International Paper rationalizes potential DS Smith merger as bidding war with Mondi bubbles

05 Apr 2024 --- International Paper has revealed progress in its negotiations regarding a possible merger with DS Smith. The proposed combination aims to facilitate International Paper’s acquisition of the entire issued and to be issued share capital of DS Smith. As discussions advance, International Paper has disclosed key details outlining the rationale behind this strategic move.

Corrugated packaging solutions are a pivotal aspect of DS Smith’s business model. Following thorough due diligence, International Paper underscores the potential to bolster the combined packaging business and customer offerings through the merger.

With packaging constituting a substantial portion of International Paper’s current sales, especially in Europe, valued at approximately US$1.5 billion, the combination is touted to reinforce the company’s market position.

As part of the merger, International Paper aims to seek a secondary listing of its shares on the London Stock Exchange, subject to official notice of issuance. In accordance with the UK Takeover Code, International Paper is required to either announce a firm intention to make an offer for DS Smith or announce that it does not intend to make an offer by April 23.

Meanwhile, although an agreement in principle was reached between Mondi and DS Smith, a second extension of the deadline for Mondi to announce a firm intention to make an offer has been obtained from the Panel on Takeovers and Mergers. The deadline now stands at April 23, subject to further extensions with consent. 

International Paper’s bid would trump the acquisition agreement made this month with Mondi, who offered £5.14 billion (US$6.57 billion) for a merger. If International Paper decides to make a formal offer, it will raise the likelihood of a bidding war with Mondi.

DS Smith is in discussions with both International Paper and Mondi regarding a merger.Financial benefits
International Paper’s board underscores a disciplined approach toward mergers and acquisitions, affirming that the potential acquisition of DS Smith aligns with the company’s strategic imperatives.

The company shares that its directors, along with its outside adviser, Merrill Lynch International, have reviewed and analyzed the potential synergies of the combination and anticipate substantial value creation for shareholders of both entities through the merger.

The combination is expected to yield pre-tax cash synergies of at least US$514 million annually by the fourth year post-completion. These synergies, validated and sensitized independently, encompass various areas, including operational, overhead and procurement efficiencies and projected revenue synergies.

Mark Sutton, chairman and CEO at International Paper, emphasized the strategic coherence of the merger, stating: “Bringing International Paper together with DS Smith is a logical next step in International Paper’s strategy to create value by strengthening our packaging businesses in North America and Europe.”

Sutton envisions leveraging both entities’ strengths to enhance sustainable packaging solutions for customers in burgeoning markets.

Renewable packaging consolidation
Addressing concerns regarding operational continuity, International Paper intends to maintain DS Smith’s North American manufacturing locations alongside its European counterparts. Furthermore, the plan is to establish European headquarters in London, UK, to preserve key elements of DS Smith’s organizational functions.Mondi had reached an agreement in principle with DS Smith before International Paper expressed interest.

Supporting Sutton’s sentiments, Andy Silvernail, CEO-elect of International Paper, says: “The combination of International Paper and DS Smith would create a winning position in renewable packaging and would be a strong catalyst to drive profitable growth and create value.”

“Upon being selected as the next CEO, International Paper engaged me in an advisory role that allowed me to discuss this strategic proposal with Mark and the board. I am fully aligned with their views and supportive of the opportunity.”

“I am highly committed to delivering the expected synergies associated with this opportunity as well as the other profit improvement initiatives in place throughout the combined group,” says Silvernail.

In light of these developments, stakeholders await further announcements as negotiations progress. The strategic maneuver by International Paper and Mondi to acquire DS Smith represents a period of consolidation since Smurfit Kappa agreed to merge with WestRock in a tie-up worth an estimated US$34 billion last year, leading to mushrooming mergers and acquisitions in the packaging industry.

By Radhika Sikaria