Ireland’s Smurfit Kappa debuts in Brazilian packaging-paper market

After years of failed attempts to enter the Brazilian market, Ireland’s Smurfit Kappa found amid the crisis the proper gap to make its debut. Taking advantage of the fall in asset prices, the packaging-paper manufacturer announced this week the purchase of Brazil’s Indústria de Embalagens Santana (Inpa) and Paema Embalagens for R$805 million.

Now, the company plans to optimize operations in the acquired facilities, getting ready for an expected recovery of the Brazilian economy in 2017. Meanwhile, it keeps on its radar potential new consolidations in the country.

Leader in the packaging paper sector, Brazil’s Klabin suffered an early blow with the new competitor’s arrival: shares of the pulp and paper manufacturer ended Monday’s trading session down more than 6%, leading losses of stock market benchmark Ibovespa. But analysts think the new competitor would not be able to disrupt the market.

"Smurfit has tried to enter Brazil for a long time, since the country accounts for about 40% of the Latin American market of corrugated cardboard, and we already had a strong presence in other countries in the region, but had not yet found the right targets with the appropriate price,” says Colombian Juan Guillermo Castañeda, president of Smurfit Kappa for the Americas.

Thee executive says the simultaneous purchase of both companies, with a combined capacity of 210,000 tonnes of corrugated cardboard (about 6.4% of the Brazilian market, where Klabin is the leader with a 15% share), puts the company in good position to meet a significant part of the country — including the Northeast, Rio de Janeiro and São Paulo and Brazil’s south.

After the announcement of the acquisitions, Fitch Ratings downgraded the outlook of the company’s debt, at BB+, to negative from stable, due to the fast pace of Smurfit Kappa’s purchases. Recently, the Irish company also made acquisitions in the Dominican Republic, El Salvador and Costa Rica, as part of efforts to diversify its asset base beyond Europe and strengthen its leading position in the corrugated cardboard segment in Latin America.

However, despite the credit-rating agency’s yellow flag, the manufacturer has no intention of hitting the brakes on its inorganic growth. "We need to keep our growth strategy, we cannot slow down,provided that the company’s balance sheet allows it," Mr. Castañeda says.

In Brazil, he continues, there is no rush, but the company is interested in expanding its operation if any merger opportunity emerges, with synergy gains from the current asset base. In this case, deals can happen both in the corrugated cardboard market, made of recycled material, and in the kraftliner industry, of virgin softwood fibers.

The difficult moment of the Brazilian economy does not scare the company, Mr. Castañeda says. "We have a long-term view and understand business cycles, particularly in Latin American countries, where we have operated for many years. We were able to enter Brazil because of the current situation; we now have 2016 to get in good shape and wait for the recovery that hopefully will take place in 2017,” he says.

Smurfit is the third major international group to arrive in the Brazilian market of paper packaging — after WestRock in 2005 and International Paper in 2012 —, increasing competition against Klabin.

But Lucas Ferreira, analyst at J.P. Morgan, reckons the Brazilian company has advantage over the Irish competitor, specialized in corrugated cardboard, since it has integrated production of virgin fiber and a richer product mix, with long-life packaging and paper card.

In addition to this, Mr. Ferreira says, Klabin’s largest market share in corrugated cardboard is an important competitive advantage, and the fact that the industry is still highly fragmented is an obstacle to a potential price war.

Smurfit Kappa had total revenue of €6 billion in the first nine months of 2015, considering production at 350 units in 33 countries — 21 of them in Europe and 12 in the Americas. The company is a leader in the corrugated industry in Latin America.

With the purchase of Inpa, whose net assets are valued at R$129 million, Smurfit now has units in Pirapetinga and Uberaba (Minas Gerais) and offices in Rio and São Paulo. As for the acquisition of Paema, with assets valued at R$26 million, it gives the Irish company units in Bento Gonçalves (Rio Grande do Sul) and Maranguape (Ceará). Both companies employ 1,700 people and Smurfit expects to generate synergies of €6 million by the end of 2017.

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