European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

Enhanced Regulatory Scrutiny of M&A in the EU

Event-Driven

Bloomberg reported on 24 February that <a href="https://www.smartkarma.com/entities/mondi-plc" target="_blank" data-smartkarma-citation="entities:22048:1" rel="noopener">Mondi PLC (MNDI LN)</a> had been "speaking with advisers" about a potential takeover offer for <a href="https://www.smartkarma.com/entities/ds-smith-plc" target="_blank" data-smartkarma-citation="entities:22150:1" rel="noopener">DS Smith PLC (SMDS LN)</a>. Bloomberg added that "deliberations are at an early stage and there is no certainty they will lead to a transaction".
<ul>
<li>DS Smith shares rose on 25 February by 5.7%, the top performer on the FTSE100, having also risen by 3.2% on the previous trading session. Mondi shares fell by 0.1% on 25 February.</li>
<li>Both DS Smith and Mondi declined to comment.</li>
<li>Mondi has a market cap of £8,726 mn vs. £5,568 for DS Smith.</li>
</ul>
The attraction of DS Smith lies in its scale and market share in Europe, exposure to relatively stable end-markets (which has limited the impact of the pandemic), integration between recycling and paper production and geographic diversification.
<ul>
<li>A combined Mondi-DS Smith would help European container board and corrugated box consolidation (price discipline) and would enhance the competitive positioning of the resulting company (c. 16.4% of of European container board capacity).</li>
<li>It would also benefit from the increased demand from e-commerce sales and plastic containers reduction (substitution of plastics by paper and board).</li>
<li>Mondi would also be less exposed to fine paper, which is declining.</li>
<li>
Synergies would not be that relevant, in my view.</li>
<li>
Production optimisation: DS Smith needs more cardboard, so merging would help find a destination for Mondi's capacity, i.e. Mondi supplying virgin fibre to DS Smith for its container board needs. Whilst DS Smith prioritises the use of recycled fibres through its circular business model, a small amount of virgin fibres is required.</li>
</ul>
Both historical and projected EBITDA margins for DS Smith are lower than Mondi's. For the last five FY an average of 20.6% for Mondi vs. 12.8% for DS Smith. Equally, last five FYs average ROCE for Mondi is 15.5% vs. 11.4% for DS Smith. Mondi is also financially more sound, as it is rated BBB+ whilst DS Smith is rated BBB-.
On an EV/Fwd EBITDA (Capital IQ consensus) basis, Mondi is trading at 9.2x while DS Smith is trading at 9.0x.
Based on comparables, the implied median EV/Fwd EBITDA valuation of DS Smith is 419p (vs. a Capital IQ consensus median TP of 405p).
On the back of strong momentum for DS Smith and comparables valuation, I would be long SMDS LN. Theremay be further upside from a potential offer for the company.

Bloomberg reported on 24 February that Mondi PLC (MNDI LN) had been "speaking with advisers" about a potential takeover offer for DS Smith PLC (SMDS LN). Bloomberg added that "deliberations are at an early stage and there is no certainty they will lead to a transaction".

DS Smith shares rose on 25 February by 5.7%, the top performer on the FTSE100, having also risen by 3.2% on the previous trading session. Mondi shares fell by 0.1% on 25 February.
Both DS Smith and Mondi declined to comment.
Mondi has a market cap of £8,726 mn vs. £5,568 for DS Smith.

The attraction of DS Smith lies in its scale and market share in Europe, exposure to relatively stable end-markets (which has limited the impact of the pandemic), integration between recycling and paper production and geographic diversification.

A combined Mondi-DS Smith would help European container board and corrugated box consolidation (price discipline) and would enhance the competitive positioning of the resulting company (c. 16.4% of of European container board capacity).
It would also benefit from the increased demand from e-commerce sales and plastic containers reduction (substitution of plastics by paper and board).
Mondi would also be less exposed to fine paper, which is declining.

Synergies would not be that relevant, in my view.

Production optimisation: DS Smith needs more cardboard, so merging would help find a destination for Mondi's capacity, i.e. Mondi supplying virgin fibre to DS Smith for its container board needs. Whilst DS Smith prioritises the use of recycled fibres through its circular business model, a small amount of virgin fibres is required.

Both historical and projected EBITDA margins for DS Smith are lower than Mondi's. For the last five FY an average of 20.6% for Mondi vs. 12.8% for DS Smith. Equally, last five FYs average ROCE for Mondi is 15.5% vs. 11.4% for DS Smith. Mondi is also financially more sound, as it is rated BBB+ whilst DS Smith is rated BBB-.
On an EV/Fwd EBITDA (Capital IQ consensus) basis, Mondi is trading at 9.2x while DS Smith is trading at 9.0x.
Based on comparables, the implied median EV/Fwd EBITDA valuation of DS Smith is 419p (vs. a Capital IQ consensus median TP of 405p).
On the back of strong momentum for DS Smith and comparables valuation, I would be long SMDS LN. Theremay be further upside from a potential offer for the company.

DS Smith PLC

DS Smith - Mondi: Potential Combination