Hedge Funds Active in Smurfit-Stone Container (SSCC) ~ market folly

Monday, February 7, 2011

Hedge Funds Active in Smurfit-Stone Container (SSCC)

Dan Loeb's hedge fund Third Point LLC and Barry Rosenstein's JANA Partners have filed a 13D and 13G respectively on shares of Smurfit-Stone Container (SSCC). Smurfit-Stone recently received a takeover bid from Rock-Tenn (RKT) worth roughly $38 per share in a cash and stock deal. Late last week we detailed that a consortium of hedge funds opposed Smurfit-Stone's takeover.

Third Point

According to SEC filings, Third Point has disclosed a 2.46% ownership stake in SSCC with 2,250,000 shares as of their February 1st portfolio. Loeb's hedge fund has filed in cooperation with Royal Capital Management (who owns 3.04% of SSCC) and Monarch Alternative Capital (who owns 3.47% of SSCC). This consortium of hedge funds collectively oppose the takeover.

While these hedge funds received the majority of their shares in Smurfit-Stone's recent reorganization, they've also been buying shares in recent months. Third Point had purchased shares of SSCC on the open market throughout December 2010 and even bought 250,000 shares as recently as February 1st after the takeover was announced (at prices of $37.5680 and $37.7497).

In their SEC filing, Third Point argues that the $38 per share valuation is inferior. According to an attachment to Third Point's disclosure, "we wonder just what numbers Smurfit’s board was looking at when it approved the Merger? This is the critical question, because if Rock-Tenn had been willing to pay 6.1 times the more appropriate Adjusted EBITDA of $938 million, and if an appropriate value had been ascribed to the NOL, Smurfit’s shareholders would receive nearly $44.00 per share of Common Stock in the Merger."

They also highlight that, "precedent containerboard transactions over the last decade had a median TEV to EBITDA ratio of 7.7x." Such a valuation would make shares of SSCC worth more like $59 per share.

JANA Partners

In a separate 13G filed with the SEC, Barry Rosenstein's hedge fund JANA Partners has disclosed a 5.7% ownership stake in Smurfit-Stone Container (SSCC) with 5,230,591 shares per their portfolio as of January 26th, 2011. Back on September 30th, 2010, the hedge fund only owned 521,479 shares, so this is a whopping 903% increase in their position size. We recently detailed some of JANA's new positions as well for those interested. While JANA is an activist oriented firm, this filing marks a passive SSCC stake.

While it's speculation on our part, it seems that JANA potentially acquired their new shares after the Rock-Tenn (RKT) takeover deal was announced and saw SSCC shares as undervalued. Since JANA did not file an activist 13D, it's unclear if they oppose the current deal. We're inclined to assume they're likely to side with Third Point's consortium. Under this scenario, you'd essentially have 14.67% of SSCC shares owned by hedge funds that oppose the takeover.

For more specifics of this deal, head to the hedge funds' letter of opposition to the deal.

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