DS Smith ups lightweight corrugated share with 104 million investment

DS Smith, the international packaging manufacturer and office products wholesaler, announces that it is substantially strengthening the competitiveness of its UK Paper and Corrugated Packaging business through an investment to produce high-quality lightweight corrugated case material (CCM) at its prime paper mill at Kemsley in Kent.

It has agreed with M-real Corporation the terms of the acquisition of the adjacent New Thames Paper Mill (NTPM) as well as the 50% balance of Grovehurst Energy Limited, the mills’ energy and services supplier, not already owned by DS Smith. The consideration for the transaction is £60 million in cash. In addition, DS Smith will incur a net cash cost of £7 million from a one-off payment, net of tax, towards the costs of the transfer of the associated pension scheme to a third party.The acquired facility currently produces fine uncoated paper and, using the latest paper-making technology, DS Smith intends to invest, over the next 12 months, a further circa £37 million in the modification of the acquired facility to enable it to produce high-quality lightweight recycled CCM with effect from January 2009. The total cost of the project is expected to be circa £104 million and will be funded from the Group’s existing debt facilities.

The Board expects that the acquisition and investment will:

• materially strengthen the long-term competitiveness of DS Smith’s important UK Paper and Corrugated Packaging business:

– enable this new capacity to be added at a highly-competitive investment cost per tonne;

– create one of ’s most flexible and cost-competitive CCM manufacturing operations at DS Smith’s already highly-competitive, well-invested prime mill at Kemsley;

• generate good financial returns in the project’s first full year of operation (2009/10):

– enhance earnings;

– produce a return on capital employed equal to DS Smith’s cost of capital and over the long-term produce returns in excess of the Group’s cost of capital;

– generate positive cash flow and make an important ongoing cash contribution.

Tony Thorne, Group Chief Executive of DS Smith Plc, said:

“This significant development will create, in a highly cost-effective way, one of the most flexible and cost-competitive CCM mills in at our principal site at Kemsley. It will strengthen our important UK Paper and Corrugated Packaging business and give us a significant capability in the growth segment of high-quality lightweight CCM paper. We are confident it will provide very good returns for our shareholders.”