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DS Smith – agreement reached on sale to International Paper Company

The board at DS Smith has agreed to an all-share offer from International Paper Company, valuing the business at £5.8bn.
DS Smith - potential deal with rival Mondi

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DS Smith and International Paper Company have agreed on deal terms that would combine the two groups. DS Smith investors would receive shares in the International Paper Company and own around 33.7% of the combined business.

The terms value DS Smith at £5.8bn, or 415p per share based on prices on 25 March. After a four-year integration period, the combination is expected to deliver annual pre-tax savings of at least £413mn.

The deal will require shareholder and regulatory approvals and is expected to be completed by the end of the year. In connection with the deal, International Paper Company is expected to issue a London listing of its shares.

The shares fell 1.5% in early trading.

Our view

Deal talk has been dominating the news recently, and it looks like DS Smith has selected the US-based International Paper as the most suitable partner. The proposed terms look largely in line with recent expectations, which had already been priced in, likely why the market reaction was muted.

Proposed medium-term savings of around £413mn certainly look attractive, significantly higher than what investors had been discussing in the early days of deal speculation. There’s a lot of scope to drive efficiency gains, from integrating plants and sharing technology to using the new combined scale to push for better terms with raw material suppliers. To us, the deal makes a lot of sense.

But as ever, it’s not a done deal until both shareholders and regulators give the green light. Back to business, DS Smith's resilience in tough conditions has allowed it to mitigate some of the macroeconomic headwinds currently faced by its customer base.

The group's a key supplier of cardboard boxes to the 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 confirmed that volume declines over the first half and lower prices have caused revenue to fall. The good news is cost savings have absorbed some of the impact, so operating margins shouldn’t be affected in a major way and volumes picked up toward the back end of the year.

We're cautiously optimistic that volumes will continue to improve. There are early signs that customers, like Amazon, are back in the market after reducing packaging levels last year to cope with lower 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.

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 International Paper deal. In these situations, there’s always added risk, with upside in the short term likely to be limited by the implied deal price.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.
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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 16th April 2024