NEW YORK, NY – International Paper Company (NYSE:IP) and DS Smith Plc (OTCPK:DITHF) [LSE:SMDS.L] recently announced a significant step in their proposed combination. The expiration of the waiting period under the Hart-Scott-Rodino Act has cleared the way for the planned merger to take effect in the fourth quarter of 2024.

In this analysis, we will delve into the performance and valuation of the combined entity. The deal, framed as a “combination”, appears more like an acquisition by International Paper, with IP acquiring all shares of DS Smith. This move will see existing IP shareholders holding 66% of the combined group, while DS Smith shareholders will own the remaining 34%. Additionally, the CEO of IP will lead the combined group, with the headquarters situated at IP’s main office.

From a valuation standpoint, the merger is likely to impact IP’s cash flow risk due to changes in the Weighted Average Cost of Capital (WACC) resulting from alterations in equity risk premium and debt costs. This will be a key factor in the assessment of the combined entity’s value.

The analysis aims to determine whether both IP and DS Smith shareholders will benefit from the merger and if potential new investors would find an opportunity in acquiring IP or DS Smith at current market prices. With IP trading at USD 43.54 per share and DS Smith at USD 5.41 per share as of July 3, 2024, the analysis will be crucial in guiding investment decisions.

Both companies operate in the packaging sector, but their differences in geographical operations and customer base contribute to varying performances. IP, being roughly double the size of DS Smith in revenue, displays greater efficiency compared to DS Smith. These disparities will influence the intrinsic value of the merged entity, particularly in the utilization of USD 514 million in synergies and a one-time cost of approximately USD 370 million for the merger.

Synergies, vital in creating additional value through operational and financial benefits in a merger, will play a significant role in determining the combined entity’s value. Estimating the impact of synergies on cash flows and the WACC will be crucial in the valuation process, as discussed in the analysis.

In conclusion, the merger between International Paper Company and DS Smith Plc presents value creation opportunities for both sets of shareholders. However, potential investors should carefully consider the risks and limitations associated with the merger to make informed investment decisions.