June 4, 2018 / 6:40 AM / 5 months ago

DS Smith to buy Europac for $2.2 billion as paper deals accelerate

(Reuters) - UK-based packaging group DS Smith Plc (SMDS.L) has offered to buy Spanish rival Europac (PYCE.MC) for 1.9 billion euros (1.64 billion pounds) including debt to bolster its position in western Europe’s fast-growing packaging market.

A deal would be DS Smith’s biggest acquisition to date and the latest in an industry benefiting from growing demand from online retailers.

“Europac’s board of directors has confirmed that the acquisition is friendly and attractive,” DS Smith said on Monday, adding it had received undertakings to accept the offer from shareholders owning 58.97 percent of the Spanish company.

Chief Executive Miles Roberts said the deal would cement DS Smith as the market leader in France and make it number two in Spain, serving customers in fast-moving consumer goods, food products and e-commerce, where it is already a leading supplier to customers including Amazon.

“It’s an exceptional opportunity to enhance our customer offer in a key packaging growth region,” he told reporters.

The proposed deal is the latest in a consolidating sector. Ireland’s Smurfit Kappa (SKG.I) agreed to buy Dutch paper and recycling firm Reparenco last month in an attempt to see off a takeover bid from U.S. rival International Paper (IP.N).

Europac shares rose 8 percent to 16.8 euros on Monday, matching DS Smith’s offer price, while DS Smith’s climbed 3.7 percent to a record 583 pence.

Trevor Green, head of UK equities at Aviva, the biggest shareholder in DS Smith with a 7.15 percent stake, said it was an “exciting deal” at an opportune time.

“This management team has an excellent track record of integrating and turning around acquisitions,” he said.

Roberts said the additional paper production from Europac would be absorbed in the coming years as the group’s package requirements were growing at over 200,000 tonnes a year, so there would be no need for major capacity reductions in Spain.

Europac made about 940,000 tonnes of the “kraftliner” used in corrugated paper boxes last year.

PAPER OVER PLASTIC

DS Smith also said it had started a strategic review of its plastics business, which accounts for 6-7 percent of turnover, as it increases its focus on production of fibre products. Roberts said it was too early to indicate any conclusions.

The British company will finance the acquisition by raising 1 billion pounds ($1.3 billion) from issuing new shares, plus a new debt facility of 740 million euros, it said.

The offer price values Europac’s equity at 1.67 billion euros. Including debt, the deal is worth 1.9 billion euros.

The deal is conditional on acceptances from Europac shareholders representing at least 50 percent plus one share, regulatory approvals and the approval of DS Smith’s shareholders, DS Smith said.

It said the undertakings of support it had received included certain members of the Isidro family, which owns around 42 percent of Europac.

Family member and Europac Executive Chairman José Miguel Isidro Rincón said the deal would deliver operating and commercial synergies for both companies.

DS Smith said the offer valued Europac at 8.4 times EBITDA (earnings before interest, tax, depreciation and amortisation) for the year ended March.

Roberts said there were many opportunities to improve efficiency at Europac, which employs 2,300 people across 23 locations, for example by reducing the weight of its cardboard boxes that are on average 20 percent heavier than DS Smith’s.

DS Smith expects annual pretax cost savings of 50 million euros.

Roberts said there was little overlap between the two firms, with Europac having a greater focus on paper than DS Smith, making him confident of winning regulatory approval.

DS Smith said it expected to have a net debt to EBITDA ratio of less than 2.5 times by the end of its current financial year, after completing the deal, and remained committed to its medium-term target of 2.0 times.

It added that it had performed in line with its expectations since the start of its financial year.

Editing by Georgina Prodhan and Mark Potter

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