Stand-out performers in bringing down debt

Smurfit Kappa this week announced a big jump in its pre-tax profits.

The packaging company will reinstate a dividend to its shareholders for the first time since 2008, writes Kyran Fitzgerald

There is a lot to be said in business for sticking to the knitting.

This week, Smurfit Kappa boss Gary McGann was on hand to announce a big jump in pre tax profits at the Irish multinational, from €103m in 2010 to €299m in 2011.

Strong cash flow has delivered a reduction in net debt of €358m to €2.75bn and this improvement in the financial situation is helping the group to secure a better deal from creditors.

Shareholders are being rewarded with a restoration in dividend payments after a three-year absence. The group is recommending a final dividend of 15 cents per share. Of course, Smurfit Kappa is a very different animal to Jefferson Smurfit Corporation, the company which Gary McGann joined back in 1998.

Indeed, the group has undergone so many transforming events that it has been hard to keep track of them.

The company was founded by Jefferson Smurfit, the grandfather of its current chief operations officer, Tony Smurfit.

Tony’s father, Michael transformed the group into a multinational and leading player in the US paper and packaging business by the end of the 1980s, with considerable assistance from his right hand man, Howard Kilroy, who put shape on Smurfit’s grand ideas.

A few major turning points stand out, including:

* The 1986 acquisition of 50% of Container Corporation of America in a joint venture with Morgan Stanley;

* The 1993 flotation of the Group on the US Nasdaq exchange;

* The acquisition in 1994 of St Gobain, catapulting Jefferson Smurfit into pole position in the European paper and packaging sector.

Through the 1970s, 1980s and most of the 1990s, Smurfit was a darling of the investor community, but towards the end of the decade, relations grew frayed as Kilroy, the steadying hand, departed and Michael Smurfit became drawn into other activities, notably the K Club, where he set about his dream of helping to bring the Ryder Cup tournament to Ireland.

Gary McGann came on board in 1998 as chief finance officer following his unexpected departure from his job as CEO at Aer Lingus, where he led the implementation of the Cahill recovery plan. The traditional Smurfit operational strengths remained intact, but the company suffered from a big investor shift away from traditional industrial stocks during what was the high point of the dotcom boom.

However, matters were not helped by poor investor relations stemming from what some regarded as a haughty, droit de seigneur attitude on the part of the chairman-CEO.

This, in turn, prompted an unlikely revolt from among the traditionally docile institutional investors. Some of the sheep finally learned to use their fangs, casting votes against the rather lavish remuneration packages on offer to managers at the top table.

A persistently sluggish share price, in turn, precipitated a decision on the part of the high command to take the group private, helping to release a large amount of capital for the chairman.

In 2002, JSG was acquired by a group of investors led by the US equity investor, Madison Dearborn. Two other companies, Cinven and CVC Capital Partners, also invested and between them, the three held a majority shareholding.

Further transformation came about, first, with the merger of Jefferson Smurfit and Dutch group, Kappa, in 2005, to form Smurfit Kappa, making the enlarged entity by far the biggest player in the European paper and packaging market. Next, in March 2007, came the groups’ return to the market with a successful IPO raising €1.5bn, much of which was used to pay down the huge debt. Through all this period, McGann has operated in tandem with Tony Smurfit and chief finance officer Ian Curley, with the experienced former CRH boss, Liam O Mahony, in position as chairman.

The Smurfit Kappa operation is huge, with 38,000 people employed in 21 countries. As an industry leader, Smurfit Kappa has focused on moves to reduce capacity in the market in an effort to preserve pricing power and margins. Since 2007, the company has been operating against a recessionary headwind in its main areas of operation, Britain and continental Europe. Its other major field of operation is Latin America, a region that is enjoying rapid growth, but also one that is affected by unpredictability and instability, with Venezuela the stand-out in this regard.

The latest results have certainly received a broad welcome from within the investment community. According to David O’Brien of Goodbody Stockbrokers, Smurfit Kappa have been “stand-out performers” as operators, managing to get the debt down in a very difficult environment. Strong cash flow has resulted in a €358m reduction in the debt, which originally stood at over €5bn, to €2.75bn, exceeding the stated debt reduction target, according to Paraic Quinn of Bloxham Stockbrokers. As O’Brien put it, the group is “firing on all cylinders.”

In his view, a dividend payout of €50m hardly overstretches a company which is delivering earnings before interest, tax and depreciation of around €1bn. Curley has taken the opportunity to extend the maturity of debt due in 2013 and 2014, although the Financial Times , suggests that a still high net debt load means that the share price trajectory is likely to be bumpy in the months ahead. The company’s brokers, Davys, maintained their full-year forecast for 2012, but revised down their forecast for the first half of the year citing management’s allusion to ongoing margin pressure.

The company remains in a strong strategic position, holding number one or two position in 18 of the 21 countries in which it operates, as such, it is in a position to make the running on price. Its overall market share in Europe is around 20%. McGann has signalled a need for further consolidation in the european industry “if this is to become a more viable business for the bigger players”.

The CEO is certainly rewarded well for his efforts. His total remuneration increased by over 18% to €2.64m in 2010, with his annual bonus jumping from €284,000 to €692,000, while Tony Smurfit’s earnings jumped 21% to €1.68m, with Mr Curley, netting just under €1.5m.

Tony Smurfit looks to be well placed to win back pole position at the company for the founding family when McGann departs.

Now 48, Tony Smurfit has adopted a much lower profile than his often outspoken father.

In 1998, he invested IR£2m in an 18% stake in the Kildare bloodstock agency, Goffs, a stake he acquired from the Aga Khan.

McGann served as a director of Anglo Irish Bank until just before its nationalisation in January 2009. Shortly after this, he stood down as chairman of the Dublin Airport Authority, a post he had occupied since 2004. McGann presided over the ambitious €2bn airport transformation programme and in particular, Terminal Two, which he drove through against fierce opposition from Ryanair, that company was quick to press for McGann’s resignation from the DAA in the wake of the Anglo meltdown.

These days, however, he sticks very much to the day job, aware, no doubt, of just how distracting and burdensome external commitments can become.

Gary McGann was Aer Lingus chief executive from 1994-1998.

Getting to know Gary McGann

*Age: Sixty.

* Education: Coláiste Mhuire, Irish-speaking school, Dublin. BA in UCD. Qualified as certified accountant. MA in management science.

* Career: Office of Comptroller & Auditor General.

* 1994-98: Aer Lingus chief executive.

* 1998: Chief finance officer, Jefferson Smurfit Corporation. n2000: JS Corp chief executive.

* 2005: Smurfit Kappa chief executive.

* Other: Past president, IBEC; chairman, Aon (insurance brokers).

* 2004-2009: Dublin Airport Authority chairman.

* Family: Married to Moira. Two daughters, three grand-daughters.

* Leisure: Golf, music, theatre.