A deal that should not cost a packet9 Feb 2024 05:13
From The Times: Alistair Osborne Friday February 09 2024, 12.01am.
Will the £10 billion moment for the merger of Mondi and DS Smith finally arrive?
Who knows, but it does look closer?
No need here to think outside the box. Some potential tie-ups have long been on every bankers’ deal list. Take the packaging bunk-up between Mondi and DS Smith. It’s been talked about so much that one day it might actually happen.
Has that £10 billion moment finally arrived? Who yet knows but it’s already got further than a previous effort. Rewind to February 2021 and Mondi also made a merger overture to its rival, even if that one never got as far as stock exchange statements. Back then, it was the height of the Covid online shopping boom, with an incarcerated population maxing out on deliveries. Cardboard mountains sprouted up everywhere, not helped by the likes of Amazon packing a toothbrush or tin opener, say, in a box big enough to house a family of four.
Mondi’s brief courtship got nowhere, since when things have got rather more “challenging”, as both companies have been at pains to point out in their most recent updates — similarly moaning about the “macroeconomic environment” and “soft” or “weak” demand. Any merger now would look far more defensive. But Mondi’s timing has another cue: the retirement of Miles Roberts, the Smith boss of 13 years.
Yes, December’s exit news made it a long goodbye: he’s off “no later than November 30, 2025”. But his opposite number at Mondi, Andrew King, may not get a better chance in what’s already a consolidating sector. A bigger rival, Ireland’s Smurfit Kappa, is carting off America’s WestRock for $11 billion. And, as Barclays analysts put it, “paper and packaging is a very fragmented industry, especially in Europe, and consolidation is inevitable”.
Hence, maybe, Mondi’s latest takeover tilt: an effort Smith called “highly preliminary”. Mondi’s shooting for an “all-share” deal, saying it “represents an exciting opportunity to create an industry leader in European paper-based sustainable packaging solutions”, which could even be more exciting than it sounds. And, of course, the bit that’s missing is the terms. Smith shares rose 10 per cent to 308½p, valuing the group at £4.3 billion. Mondi slipped 3 per cent to £13.36 for a market cap of £5.9 billion.
No way would the Smith board, chaired by Geoff Drabble, roll over without a premium: a bigger share of any combo than implied by the duo’s market values, say, or even a bit of cash. But it can probably spot the strategic logic. Mondi’s factories are skewed to eastern Europe, Smith’s the west.
Mondi has a broader client base, also making bags for cement and printer paper, while Smith is more focused on consumer groups. And while both are big in corrugated packaging, Mondi is right that a deal could bring “a balanced paper position”.
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