Mondi Is In Talks With Financial Advisers To Acquire The British Blue Chip DS Smith

Mondi Is In Talks With Financial Advisers To Acquire The British Blue Chip DS Smith

Mar 22, 2021

[CPP114] News: Bloomberg reported that the FTSE 100 listed company Mondi is in talks with financial advisers to acquire the British blue chip DS Smith, which has a market value of more than 5 billion pounds. This also makes the UK’s largest papermaking company Packaging Group's stock soared on Thursday. Once the acquisition is finally successful, Mondi will increase by 30,000 people on the basis of the existing 26,000 employees.


  During the epidemic, consumers are increasingly turning to online shopping. Retailers' efforts to increase product delivery have further stimulated the demand for carton packaging. Before the epidemic, DS Smith's share price had risen by more than 10% in the past year, and it has risen by 2.5% so far in 2021. The group's total market value has reached 5.3 billion pounds. According to Bloomberg data, the transaction between these two competitors may become one of the largest transactions in the UK this year. However, the negotiation is still in the early stages and it is uncertain whether it will eventually succeed, and both companies declined to comment on this.


David O'Brien, an equity analyst at investment bank Goodberg, said the merger will "mark a shift from a more vertically integrated cardboard business to a cardboard box business." "Mondi is a technology-focused boxboard manufacturer with a focus on low-cost production, while DS Smith is more of a company oriented to the end industry, focusing on innovation in the corrugated box market. This will also put DS Smith more towards The business in Western Europe is merged with Mondi's assets in Eastern Europe. From this point of view, the integration of the two will be very reasonable."


  Mondi said on Thursday that the company’s annual profit fell by one-third due to a “substantial reduction” in the average selling price of pulp and paper, and the impact of the new crown epidemic. The company said on Thursday that its pre-tax profit for the full year ending December 31, 2020 fell by 30% to 770 million euros, while revenue fell from 7.2 billion euros to 6.6 billion euros. The revenue of its corrugated packaging business unit reached 1.879 billion euros, a decrease of 7% year-on-year, and its basic EBITDA was 518 million euros, a decrease of 11% from the previous year. The flexible packaging business unit's revenue reached 2.667 billion euros, a decrease of 2% year-on-year, and the basic EBITDA was 519 million euros, a 4% decrease from the previous year.


  In January 2021, Mondi agreed to acquire 90.38% of the outstanding shares of the Olmuksan plant in Turkey from International Paper for a total price of 66 million euros. As a leading and well-known corrugated packaging company in Turkey, Olmuksan's five factories can greatly consolidate Mondi's position in the fast-growing Turkish corrugated packaging market and expand its products to existing and new customers in the region.


  At the same time, Mondi strengthened its investment in Steti (Czech Republic), a company dedicated to the production of specialty kraft paper for e-commerce and retail shopping bags. Mondi has also launched a new 300,000-tonne cattle-card paper machine in Ruzomberok (Slovakia) and is advancing previously announced major capital investment projects in Syktyvkar (Russia) and Richards Bay (South Africa). In addition, many packaging processing businesses are also undergoing expansion projects to enhance production capacity and product supply to further support customers.


 Group CEO Andrew King said: "Mondi will perform strongly in 2020, with basic EBITDA of 1.353 billion euros, ROCE of 15.2%, and continued to maintain excellent cash flow. Faced with the substantial average selling price of major pulp and paper types The decline and the challenges brought by the new crown epidemic prove the advantages of our business model. Driven by the active promotion of sustainability and the long-term growth of e-commerce, the packaging business demand is strong, and we have achieved positive results this year. "


  Compared with Mondi's 2020 fiscal year, DS Smith announced the results of the first half of the 2020/21 fiscal year in December last year. Its revenue was 2.889 billion pounds (approximately 3.3 billion euros), a year-on-year decrease of 9%, and EBITDA was 385 million pounds. . In the previous year, the 2019/20 fiscal year, revenue was approximately 6.043 billion pounds (approximately 7 billion euros), and EBITDA was 956 million pounds. Therefore, whether it is from operating income or EBITDA, the two companies basically belong to the same level. However, the former not only owns the corrugated packaging business, but also operates other business units such as flexible packaging, while the latter is basically concentrated in the corrugated packaging business. Therefore, from the perspective of corrugated packaging revenue, DS Smith is far stronger than Mondi.


  Of course, this is also different from a merger three years ago, when International Paper tried to acquire Europe's largest paper and carton packaging manufacturer with cash and stocks, the Smurfit Kappa Group headquartered in Dublin, Ireland. The board of directors of Smurfit Kappa seriously considered the proposal and rejected International Paper’s M&A invitation, saying that the latter’s proposal did not reflect the true value of the company at all. At the same time, it believed that the best interests of the group’s shareholders and other stakeholders would be taken as the prerequisite. It operates as an independent company, as a leader in the field of paper packaging in Europe and Pan American.


  In fact, in Europe, the five largest corrugated packaging suppliers, including Smurfit Kappa, DS Smith, Saica, Mondi, and Prinzhorn, account for one third of the European market share, while competitors are relatively scattered, accounting for about 46% of the market. Provided by cardboard paper manufacturers with a total share of less than 2%. Generally speaking, the corrugated packaging industry such as Europe has been in line with the US market structure, while emphasizing the main driving force for the consolidation of the European market.


  The first driving force comes from increasing profit margins, which forces European companies to operate more effectively and seek ways and means to improve market competitiveness; second, the second driving force is that an integrated customer base means more buyers Seeking more and more pan-European coverage from suppliers, including packaging suppliers; finally, corrugated packaging companies must be close to customer factories, which is also a major driving force. Corrugated boxes and cardboard are usually sold in a radius of up to 400 kilometers, but preferably within 200 kilometers, which leads larger group companies to want to acquire smaller competitors in more convenient locations.


  AJ Bell Investment Director Russ Mold said that for many years, the growth of online shopping has been the driving force behind the slow development of the packaging industry, because almost everything ordered online needs to be packaged in cartons. Due to the control of the epidemic, we have been staying at home for the past 12 months, and the trend of e-commerce shopping has accelerated greatly.


  Although this has led to reports of cardboard shortages and boosted strong demand, especially in the fourth quarter of 2020 and the Christmas period, Mondi’s performance results indicate that this is not enough to make up for the pandemic caused in other regions. Business loss. Because people have a large amount of waste cardboard in their homes, this situation is aggravated. In addition, because pick-up and recycling services cannot keep up, this pushes up the recycling price of waste paper, which is one of the most important raw materials used by companies such as Mondi and DS Smith to make base paper. Scale may be a big advantage in taking advantage of opportunities related to e-commerce, which may be why Mondi is interested in some major mergers and acquisitions.