DS Smith enters U.S. with $920 million buy, reports higher FY profit

(Reuters) - DS Smith Plc SMDS.L, a maker of corrugated cardboard, recycled paper and plastic packaging, said it would buy 80 percent of Interstate Resources, a corrugated packaging business, for $920 million, giving it an entry into the American market.

DS Smith’s stock rose 9.8 percent at 487.8 pence to a record high, making it the largest gainer on the FTSE Midcap Index.

The company, which makes corrugated trays, soft plastic containers, transport packaging and display cases, also said it would fund part of the deal by raising about 285 million pounds through an underwritten placing of new shares at 10 pence each.

DS Smith, which has the option to buy the remaining 20 percent from Merpas Co over five years, will take on $226 million of the family-owned business’ debt.

The deal will immediately add to earnings, the company, which made five bolt-on acquisitions for 85 million pounds in the year ended April, said.

The U.S. market will allow DS Smith to grow its packaging business, specially in retail ready e-commerce and performance packaging solutions, CEO Miles Roberts said on a media call.

"Our customers including Mondelez MDLZ.O and Nestle NESN.S want us to enter this (U.S.) market to support them. Seventeen of our top 20 pan-European customers have significant U.S. operations," he said.

“Packaging has never been more relevant to our customers. Our customers are those big FMCG companies who are really looking to engage more with their customers... they say, ‘can you also help us in other markets, can you help us in the U.S.?’”

The company’s customers had “rewarded” DS Smith with work in Europe, Roberts added. The region accounts for the bulk of the firm’s revenue.

DS Smith operates in a challenging volume growth environment for European fast-moving consumer goods operators, competing with Smurfit Kappa SKG.I, Mondi MNDI.L and RPC Group RPC.L.

Roberts said the deal, the second-largest ever for DS Smith, was not a diversification acquisition, protecting DS Smith from other headwinds in the UK.

DS Smith wanted to focus on America’s east coast and approached a number of potential targets until it began talks with Interstate Resources, which operates 19 production sites in the U.S. and reported revenue of $618 million in 2016.

The company, which was founded in 1940 as a box-making businesses in East London, also reported a 31 percent jump in full-year pretax profit to 264 million pounds ($342 million), driven by acquisitions and demand from its European customers.

($1 = 0.7714 pounds)

Reporting by Noor Zainab Hussain in Bengaluru; Editing by Sunil Nair