packaging prominence with the food and beverage industries, in particular, bodes well for Rock-Tenn as consumers spend more on everyday goods.

“Rock-Tenn is a very important company in the paper and packaging space, but containerboard is an area in which they want to move forward in, strategically,” said Idichandy of Wells Fargo, which took the lead on financing the merger. “This makes Rock-Tenn a stronger presence not only in the Southeast, but also as a global player in the industry.”

Large company mergers typically lead to job cutbacks to rid the combined company of so-called “redundant” workers. Rock-Tenn spokesman John Stakel couldn’t say whether the new Rock-Tenn, with 27,500 employees companywide, will shed jobs.

The Rock-Tenn-Smurfit merger portends a wave of corporate marriages in 2011, analysts say.

“There are a lot of companies with a lot of cash on the books, so the question is what they will do with that cash,” said Michelle Leder, founder of Footnoted.com, a Morningstar Research-owned website that analyzes SEC filings. “You’ll definitely see merger-and-acquisition activity heating up.”