(Reuters) - DS Smith Plc has agreed to sell its plastics division to private equity firm Olympus Partners as the packaging company looks to focus on fiber and corrugated products, it said on Wednesday, sending its shares up as much as 6.3 percent.
The deal, for an enterprise value of $585 million, is expected to marginally dilute its earnings per share and result in a substantial one-off gain, the company said.
The sale marks an end to the company’s foray into plastics and would allow it to focus on recyclable packaging materials and corrugated products.
DS Smith supplies packaging products to companies including Amazon.com Inc, British fashion chain Next Plc and brands such as Aldi, Tesco Plc, Primark, Auchan and IKEA.
“It really means that the group now is exclusively focused on fiber-based packaging”, Chief Executive Miles Roberts told Reuters.
The plastics business, which includes flexible and rigid plastics and foam products, reported a profit before tax of 28 million pounds for the 12 month period ended Oct. 31.
Proceeds from the sale will mostly be used to bring the net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio to at or less than two to one, in line with the company’s medium term target, Roberts said.
DS Smith expects net cash proceeds after taxation, transaction adjustments and expenses of about 400 million pounds ($524.96 million).
“We believe this is slightly ahead of investors’ 350-400 million pound expectations”, Jefferies analysts said.
The packaging sector has seen a series of recent takeovers as investors are drawn to reliable cashflow underpinned by strong demand from online shopping.
Environmental concerns have led to the plastics industry facing tighter regulation, meanwhile.
The company said in December it was exploring options for its plastics division including a potential sale. The business, contributing 6 percent of overall revenue, has been hit by higher polymer prices and a lag in price recovery.
DS Smith’s U.S. business continues to perform well with strong margins, it said, adding that overall margins are expected to improve in the second half of the year.
The company, which had been expected to release its quarterly trading update on Thursday, also said trading since Nov. 1 had been in line with expectations and that the Christmas period was busy for e-commerce focused customers.
When asked if shareholders would be happy with the deal, Roberts said he expects them to be delighted.
“If I was a shareholder, I would be giving the chief executive a pat on the back,” he added.
Reporting by Sangameswaran S in Bengaluru; Editing by Shounak Dasgupta and Jan Harvey