Smurfit Holders Ask Judge to Block $3.5 Billion Buyout Bid

Smurfit-Stone Container Corp. investors urged a judge to block a $3.5 billion buyout of the packaging maker by Rock-Tenn Co. because it doesn’t provide enough for the company’s shares.

Smurfit-Stone directors didn’t properly shop around to get the highest bid for the Chicago-based company and allowed Rock-Tenn executives to include language in the deal to scare off other potential suitors, Stuart Grant, a lawyer for disgruntled Smurfit-Stone shareholders, argued today.

“This company is worth a heck of a lot more” than Rock-Tenn’s $35-a-share offer, Grant told Delaware Chancery Court Judge Donald Parsons at a hearing. Parsons said he would rule on the investors’ request to block the buyout by May 20.

Rock-Tenn, based in Norcross, Georgia, agreed earlier this year to buy Smurfit-Stone for about $35 a share, half in cash and half in Rock-Tenn stock, according to court papers. The combination would create North America’s second-biggest containerboard producer after Memphis, Tennessee-based International Paper Co.

Third Point LLC, Royal Capital Management LLC and Monarch Alternative Capital LP, which collectively own about 9 percent of Smurfit-Stone’s shares, have vowed to vote against the deal, which the funds contend undervalues Smurfit-Stone. A shareholder vote on the offer is set for May 27.

Smurfit-Stone’s lawyer countered today that the company’s directors weighed at least one other buyout bid for the container company and forced Rock-Tenn officials to bump up their offer several times.

‘Fell Down’

“There’s no evidence that these directors fell down on the job,” William Savitt, a New York-based lawyer for the company, told Parsons at a hearing in Wilmington, Delaware.

The company, which makes paper-based packaging and corrugated containers, has 12 paper mills, 110 container plants and 29 reclamation plants, according to court documents. It has operations in Canada, Mexico, China, Puerto Rico and the U.S.

Smurfit-Stone sought bankruptcy protection from creditors in 2009 as a result of the economic decline in the U.S., officials said. The company emerged from Chapter 11 a year later with a new board selected by its creditors’ committee, according to court papers.

As part of its bankruptcy case, Smurfit-Stone wiped out more than $3 billion in debt by giving shareholders 4.5 percent of the reorganized company.

Takeover Target

Smurfit-Stone officials contend the company was a takeover target while in Chapter 11 and took no steps to ward off offers when it emerged from court protection.

“Smurfit-Stone erected no barriers to potential acquisition, no staggered board, no poison pill” takeover defenses, its lawyers noted in court filings.

Investors question whether financial incentives prompted Smurfit-Stone managers and the company’s advisers to back Rock-Tenn’s bid, Grant said today.

He noted that that retiring Chief Executive Officer Patrick J. Moore and other Smurfit-Stone managers stood to receive as much as $38 million by backing Rock-Tenn’s offer. He also said that New York-based Lazard Freres & Co. stood to gain as much as $23 million in fees as the company’s financial adviser on the deal.

“We contend that $23 million is still a lot of money to Lazard,” said Grant, who is based in Wilmington. He characterized the Rock-Tenn deal as a “quick fire sale.”

November Offer

Smurfit-Stone’s lawyers countered that company directors turned down a $29-a-share offer from an unnamed private-equity firm in November and didn’t publicly shop around for other bidders for fear of damaging the container company.

Making a public inquiry for other offers could have prompted executives to flee and created the impression in the marketplace that Smurfit-Stone was “a wounded bird,” Savitt said.

Smurfit-Stone officials acknowledged in a May 16 filing with the U.S. Securities and Exchange Commission that some of its financial advisers said in July 2010 that the company could be worth as much as $52 a share.

Smurfit-Stone rose 77 cents, or almost 2 percent, to $39.52 at 4:15 p.m. in New York Stock Exchange trading. The shares have risen more than 54 percent this year. Rock-Tenn rose $2.23, or 3.2 percent, to $72.01 on the same exchange.

The Chancery case is Marks v. Smurfit-Stone, CA-6164, Delaware Chancery Court (Wilmington). The bankruptcy case was Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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