Investors in DS Smith (LSE:SMDS) would be reaping their rewards if they bought the stock six months ago. The share price has been boosted more than 50% during that time as it has weathered the Covid 19 storm better than most from the FTSE 100.
Just this week, the share price was boosted by the news that the firm was the subject of interest from fellow FTSE 100 blue-chip Mondi.
The shares rose more as much as 14% on Thursday as news of the potential merger was reported. With the news of the potential merger, would I add the shares to my portfolio or Stocks and Shares ISA today?
Mondi madness
Let’s have a look at what details have emerged about the Mondi deal. According to data from Bloomberg, it would be one of the biggest UK M&A deals this year at around £5bn.
It must be noted that the deal is still in its early stages according to the report, so is far from being signed off.
I think the deal would make a lot of sense for both parties however. Both Mondi and DS Smith offer similar paper and packaging services. Demand for these has increased due to the pandemic, and such a merger would allow for quick growth and scalability.
DS Smith has benefited from the pandemic as both its core business of supplying supermarket packaging has boomed. In addition to this, ecommerce has clearly been one of the big winners from Covid 19, and our increasing amount of deliveries need to be packaged.
Profits returned to growth in DS Smith’s most recent earnings report, after suffering an initial drop in its first quarter following the onset of the coronavirus.
Risk potential
It hasn’t been all plain sailing for DS Smith throughout the pandemic, however. The shares still carry a certain amount of risk.
The cost of paper for recycling has almost doubled from 2020, with the price rising more so in Europe than anywhere else. Europe happens to be one of DS Smith’s largest markets.
Analysts at Bank of America reckon it could take up to a year for DS Smith to increase prices to protect margins, potentially stifling profits during that time.
There is also the potential of increased competition in the industry. As a fellow Fool noted, if Amazon or another large ecommerce retailer were to enter the packaging market, it could harm the DS Smith share price performance in the long run.
As for whether I would invest in DS Smith shares today, I think I would hold off for the time being. Much will depend on if and how the Mondi merger deal goes through, and there isn’t anything official from either company regarding the acquisition.
I may well revisit DS Smith shares if anything official is announced by either company, however.