Andrew King would be CEO of the enlarged group

Mondi and DS Smith make agreement in principle on combination

"Robust contingency plans" are in place at DS Smith
Several expected synergies are anticipated from a combination

The boards of Mondi and DS Smith have reached an agreement in principle on the key financial terms of a possible all share offer by Mondi for DS Smith, according to a statement published yesterday afternoon (7 March).

This is pursuant to which Mondi would acquire the entire issued and to be issued share capital of DS Smith.

Proceeding with what the two companies have called ‘the combination’ is conditional on, inter alia, reaching agreement on the other terms and conditions of any offer, including as to regulatory matters and the completion of mutual confirmatory due diligence to the satisfaction of Mondi and DS Smith.

The combination would see Mondi shareholders own 54% and DS Smith shareholders owning 46% of the issued and to be issued share capital of Mondi.

This is based on Mondi's closing share price of 1,381p per share on 7 February 2024 (being the day prior to the commencement of the offer period), meaning the terms of the combination would represent an implied value of 373p per DS Smith share and a premium of 33% to DS Smith's closing share price of 281p per share on 7 February 2024.

The deal values DS Smith at £5.1bn.

Philip Yea would be chair, Andrew King would be the CEO, and Mike Powell would be the CFO of the enlarged Mondi Group; and three non-executive directors of DS Smith are expected to join the enlarged Mondi Group board.

“The combination is an exciting 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,” the statement said.

Highlighted key benefits to both sets of shareholders include increased exposure to structural growth trends in sustainable packaging; and “a highly complementary geographic footprint creating a leading player in corrugated packaging across Europe”.

Also the combination of both firms’ strengths in the corrugated value chain; a strengthened ability to serve global FMCG customers; significant value creation for both sets of shareholders from substantial synergies; a strong balance sheet; a strong customer focus; and commitment to sustainability in packaging with a complementary portfolio of products.

Expected 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 [Takeover] Code in due course.

In accordance with Rule 2.6(a) of the Code, Mondi was required, by not later than 5pm on 7 March 2024, either to announce a firm intention to make an offer for DS Smith in accordance with Rule 2.7 of the Code, or announce that it did not intend to make an offer, in which case the announcement would be treated as a statement to which Rule 2.8 of the Code applies.

In accordance with Rule 2.6(c) of the Code, the DS Smith board has requested that the panel on takeovers and mergers extends the relevant deadline to enable the parties to continue their discussions regarding the combination.

In light of this request, an extension has been granted by the panel and Mondi must, by not later than 5pm on 4 April 2024, either announce a firm intention to make an offer for DS Smith in accordance with Rule 2.7 or announce that it does not intend to make an offer for DS Smith, in which case the announcement would again be treated as a statement to which Rule 2.8 of the Code applies.

This deadline will only be extended with the consent of the panel in accordance with Rule 2.6(c) of the Code, and the firms said “there can be no certainty that any firm offer will be made”.

DS Smith’s share price was up by 2.98% at yesterday's close, to 325.20p, while Mondi’s shares were down by 0.29% at 1,380p at 4.35pm yesterday.