DS Smith has received a takeover approach from Mondi, a rival UK paper specialist, in a deal that would create a European packaging giant with a value of more than £10 billion.
Mondi has approached DS Smith with a “highly preliminary expression of interest” regarding a combination that it has been weighing up since the pandemic boom in online shopping.
The board of DS Smith told investors there was “no certainty” a deal would be signed, while Mondi said the combined operations would be more resilient and could benefit from “economies of scale and efficiencies across a combined supply chain”.
Mondi said: “Mondi believes a possible all-share combination with DS Smith represents an exciting opportunity to create an industry leader in European paper-based sustainable packaging solutions.”
It was interested in a tie-up with DS Smith on the back of an increase in demand for packaging during lockdowns, it said. Mondi was reportedly talking to advisers about the merits of a deal, prompting a lift in DS Smith’s share price.
The group would become Europe’s largest manufacturer of the corrugated cardboard used to make packaging and boxes, with a market share of up to 13 per cent.
Cole Hathorn, an equity analyst at Jefferies, the broker, said the market for containerboard in the European Union was oversupplied and that the merger could lead to a “positive” reduction.
He said the companies could also benefit from “meaningful” cost savings as a combined operation by integrating their paper mills and box-manufacturing plants.
“DS Smith is the number two box maker in Europe but its footprint is skewed to west Europe and it would benefit from the addition of Mondi’s regional corrugated box operations in central eastern Europe,” Hathorn said.
“We would not expect substantial antitrust issues … however, we would expect reviews, given footprints in certain countries and how it might change competitive dynamics,” he added.
The deal comes amid rising hopes of a revival in UK mergers and acquisitions after more than a year of subdued activity. Barratt Homes, the housebuilder, announced plans for a £2.5 billion merger with Redrow on Wednesday.
Only three mid-sized companies attracted the interest of bidders last year. Dealmakers were held back by tough financing conditions and bidders faced pushback from company boards and shareholders reluctant to sell companies in cut-price deals.
Dechra Pharmaceuticals, Network International and the the UK landlord LondonMetric were all subject to bids last year but private equity investors were largely active on the junior stock market.
Research by Peel Hunt, the broker, has revealed that 40 public companies with a total value of £21 billion were subject to takeover activity last year, with33listed on the Aim and SmallCap indices.
One private equity source said institutional investors would now be under pressure to sell portfolio companies to meet redemption requests in their funds. However, they said a stable economic outlook would ultimately settle valuation disputes and clear a path for a revival in dealmaking in the City.
DS Smith’s shares closed up 28p, or 9.9 per cent, to 308½p, while Mondi’s fell 45p, or 3.2 per cent, to £13.36.
by Helen Cahill
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