DS Smith shares skyrocket following Suzano’s retreat from International Paper acquisition

02 Jul 2024 --- Suzano will not proceed with its attempt to acquire International Paper (IP), as IP rejected its offer of US$15 billion as too little, and Suzano was unwilling to rebid. The fall through brings IP’s merger with DS Smith back into the picture, for which shares shot up last week following the announcement. 

Suzano shared the following statement with Packaging Insights: “After some negotiations with the IP company regarding a potential transaction between the companies, [Suzano] has reached what it believes to be the maximum price for the transaction to generate value for Suzano, without engagement from the other party.” 

“Suzano formalizes that it will not pursue a transaction involving the acquisition of IP.”

Suzano cites an “observance of ‘capital discipline.’ But that really means it has US$11.9 billion of net debt and was not prepared to increase its EBITDA gearing of 3.5 times,” Packaging industry analyst Neil Farmer tells us.

Capital discipline is defined as a shift from focusing on production volume to financial value. 

But the company continues to enhance its European market position. Last month, Suzano took a 15% stake in Lenzing of Austria for US$248 million.

Despite the bursted merger with IP, Suzano continues to invest in European businesses.“My opinion is that the company overreached itself with IP deal, terms of net debt and gearing, but that is not to say there aren’t other targets that might be on its radar,” he says.

When asked how the recent DS Smith hike in share price, which reached a 52 week high last Thursday, could impact the UK packaging market, Farmer says the increase is good for investors in the business, giving them greater confidence in the benefits of the deal and the future profitability of the company. 

“There will be some who are investors for the short term, and they will sell to make a paper profit.”

Clear road for DS Smith 
The shareholders of DS Smith are sitting on “a good paper profit” since the original takeover battle commenced in March, according to Farmer.

Although the deal will still need to be cleared by the European Commission, Farmer assumes that IP will complete the deal in the fourth quarter of the year.

“There can be no certainty the European Commission will waive the transaction through, but DS Smith is expecting to complete the deal in the fourth quarter,” he says.

“I suspect the fact that IP will look for a secondary listing on the London Stock Exchange and retain a base in the City of London as part of the deal will count as something in its favor.”

“Also, IP has a relatively small presence in Europe, indicating that direct competitive pressures should not be a massive hurdle to overcome,” he adds.

“Good for all parties”
The DS Smith board has been positive about the benefits of the deal right from the outset.

“They believe it is a good opportunity to create a sustainable packaging business in markets in North America and Europe,” says Farmer.

“In addition, there will be a reported US$514 billion in pre-cash synergies.”An IP-DS Smith merger is a good opportunity to create a sustainable packaging business in North America and Europe (Image credit: DS Smith).

Farmer says that DS Smith shareholders have furthermore made a good paper profit since the original battle commenced in March, with the shares jumping 17% over that time.

“This is a good deal for all parties, allowing DS Smith to continue its strong presence in Europe while benefiting from the opportunities of a strong partner in the global market.”

“DS Smith has a good customer base and is well known for its innovations in packaging and its customer service. These features will be enhanced in a global way by the tie-up with IP,” he adds.

Merger background 
In March, Mondi considered a possible all-share combination with rival DS Smith, with the companies revealing an agreement in principle regarding a £5.14 billion (~US$6.57 billion) merger. 

Shortly after, DS Smith confirmed its discussions with US rival IP for a possible all-share takeover worth a potential £5.72 billion (~US$7.22 billion). IP’s bid would have trumped the acquisition agreement made with Mondi, who offered £5.14 billion (~US$6.57 billion) for a merger. 

While the Mondi merger was agreed upon in principle, no formal proceedings have begun, and DS Smith could choose to change course with a better offer on the table. If IP decides to make a formal offer, it will raise the likelihood of a bidding war with Mondi.

In April, IP revealed progress in its negotiations regarding a possible merger with DS Smith. The proposed combination aims to facilitate IP’s acquisition of the entire issued and to be issued share capital of DS Smith. As discussions advance, IP has disclosed key details outlining the rationale behind this strategic move.

A few days later, IP announced an agreement for an all-share takeover of DS Smith, following weeks of speculation. The US-based packaging giant will acquire the entire company for £5.8 billion (~US$7.2 billion) and deliver at least US$514 million in pre-tax cash synergies.

Recently, Suzano, was rumored to be weighing up a bigger offer for IP, for which the Brazilian giant was reportedly preparing a US$15 billion acquisition bid earlier this month. Suzano had confirmed its interest in a merger, despite initially denying the rumors.

Unconfirmed reports that Suzano is working with advisors to increase a bid for IP were also announced at the time. Initial reports also suggested that IP would reject a US$15 billion offer as insufficient.

By Natalie Schwertheim