packaging companies rocktenn co. and meadwestvaco corp. agreed to merge, creating a nearly 16 billion industry heavyweight that will supply containers for everything from soda to appliances.the deal, announced on monday, unites large players in two separate segments of the packaging business. rocktenn, which had sales of 10 billion last year, is the secondlargest north american seller behind international paper co. of the corrugated boxes used to carry pizza or expressdelivery packages from amazon.com inc. and other internet merchandisers.meadwestvaco, with annual revenue of 5.6 billion, holds the no. 2 two spot behind graphic packaging holding co. in the market for thinner paper cartons that hold ice cream, breakfast cereal and a 12pack of beer.the proposed combined company will have capacity to produce 13 million tons a year of paper to make packaging, and 42,000 employees in 30 countries, including plants in brazil and india.the deal is the latest in a string for rocktenn, which has completed 7 billion of acquisitions in the past decade, including its 3.5 billion purchase of smurfitstone container in 2011 that helped catapult its market share of corrugated packaging to about 20. but the rapid consolidation of the corrugated containerboard market has left rocktenn with few options for further acquisitions, forcing the georgiabased company to look elsewhere for significant deals.the new company, which hasn&rsquot yet been named, will be headed by rocktenn chief executive steven voorhees. meadwestvaco chairman and ceo john luke jr. will become chairman of the new board, which will have eight directors from rocktenn and six from meadwestvaco. the deal is subject to the approval of the companies&rsquo shareholders.one apparent beneficiary of the merger is activist hedgefund starboard value lp. as of december, the hedge fund had a 6.1 stake in meadwestvaco, according to a filing. in a june letter to the company&rsquos ceo, starboard called meadwestvaco &ldquodeeply undervalued.&rdquomeadwestvaco has been methodically divesting businesses for the past decade. the virginiabased company said earlier this month that it would spin off its chemicals business as a standalone public company, leaving meadwestvaco mostly with business lines of folded paperboard cartons.&ldquoi think both companies have very complementary capabilities,&rdquo rocktenn&rsquos mr. voorhees said during a conference call with analysts. &ldquoi expect it&rsquos going to be worth a lot to our customers because we&rsquore going to be able to go to them with capabilities we just have not had before.&rdquothe new company will generate 50 of its annual sales from corrugated packaging and 43 from consumer packaging. meadwestvaco&rsquos chemical business&mdashwhich it plans to divest&mdashwill account for the remaining 7. the companies expect the merger to generate 300 million in cost reductions in three years, primarily by eliminating overhead and administrative functions and consolidating purchasing.both companies operate in slowgrowing markets. industry volumes of corrugated packaging in the u.s. have grown little since 2000, as an exodus of u.s. manufacturing weighed on demand for shipping boxes. industry consumption of folded paper cartons has been growing by 1 or less annually.the merger &ldquomakes a lot sense for meadwestvaco,&rdquo said ghansham panjabi, a packaging industry analyst for robert w. baird & co. &ldquoit&rsquos been a challenging set of end markets for mead and consolidation is the only way to get around that.&rdquopaper industry analysts say the merger is likely to attract other buyers to the folded carton market, which has industrywide annual sales in the u.s. of about 38 billion. rocktenn also competes in the folded carton market.the merger is expected to move rocktenn and meadwestvaco&rsquos sales ahead of graphic packaging.&ldquothere could be other deals out there,&rdquo said chip dillon, an analyst for vertical research partners.under the terms of the deal, meadwestvaco shareholders will own 50.1 of the new company, while rocktenn shareholders holders will own 49.9. as of friday&rsquos close, rocktenn had a market value of 8.82 billion with meadwestvaco at 7.51 billion. meadwestvaco will end up with a slightly larger share of the new company to keep the planned spinoff of its chemicals business taxfree.meadwestvaco brings a pension surplus of 1.4 billion to the deal that is expected to offset a 1 billion shortfall in rocktenn&rsquos pension plan. the pension surplus is forecast to save the new company 550 million in pension costs over the next decade.on monday, meadwestvaco reported fourthquarter earnings of 53 million, or 31 cents a share, down from 677 million, or 3.77 a share, a year earlier. excluding items, income from continuing operations came to 46 cents a share, compared with 29 cents a share a year earlier. revenue rose 4.9 to 1.37 billion.for its fiscal first quarter ended dec. 31, rocktenn on monday posted earnings of 125.1 million, or 88 cents a share, from 109.7 million, or 75 cents. excluding items, earnings were 96 cents a share. revenue grew 6.4 to 2.51 billion.in afterhours trading, meadwestvaco&rsquos stock was up 14 at 51.35, while rocktenn shares rose 6.1 at 66.85.
