DS Smith has confirmed, in response to press speculation, that it is in discussions with International Paper Company over a potential deal.
The proposed deal is an all-share offer, involving no cash. It implies a value of 415p for DS Smith shares, representing a premium of 48% to the closing price before the proposal was announced.
DS Smith’s board acknowledges the strategic merits and potential for value creation through the combination.
International Paper has until 5pm on 4 April to announce whether it intends to make a firm offer or not.
Further to a prior announcement, DS Smith remains in discussions over a potential all-share offer from Mondi.
The shares rose 7.3% following the announcement.
Our view
Deal talk continues to dominate the DS Smith story. Another potential bidder has now thrown its hat in the ring, with the latest proposal from International Paper Company valuing DS Smith at a premium to the prior Mondi proposal.
But to be clear, there is still no firm offer on the table from either Mondi or International Paper Company. The hardest part of any deal like this will be appeasing both sets of shareholders. Mondi and International Paper’s investors won’t want to overpay and for DS Smith, at first glance, an all-share offer is less attractive than a cash buyout.
We continue to see the combination as positive but await further details.
Back to business. Resilience in tough conditions has allowed DS Smith to mitigate some of the macroeconomic headwinds currently faced by its customer base.
The group's a key supplier of cardboard boxes to e-commerce and consumer goods sectors, including 'shelf-ready' options for supermarkets. Looking further ahead, demand for these segments is benefitting from structural growth drivers - consumers are keen to shift away from plastic packaging, and reliance on e-commerce is a trend that's here to stay.
Input costs have been falling, but the latest trading update warns container board prices may be nudging back up. While this will need monitoring, it isn't all bad news. The group's robust approach to pricing means that it expects to pass on costs to customers, so operating margins shouldn’t be affected.
We're cautiously optimistic that volumes will continue to improve in the fourth quarter. There are early signs that customers, think Amazon, are back in the market after reducing packaging levels last year to cope with lower levels of end-consumer demand. We’re also starting to see easier comparable periods acting as a tailwind.
Looking at the balance sheet, despite the increase in net debt levels, 1.7x cash profits is still a level we're comfortable with. The lack of cash generation seen in the first half was disappointing but we're hopeful that this was a blip rather than a trend. It's something to keep an eye on though.
There's probably scope for a buyback or bolt-on acquisitions, but the focus is organic growth and efficiency improvements - which makes sense. The forward prospective yield sits at an attractive 5.1%, which looks well covered for now. As always, there can be no guarantees and any takeover would change the picture.
DS Smith is in a good position with exposure to attractive end markets and we continue to like the business. The valuation will now likely be led by developments with the potential merger talks. In these situations, there’s always added risk. And should the deals fall through, sentiment can quickly change.
DS Smith key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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