The year started with a bang. DS Smith was already a major player in the corrugated sector but its acquisition of SCA’s packaging operations for €1.7bn made many sit up and take note. The move creates a £4bn group and makes DS Smith the second biggest corrugated business in Europe.

DS Smith isn’t the only company making waves on the mergers and acquisitions front. Last year, Smurfit Kappa president and chief executive Tony Smurfit told Packaging News that the group was eyeing M&A opportunities in Brazil and expanding its operations in Russia. Smurfit said that the company would be “well positioned” to make acquisitions in 2012 and Smurfit Kappa Bag-in-Box has already purchased Argentinian bag-in-box firm Baguin this year.  Meanwhile, another premier player, SAICA, has been no slouch in the M&A arena either, having bought Audenshaw-based Houghton’s Waste Paper this year to add to a series of acquisitions in the UK in recent years.

The phrase “game changer” is often banded about but the signs are that the DS Smith deal will have ramifications for the corrugated market right across Europe. So how will the sector shape up over the coming year and how will some of the smaller players react?

For DS Smith, the takeover still isn’t quite done and dusted yet. “Our first priority will be integrating SCA as we haven’t taken over yet,” says DS Smith’s head of investor relations Rachel Stevens. “Secondly, we will focus on getting the net debt down. There will then be a range of subsequent options available but it is premature to speculate on those.” Exactly how the takeover changes the sector remains to be seen but knowledgeable observers invariably believe it will be for the better. The company’s larger footprint is more likely to spark healthy competition rather than fears about the big player stomping a destructive size 12 over the industry.

According to Paul Holohan, chief executive at Richmond Capital Partners, the acquisition opens up new possibilities. “It gives DS Smith access to new markets, not just Europe but perhaps, in the long term, further afield, becoming increasingly global,” he says.

“It’s a game changer because they are now able to access a much bigger percentage of the market now with the extra 40% they now reach due to their European footprint,” explains Know It All’s Raj Bhardwaj. “I think it’s really positive for buyers because that 40% previously only had Smurfit Kappa as a viable option. Smurfit Kappa is excellent but choice is a good thing and now DS Smith will be able to offer a really good and viable alternative.”

Whether the move signals a new wave of consolidation within the sector will depend on several factors. “Further consolidation in the sector would certainly be a good thing,” continues Bhardwaj. “I understand that there are companies thinking about buying and there are some putting feelers out. But these things tend to take time. I suspect that paper prices will rise over the course of the summer and as prices rise I would imagine that paper makers will look more attractive and that would increase the likelihood of further consolidation.”

Having the financial capability to consider acquisitions is one thing but a sound strategy is also an essential starting point and DS Smith’s group chief executive Miles Roberts has been praised for putting the company’s plan into practice effectively.   “The takeover of SCA by DS Smith is a fantastic example of action of strategy by Miles Roberts,” says former DS Smith Packaging chief executive Bob McLellan, now director at Swanline Print and chairman of Logson Group. “There’s no doubt that compared to the US, Europe is an unconsolidated market so it must now be ripe for more. If you look at the top three players, DS Smith, Smurfit Kappa and SAICA, they represent 70-80% of the market, so I feel there will be further consolidation among the minor players, sheet plants and second tier firms.”

Smaller players in the hunt

While such billion euro deals might be beyond the reach of firms outside of the top three, many industry commentators are convinced that smaller players will soon be looking at M&A in addition to organic growth. Fencor Packaging Group, an independent corrugated box manufacturer, is an example of a ‘second tier’ firm that has developed through consolidation.

“We have been part of that,” says commercial/business development director Chris Hall, who founded of Easypack, which is now part of Fencor. “We are sheet plant specialists working within the second tier and we’ve gone from six operating sites down to three through consolidation, helping to create more efficient, streamlined and larger sheet plants with improved profitability. We buy in corrugated board, print and convert, while the top tier [DS Smith, SAICA and Smurfit Kappa] make their own.”

Many will continue to focus on organic growth rather than M&A and perhaps another part of the game change will be how smaller players conduct their business going forward, focusing on their unique selling points to ensure that they can compete.

Packology managing director Doug Johnston says: “To a great extent, smaller players in the market recognise that they can have little influence over what DS Smith do or the power they have, and will therefore ensure that their own business is as good as it can be to service their customer base.” A more specific example of niche focus is Moorgate Capital partner Nicholas Mockett’s suggestion that smaller players could be “picking customers who need a specialist or local supplier, or a particular segment such as micro flute or heavy duty corrugated”.  Quality service among smaller firms and the good reputation that follows can also make firms desirable targets for takeover bids of course but, consolidation speculation aside, innovative excellence in a specific area brings its own rewards.

“The smaller players will probably focus on quicker turnaround and be more innovative. Packaging is undergoing a lot of change particularly in terms of innovation and if I were running a small firm I’d be looking to be more responsive and innovative than my bigger rivals,” says Richmond Capital Partners’ Holohan.

It is an exciting time for the sector with DS Smith’s purchase keeping players of all levels on their toes; whether those toes will enable them to form part of a bigger footprint or help them to spring into renewed action in terms of service and innovation.  Mockett foresees more of the former. “Mergers and acquisitions often happen in waves,” he said. “As the industry concentrates, other players may come together to be able to offer a comparable footprint to the customer base, providing corrugated packaging across a broader geographic area – bear in mind it’s expensive to ship air,” he says.

“As more mature segments of the packaging industry consolidate we would expect to see capacity reduced, as older equipment is retired, so the consolidator should become more efficient. Investors will be attracted to more profitable businesses, so their share price should rise, increasing the focus on M&A.” Whether you are a shareholder, manager, employee or customer, the product on offer is paramount at the end of the day and with corrugated remaining the packaging industry’s largest sector globally, despite the various global economic woes, it’s in a quite a healthy state.

CPI director of packaging affairs Andy Barnetson concludes: “The product’s important environmental dimension together with its versatility, makes corrugated packaging an attractive alternative for numerous applications.”