(Reuters) - Packaging companies Rock-Tenn Co (N:RKT) and MeadWestvaco Corp (N:MWV) will combine to form a company worth $16 billion to take on market leader International Paper Co (N:IP) as demand for corrugated boxes surges in North America.
Rising confidence in the U.S. economy is boosting demand for consumer products, which are usually packed in corrugated boxes.
The deal will help Rock-Tenn close the gap with International Paper in terms of market capitalization. Packaging Corp of America (N:PKG) is the third-largest company in the industry, which has consolidated in recent years.
Rock-Tenn and MeadWestvaco also reported better-than-expected quarterly profit on Monday. Rock-Tenn's shipments of corrugated boxes jumped about 11 percent in the its first quarter ended Dec. 31.
With U.S. consumer sentiment at its highest in more than a decade in January, the companies are expected to gain further this year.
MeadWestvaco shareholders will have a 50.1 percent stake in the new company, which will be named before the deal closes, while Rock-Tenn shareholders will hold the rest.
MeadWestvaco shareholders will receive 0.78 shares of the new company for each share held.
Rock-Tenn shareholders can choose to receive either one share of the new company for each share held or a cash amount equal to the average price of Rock-Tenn shares during a five-day period ending three trading days before the deal closes.
Rock-Tenn Chief Executive Steven Voorhees will lead the new company, while MeadWestvaco CEO John Luke will become non-executive chairman.
MeadWestvaco, which decided to spin off its chemicals business earlier this month after pressure from activist investor Starboard Value LP, said the separation would be completed after the merger.
The companies said the structure of the deal announced on Monday would help retain the "favorable tax attributes" related to the spinoff.
Blackstone Advisory Partners LP was financial adviser to Rock-Tenn in the deal. Cravath, Swaine & Moore LLP was Rock-Tenn's legal adviser.
MeadWestvaco's financial advisers were BofA Merrill Lynch and Goldman Sachs & Co. Wachtell, Lipton, Rosen & Katz was the legal adviser.