Shares in FTSE 100 paper and packaging producer DS Smith (SMDS) have jumped in value this morning after reports emerged that its blue chip giant Mondi (MNDI) was considering making a large offer for the business.
Instead of investing based on merger whispers, I like to look at the longterm potential of businesses. I believe high quality companies will always be attractive investments, whether or not they’re subject of a potential takeover bid. With this in mind, I’ve been taking a closer look at both of these stocks to see whether or not they’re worth buying, based on longterm potential.
One of the main reasons I like these two businesses is that E-commerce is flying. Last year, online transactions jumped to around 45% of the UK retail market. COVID19 was responsible for most of this growth, and the share of the market did drop back when the economy started to open up again. However, it’s remained significantly above pre-pandemic levels.
I think this bodes incredibly well for the future of the packaging industry. However, one of the challenges these companies face is costs. While both organisations produce some of their own materials, such as wood pulp for cardboard packaging, for the most part, they’re reliant on market forces. This means they can’t control the cost of commodities used in their factories. As a result, if material costs rise, profit margins will drop.
There are of course risks from competition like giants Amazon taking over the marker, but thats why a merger would get rid of some of these issues. Based on current market values, the enlarged group could be worth as much as £15 billion. That would give it significant economies of scale and strength with suppliers. Mondi predicts price rises for its paper and packaging products due to increased demand. I think this shows the company’s potential to grow as the market expands further.
In summary I would I’d buy the Mondi stock today, but will probably avoid DS Smith. I think Mondi’s size should help it mitigate risk and help to to grow much stronger.