Stocks in Focus: DS Smith


Wednesday 6 June 2018



DS Smith, the international packaging company, announced its intention to purchase the Spanish based Papeles y Cartones de Europa, S.A (known as Europac) on Monday 4 June 2018.

The deal, costing 1.9bn, follows a trend set by the company of continuing to consolidate the European market in packaging. Further news of the acquisition is expected in June along with the annual results.

The acquisition is at the higher end of valuations to other European deals; but comes with potential cost saving synergies of circa 50m. Management have a good track record and experience in integrating European businesses. The company is planning to finance the transaction with a fully underwritten rights issue of approximately 1bn with the remainder funded by debt. This deal is expected to enhance earnings from year one and while debt will increase in the short term, the company is targeting a reduction over the longer term.

DS Smith has been on an aggressive acquisition path. This is the second purchase of 2018, and the company made two in 2017. The fragmented paper and packaging industry is still ripe for consolidation but even without acquisition growth, volumes are still predicted to rise. In the company's trading update on 1 May 2018 it stated strong performance with both volume growth and successful cost savings from earlier purchases.

Investor sentiment remains positive, endorsing management's progress in carrying out their strategy to drive growth both organically and through acquisitions. The Europac deal does not come completely without risk as the cost synergies still have to be delivered and the extra debt does weigh on the balance sheet even if it is only intended for the short term. We will watch closely to see whether the company can consolidate the various new businesses without getting distracted.




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