Mondi-DS Smith merger: Agreement in principle reached to form paper packaging giant

08 Mar 2024 --- After a month of industry speculation sparked by Mondi’s confirmation that it is considering a possible all-share combination with fiber-based packaging rival DS Smith, the companies have now revealed an agreement in principle regarding a £5.14 billion (US$6.57 billion) merger. The combination would create a paper and packaging giant worth more than £10 billion (US$12.82 billion) in market value and Europe’s largest containerboard manufacturer.

Under the terms of the agreement, Mondi shareholders would hold 54% of the combined entity’s shares, with DS Smith shareholders owning the remaining 46%.

“It is a deal with something for everyone: shareholders, customers and the combined benefits of a strong operational and financial group with a high-quality team of employees,” packaging industry analyst Neil Farmer tells Packaging Insights.

“Great possibilities for advances in the circular economy and sustainability will ensue as the deal progresses.”

Mondi would acquire the entire issued and to-be-issued share capital of DS Smith. The agreement is conditional upon various factors, including reaching a consensus on regulatory matters and completing mutual confirmatory due diligence to the satisfaction of both parties.

Mondi shareholders would hold 54% of the combined entity’s shares, with DS Smith shareholders owning the remaining 46%.Deadline extended
While the agreement in principle marks a milestone in the potential merger of Mondi and DS Smith, both companies emphasize that there is no certainty that a firm offer will be made. Further updates regarding the merger will be provided as the discussions progress.

In light of the ongoing discussions, the Panel on Takeovers and Mergers has granted an extension of the relevant deadline. Mondi now has until April 4 to either announce a firm intention to make an offer for DS Smith or declare its intention not to proceed.

Based on the closing share prices of both companies on February 7, the terms imply an implied value of £3.73 (US$4.78) per DS Smith share, representing a premium of 33% to DS Smith’s closing share price on the same day.

The leadership structure of the enlarged Mondi Group would see Philip Yea as chair, Andrew King as CEO and Mike Powell as CFO. Additionally, three non-executive directors of DS Smith are expected to join the board of the combined entity.

Strategic and financial rationale
The merger is positioned as an opportunity “to create a pan-European industry leader in paper-based sustainable packaging solutions, with complementary geographic footprints, leading customer relationships, a strong balance sheet and cash flow profile and the potential to deliver substantial benefits to respective shareholders, customers, employees and related stakeholders.”

According to the statement released by the companies last night, the proposed combination offers numerous benefits to shareholders of both companies. The benefits include increased exposure to sustainable packaging trends, a strong geographic footprint in corrugated packaging across Europe, leveraging strengths in the corrugated value chain, enhanced vertical integration, improved ability to serve global FMCG customers, substantial value creation from synergies, leveraging Mondi’s leadership in flexible packaging, maintaining a strong balance sheet and cash flow profile and a customer-centric approach driven by experienced management teams.

The combined entity aims to capitalize on economies of scale and operational efficiencies across the supply chain.

“In reaching an agreement in principle on the key terms, both boards have taken into account the substantial synergies, which they believe would arise from combining the two pan-European companies and the consequent significant added value which should accrue to shareholders in the combination,” reads the statement.

“These synergies are expected to result from vertical integration alongside highly complementary positions and expertise in containerboard, corrugated solutions and flexible packaging, as well as expected benefits from economies of scale and efficiencies across a combined supply chain and administration.”

“Mondi and DS Smith are currently undertaking an exercise to validate the quantity of synergies, which they believe will arise from the combination and intend to publish their estimated quantity of any synergies together with the reports required under the code in due course.”Mondi confirmed early stages of a possible merger with DS Smith in February.

Market response
The announcement of the agreement in principle has predictably generated considerable interest in the market, with shares of both Mondi and DS Smith experiencing upward movement in early trading.

In the days leading up to yesterday’s announcement, there were reports of Mondi improving its indicative all-stock proposal, though DS Smith reportedly deemed the bid inadequate. DS Smith refrained from discussing the merger talks during its recent trading update on March 6.

Natasha Valeeva, a senior analyst for Packaging & Logistics at Rabobank, previously spoke to us about the merger’s potential impact on the paper packaging sector. She stressed that the industry faces challenging global demand conditions and lower prices, making consolidation increasingly attractive.

Valeeva predicts that the proposed merger could stimulate further merger and acquisition activities in the packaging sector, both in Europe and globally. Regulatory approval will be necessary, but if successful, the merger could reshape the industry’s competitive landscape and drive further consolidation efforts.

Further consolidation in the paper and packaging industry was expected after the recent mega-merger between Smurfit Kappa and West Rock.

By Radhika Sikaria

To contact our editorial team please email us at editorial@cnsmedia.com