DS Smith sells plastics business in US$585m deal to focus on fiber-based model
07 Mar 2019 --- British packaging group DS Smith has sold its plastics division to private equity firm Olympus Partners in a US$585 million deal, Reuters reports. The move allows the company to focus on its fiber-based model – as well as e-commerce packaging solutions – which spans corrugated packaging and paper. The rising use of paper-based materials could be partly attributed to increasing anti-plastic sentiment, especially from the consumer and regulatory sides, meaning NPD utilizing the “sustainable” material can be expected to continue flourishing.
The company announced that it was looking for a buyer for its plastics division in October last year, amid predictions that the deal could be worth US$800 million. Although the end deal has been finalized on a lower number, it is still higher than other deals in the plastics sector that have recently been finalized, industry experts note.
A DS Smith spokesperson tells PackagingInsights that the plastics division represented 5 percent of the business and made up 6 percent of its total revenue. It largely focused on industrial bag-in-box type products for transporting large volumes of liquids. Thanks to this, the company did feel the backlash from the rising anti-plastic sentiment – particularly single-use plastics.
“Our plastics business does not make the type of plastic that is the principal cause for concern, such as plastic bags or single-use drinks bottles. Much of what it does is heavy-duty and is reusable for many years. However, our customers are actively seeking alternatives for single-use plastics and so we will continue to see a growing trend towards plastics replacements to meet this demand. The opportunity and demand could potentially persuade others to assess their current offerings,” they say.
DS Smith’s plastics division performed well during the first half of 2018, rising 2 percent from the previous year, although higher polymer prices and the lag in price recovery had reportedly hurt short-term profitability.
Speaking on the sale, Neil Farmer, Packaging Expert and Consultant, tells PackagingInsights that the plastics division of the company has long been seen as non-core. The disposal of it could enable DS Smith to concentrate on further developing its corrugated fiber business and also on reducing the amount of debt on the balance sheet. This has been a concern for some time in the view of some industry observers.
Previous estimates had forecast that the sale could reach US$800 million, but in reality, the price was somewhat lower, coming in at US$585 million. Farmer, however, states that this is a good number, representing a multiple of 9.9 times earnings before interest tax and other charges for the year to end October 2018.
“This is a good number and higher than other deals in the plastics sector that have been going through recently. The deal also makes sense because there are concerns by some shareholders and industry experts over the amount of debt that DS Smith has. The sale will reduce gearing and strengthen the balance sheet,” he says.
The company has a solid presence in the e-commerce sector, which is growing at 14 percent a year and it’s also positioned to continue growing due to the proliferation of e-commerce as a whole.
DISCS, DS Smith's e-commerce packaging testing hub.Last week, DS Smith launched a new Flat Bottle Case for e-commerce aimed at maximizing efficiency, saving space and slashing excessive packaging in and carbon emissions in collaboration with London start-up Garcon Wines. While during Black Friday last year, the company demonstrated its strong knowledge of the space by highlighting its e-commerce testing hub – DISCS – is seeking to improve pack durability.
“The sale also means DS Smith is focused on corrugated fiber packaging production and recycling. With its debt reduced, it is in a strong position to further expand its presence in this market,” Farmer concludes.
“We are currently experiencing good organic growth across the business, both in terms of volume and market share gains driven by our e-commerce and FMCG weighted customer base. We are also seeing good margins and returns,” says the spokesperson.
“In the short to medium term our focus will be on the continued integration of recent acquisitions, particularly Europac which is already showing good results. Further acquisitions could be considered in the medium to long term, and we are proud of our long-standing relationships in the market. Ultimately, we only seek to acquire businesses that make strategic sense and enhance our offer, while increasing shareholder,” they explain.
Strong half-year results to 31 October 2018
DS Smith’s half-year results to October 31, released in December, showed increased margins driving strong growth, with a reliable and consistent FMCG and e-commerce focus. Its steady growth was bolstered by the renewed focus on environmental issues in the packaging industry, the company notes.
The company’s multinational customers are more than 90 percent FMCG and e-commerce companies.
Structural industry growth drivers for 2019 are forecast to be e-commerce growth, retail channel proliferation and an increasing focus on sustainability. The company reports that it is in “pole position” to capitalize on scaling across Europe and into the US, invest in innovation and end-to-end packaging solutions and customer consolidation of suppliers.
It also noted positive progress on its acquisition of Spanish competitor Europac, a US$2.2 billion deal announced this summer and to be completed at the end of Q4, and which marked DS Smith’s largest acquisition yet. A primary focus for 2019 will be integrating the company.
By Laxmi Haigh
