Rabobank analyst: How a Mondi merger with DS Smith could alter the packaging industry

13 Feb 2024 --- Following the announcement that Mondi might fully acquire DS Smith, we speak to Natasha Valeeva, senior analyst for Packaging & Logistics at Rabobank. She explains that industry consolidation was expected since difficult market conditions have impacted the corrugated sector since the COVID-19 pandemic.

Previously, Valeeva worked as a market and supply chain researcher at LEI Wageningen University in the Netherlands and conducted a Ph.D. focusing on the economics of food safety and traceability in the Dutch dairy chain.  

She explains that the economic landscape has made such a merger a likely outcome for the past years and that a period of further consolidation within the European containerboard industry is likely to follow. 

Were you expecting this merger to be considered by either company?
Valeeva: During the last three years, DS Smith was reportedly (rumours) linked to a potential deal with Mondi. We need to see how this will develop over time. Industry leaders routinely explore options to accelerate growth and to strengthen their market positions, including via mergers and acquisitions (M&A). 

It is especially unsurprising to see the fragmented European market. In our earlier report, we highlighted that the pace of M&A activity in the European corrugated packaging industry accelerated during the last decade. 

The paper packaging market has faced challenges since the COVID-19 pandemic.However, this has not led yet to significant changes in market leadership and structure since, at the same time, most leading players have also been investing in greenfield projects, especially on the back of growth in demand for boxes because of COVID-19 trends. As a result, the European corrugated packaging market remained fragmented.

Currently, the paper packaging sector is still dealing with challenging demand conditions and lower prices globally. Most companies report declining sales and lower margins. In such market conditions, the rationale for consolidation is getting stronger. For example, new geographies, portfolios and efficiency improvements might help protect margins. 

Also, vertical integration of containerboard (paper for boxes) and box production might help some players mitigate earnings volatility and ensure greater resilience. Furthermore, combined with the sector’s challenging market conditions, the Smurfit Kappa-Westrock deal is a likely trigger for potential larger consolidation moves in Europe.

What impact has the Smurfit WestRock deal had? 
Valeeva: After the Smurfit Kappa-WestRock deal, Rabobank suggested that more consolidation in the European paper packaging sector will be in the offing.

Two Paper Packaging Leaders Join Forces: Sector Implications of the Merger of Smurfit Kappa and WestRock. 

There is no immediate significant impact of the Smurfit Kappa-WestRock on European corrugated space in terms of market share changes, given the limited footprint overlap. However, this deal might have increased focus on M&A and consolidation in Europe and globally.

As I mentioned above, the Smurfit Kappa-WestRock deal is a likely trigger for another multi-billion attempt to consolidate the corrugated packaging market, in the first instance in Europe — where the largest food print of both companies (Mondi and DS Smith) is.

What could the impact of the merger be assuming it goes ahead?
Valeeva: In contrast to the Smurfit Kappa-WestRock deal, a potential Mondi-DS Smith deal would change the competitive landscape of European corrugated packaging, with a potential change in the market structure. This could be a step to a somewhat more consolidated market —  since, in the current market conditions, major players are not likely to add significant containerboard capacity to the market.

Both players are among the top largest players in Europe, with Smurfit Kappa currently number one in Europe. A potentially new entity would result in a new European industry leader with the largest containerboard production capacity — marginally larger than Smurfit Kappa, subject to regulatory approvals for any potential antitrust issues.

Moving forward, this might lead to another push for more M&A activities in the sector in Europe and globally, which could further consolidate the industry.

Will these mergers have an impact on the plastics market?
Valeeva: Larger players like Smurfit Kappa and a potential entity, Mondi-DS Smith — are likely to accelerate the adoption of scalable, innovative, sustainable packaging solutions across European geographies. 

In this way, they could bring more growth opportunities from sustainable packaging for the entire sector while competing with other packaging materials, for example, in plastic to paper shifts; when it fits for purpose — Mondi’s mantra — paper where possible, plastic when useful.

By Louis Gore-Langton