DS Smith (SMDS) has sold its plastics division for $585m (£445m) to private equity group Olympus Partners, in line with a strategic shift into fibre-based packaging and a global push among consumers for more sustainable products.
The price tag of the plastics business, which included flexible plastics, rigid plastics and foam products, represents a multiple of 9.9 times cash profits based on the past 12 months to 31 October 2018. The disposal is expected to complete in the second half of 2019, and DS Smith anticipates net cash proceeds of around £400m, which will go towards reducing its debt pile.
The news follows the January completion of DS Smith’s €1.7bn (£1.5bn) acquisition of Spanish rival Europac. The deal was funded by a July 2018 rights issue, which raised £1bn. Excluding this impact, DS Smith’s ratio of net debt to cash profits would have stood at 2.1 at its half year. Management has set a medium-term target multiple of two or below.
Chief executive Miles Roberts said the changes “reinforce our position as a leader in sustainable packaging with a clear focus on our fibre-based business”. In December, finance director Adrian Marsh told Investors Chronicle that the decision to sell the plastics business had not been taken on environmental grounds.
But Russ Mould, investment director at AJ Bell, sees the exit from plastic as evidence that DS Smith is addressing long-term environmental concerns, which have swept the packaging industry. He also highlighted it as a way of reassuring “investors who feared it may have taken on too much borrowing and overstretched itself” with the Europac deal. Mr Mould observed that DS Smith was well within the 3.25 times net debt to cash profits ratio stipulated by the terms of its borrowings and banks.
Following DS Smith’s half-year results, analysts at JPMorgan Cazenove forecast full-year 2019 earnings per share of 36.9p, against 32.4p in the prior year.
