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DS Smith’s [LON:SMDS] pending acquisition of Europac [BME:PAC] is unlikely to make the UK-based packaging group a less attractive candidate for its US rival International Paper [NYSE:IP], which is looking to expand its footprint in Europe, according to three sector bankers.

Purchasing DS Smith even after the deal would give IP access to Europe, deliver cost synergies and add a sophisticated portfolio of corrugated packaging products to the US company's offering, these bankers said. Growth in earnings and a dilutive capital raise could even make DS Smith cheaper than previously, according to Dealreporter analytics.

DS Smith and Europac were separately reported to be logical takeover candidates for International Paper after the would-be acquirer’s bid for European packager Smurfit Kappa [LON/ISE:SKG] ended without target engagement earlier this year. An analyst report has since speculated that DS Smith could be open to a deal.

If International Paper is seeking is exposure to Europe, then an acquisition of both DS Smith and Europac would make sense, the first banker said. The rationale for the deal would be the cost synergies that would be generated through the growth in scale, he said. IP declined to comment.

IP’s previous foray into Europe proved unsuccessful. The company in June walked away from making a firm offer for Smurfit, citing lack of engagement from the Irish packaging company, ahead of a 6 June “put up or shut up” (PUSU) deadline imposed by the Irish Takeover Panel.

Given the Smurfit offer, the market recognises that IP has its buying boots on, the second sector banker said.

It’s clear that IP wants to grow in Europe, the third sector banker remarked. IP may still be eager to grow through acquisitions in view of recent consolidation in the industry such as that wrought by rival WestRock’s [NYSE:WRK] acquisition of KapStone Paper and Packaging Corp [NYSE:KS], a banker previously told this news service.

Europe represented less than 10% of IP's industrial packaging business in the second quarter ended 30 June. Industrial packaging is IP’s largest business. The company also has a smaller global cellulose fibers unit, besides a printing papers business.

DS Smith meanwhile derives nearly all of its revenue from Europe.

DS Smith makes for a better target than Smurfit for IP because DS Smith’s products are more sophisticated than Smurfit’s commoditized paper packaging items, the third banker said.

The second banker agreed that DS Smith’s acquisition of Europac makes it attractive to a pure-play paper, cardboard and packaging company like IP.

DS Smith’s acquisition of Europac should not be a hurdle because that deal does not change the nature of DS Smith’s business, a third sector banker said.

DS Smith is a corrugated packaging company that also makes plastic packaging. The company’s recycling business collects used paper and corrugated cardboard, from which its paper manufacturing facilities make the recycled paper used in corrugated packaging. International Paper, on the other hand, makes fiber-based packaging, pulp and paper.

In any case, DS Smith cannot revoke its offer for Europac, according to two sources familiar with the matter. If DS Smith were to receive an offer before it submits its Europac offer documentation to Spain’s National Securities Market Commission, the company would have to amend the prospectus, the sources said.

DS Smith’s offer for Europac has already met all its conditions, said the second source familiar. As a voluntary offer, it cannot be withdrawn, this source said, adding that it could be delayed.

Both the second and first bankers agreed that a deal between DS Smith and IP would depend on price.

DS Smith management “would engage with IP if it came ‘knocking’ with an appropriate valuation for the business, analysts at Jefferies wrote in a recent research note to clients.

The deal would have to be at a “generous price,” the second banker said, noting that most UK transaction’s unlike those in the US are done at a 30% premium.

DS Smith is trading at a standalone EV/EBITDA multiple of 11.1x, which represents a high “starting point”, the banker said.

Adjusting for DS Smith’s rights issue, which raised GBP 1bn in proceeds, net of the EUR 1.7bn (GBP 1.5bn) Europac deal value and combining the two companies’ trailing-12-month EBITDA, the effective multiple falls marginally to 10.6x.

After factoring in a premium, the deal would land in the mid teens in EV/EBITDA terms, making it expensive for a packaging deal, he said. At a 30% premium, a takeover offer would value DS Smith, including Europac, at 13.0x EBITDA, according to Dealreporter analytics.

International Paper’s EUR 37.54 final offer for Smurfit valued the business at 10.5x EBITDA

Given IP’s conduct during the Smurfit approach, the company can be expected to be very disciplined when it comes to price, the second banker said.

IP needs to offer DS Smith the right price, because the UK company has a lot going on internally, the first banker said. The company is reviewing options for its plastics unit and is also focused on integrating an acquisition it made in 2017 - that of Interstate Resources, a corrugated packaging business, which DS Smith bought to enter the American market.

The analysts at Jefferies said DS Smith and IP’s combined footprint in the US might prove an obstacle. However, the first sector banker said that because there’s comparatively less consolidation in the paper packaging sector, unlike the metal and glass packaging sectors, there wouldn’t be many antitrust concerns.

Europac did not respond to requests for comment. DS Smith declined to comment on market speculation.