Packaging company WestRock to buy smaller rival KapStone

(Reuters) - WestRock Co agreed to buy smaller rival KapStone Paper and Packaging Corp for about $3.5 billion as it looks to make the most of strong demand for packaging products in a growing U.S. economy and a booming ecommerce market.

WestRock, the No. 2 packaging company behind International Paper, last year bought Multi Packaging Solutions International Ltd and sold its division that makes soap dispensers and perfume sprayers to focus on its core paper and packaging businesses.

The company on Monday offered KapStone shareholders the right to receive $35 per share in cash, or elect to get 0.4981 WestRock shares, a premium of 32 percent to Capstone's Friday close.

KapStone's shares jumped about30 percent to $34.48 at mid-afternoon, while those of WestRock were down 2.8 percent at $68.31.

"This is one of the last opportunities to consolidate in an industry that's already becoming very well-structured," D.A. Davidson & Co analyst Steven Chercover said.

By adding mills, WestRock would be grabbing some of the scarce assets, Chercover added.

WestRock said the deal was valued at about $4.9 billion, including assumption of KapStone's net debt of about $1.36 billion.

The equity value is based on 98.7 million diluted outstanding shares of KapStone as of Sept. 30, according to Reuters calculation.

The deal, which is set to close in the quarter ending Sept. 30, is expected to immediately add to WestRock's adjusted earnings and cash flow and generate savings of about $200 million by the end of fiscal 2021, the companies said.

Norcross, Georgia-based WestRock said the deal would help it expand in the western United States and broaden its portfolio of paper grades, allowing it to tap into the kraft bag market when plastic is being banned.

WestRock, created in 2015 by the $16 billion merger of MeadWestvaco and Rock-Tenn, said it expects the deal to boost margins in its North American corrugated packaging business, used in the industrial and consumer end-markets.

Northbrook, Illinois-based KapStone, which produces containerboard, unbleached kraft paper and corrugated products, will be integrated into WestRock's corrugated packaging business.

Separately, WestRock said sales in its first quarter jumped about 13 percent on higher price and shipments.

The company said it would fund the deal through issuance of new debt under a fully committed financing package and expects to refinance KapStone's debt.

Lazard and Wells Fargo are WestRock's financial advisers while Rothschild & Co and Moelis & Co LLC advised KapStone.

(Reporting by Arunima Banerjee in Bengaluru; Editing by Sriraj Kalluvila)