DS Smith and SCA Packaging integration 'off to a great start'
By Hannah Jordan Friday, 12 October 2012
Recycled packaging supplier DS Smith has said its acquisition of SCA Packaging will deliver a return on investment above its cost of capital in 2012/13, with a 'substantial' earnings enhancement.
The Berkshire-based packaging group completed the £1.3bn acquisition of SCA Packging, Europe’s second largest packaging business, on 30 June and in a statement issued to shareholders last week, after the first 100 days of ownership, indicated that the firm is progressing better than forecasted.
An analysis carried out by DS Smith showed that cost synergies for the group, which were previously expected to reach €75m (£60m) in the third year following the acquisition completion, are now anticipated to reach €100m. Around €25m of that is expected to be delivered in 2012/13 with the rest phased over the next two financial years.
In addition, cash synergies are now expected to reach €130m, €90m more than forecasted, over the first three years. The figure breaks down to €100m of working capital savings and €30m of capital expenditure efficiency.
Of this, €60m is expected to be achieved by April 2013, €47m more than previously anticipated, while DS Smith’s forecasted capital expenditure in the 2012/13 financial year has reduced from £160m to £150m, while it also expects to make €100m from the disposal of surplus property and non-core businesses.
Commenting on the figures chief executive Miles Roberts said the synergies were better than the group had ever expected. "We are very pleased with progress and we’ve got off to a great start, although there are a lot of challenges to come in the future and a lot of work to do," he added.
The cost of achieving the results laid out in the statement issued this week has increased from from an anticipated €80m to €90m, but Roberts said that the group was fully capable of delivering on the targets.
On completion of the acquisition agreement in June, total debt to the group was 2.4x EBITDA and DS Smith pledged to reduced the net debt to EBITDA ratio to 2x or lower by April 2014; however, Roberts pointed out that due to the group’s strong focus on debt reduction, this target will be achieved a year ahead of schedule in April 2013.
He added: "This really reflects the work we have done on working capital but also the disposal of non-core assets."
Roberts said that the tough trading conditions in Europe, although challenging, would not stop the company from growing. "The economic forecast is very bad but that is built into our forecast and it won’t stop us building a stronger business," he explained.
Roberts said that he was very satisfied with the relationship that was evolving between the two companies and that the successful start was in part due to communication and learning "from the bottom up".
"Six months ago DS Smith and SCA Packaging were already two strong packaging businesses, neither of which could reach its full potential on its own. The improved synergies show how the new enlarged group is not just bigger, but far stronger.
"Our customers now have a business that is very focussed on packaging. We have also created a pan-European supply base so all of the sales, marketing and innovation teams are set up on a European basis for our largest customers."
The group said it was "firmly paced to drive growth in the FMCG sector" and that it would exit "some categories of business " that it felt would not deliver sufficient returns. Additionally the group said it intended to "align capacity" in its paper activities to the requirements of its packaging business in order to "limit exposure to this more volatile business".
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