Mondi seeks to box clever around DS Smith takeover speculation

It takes lot of cardboard to hide an elephant in the room.

Mondi’s post-results conference call provided 72 minutes of discussion on the mechanics of corrugated-paper recycling and pricing trends for virgin fibre grades.

Yet, management showed no urgency to tackle the most interesting issue: an overnight report that Mondi has been considering a takeover offer for DS Smith, its £5.3bn-valued packaging sector peer — and the rebuff, when it came, took only moments.

Market rumours receive no comment, said Andrew King, chief executive. A later prompt to talk about acquisition strategies in general was dismissed with “nice try” and the conversation moved back to unbleached kraft pulp.

Fair enough. People who run paper companies ought to concentrate on paper. Yet with DS Smith shares up about 10 per cent at the time, a little more context on the story would have been useful.

All in all, it was an unrewarding end to a month of rumour-mongering around DS Smith that drew a pack of City reporters to chase some vague, but widely disseminated gossip.

Compared with American rivals such as International Paper, Mondi had been considered a plausible rather than an obvious predator. DS Smith needs more cardboard, so merging would fix Mondi’s capacity glut, as well as diluting its reliance on paper markets that have been hit by office closures and advertising budgets moving online.

Their union would create Europe’s largest containerboard maker, matching Mondi’s low-cost mills with DS Smith box factories that have been sharper at developing new products for big customers such as Amazon.

But financing would be a challenge for Mondi, which has a reputation for conservatism. Its balance sheet can carry another £2bn of debt at most, creating a requirement for equity funding that might nearly double the share count.

For that to work, Mondi investors would need to embrace a strategy change that tilts the company away from eastern Europe and into the much more competitive western recycling space. And while overlaps offer scope for cost cutting, there would first need to be comfort on why DS Smith’s historic free cash flow generation has been so underwhelming.

It all looks moot now. The Takeover Panel will have leaned on Mondi overnight to make a statement or justify why none was required. King’s “no comment” suggests all serious work on a potential offer has stopped, assuming it ever started.

Not that anyone has been brave enough to say that out loud. Mondi is the third UK company this month to meet bid gossip with a terse or taciturn response whose interpretation demands a lawyer’s understanding of the Takeover Code. Stock traders will be familiar with the game, but employees of DS Smith (along with those of outsourcer Equiniti and chemicals maker Synthomer) deserve a little more clarity.

American beauty

Anglo-American has a diamond in its mining portfolio, writes Alan Livsey. No, it isn’t De Beers, the famous gemstone producer. It is a Peruvian mine filled with a ruddy coloured rock containing copper. Anglo’s Quellaveco mine should start producing copper concentrate next year. That will add to its copper portfolio — a good thing because these days the red metal really shines with investors.

Assuming that production of electric vehicles picks up as promised, demand for copper should soar. Anglo forecasts that copper demand from the car industry will rise by half to 3.5m tonnes by the end of this decade, entirely on demand from electric carmakers.

While the car industry’s need for copper is hardly a new concept, it took a worldwide lockdown to convince people that getting through enormous structural economic change is at least possible.

Copper’s high conductivity for electricity is well known. While substitutes for copper do exist — aluminium, silver and even gold — they are either not as efficient or just too expensive. Its price, along with almost every other commodity, has soared in recent months. It is up 23 per cent this year alone. At that pace one should expect some retreat for copper and all metals in the short term. Then again, the markets these days tick on global warming time — over decades, not weeks and months.

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More importantly for Anglo shareholders, Quellaveco provides the miner with clear production growth in its portfolio. The miner should deliver 14 per cent volume growth over 2021 to 2023, if measured on copper equivalent terms. That outruns that of its peers BHP (by double), Rio Tinto and Glencore, says RBC Capital Markets analyst Tyler Broda.

Not that any of their share prices have suffered recently. Not only have Anglo and its FTSE All-Share Mining peers zoomed up in the past year, they have even left the tech-heavy Nasdaq 100 index behind. Even so, Anglo still looks cheap at less than four times its forward ebitda, a third below its large-cap peers.

That discount is usually blamed on Anglo’s South African operations, mostly coal and platinum group metals, which though profitable now are also very mature. A low dividend yield, at 2.4 per cent, compared with an average of 5 per cent for Rio and BHP, also does not help. Still, for those keen on the reflation theme slamming bond prices, Anglo offers some sparkle.

Mondi: bryce.elder@ft.com
Anglo American: alan.livsey@ft.com