Merger and acquisition fever is one reason why the London market, as benchmarked by the FTSE 100 index, is reaching new all-time highs, not least because the rash of bids for London-listed companies suggests they are going cheap, and trade and private equity buyers are looking to make the most of the value that is on offer.

However, it is the decision by paper and packaging giant Mondi to walk away from a bid battle for fellow FTSE 100 member DS Smith that catches the eye and offers encouragement to shareholders.

After the lockdown home shopping inspired a boom in packaging plays, now the industry’s leading players are adapting to the bust. Mondi’s profits more than halved in 2023 and analysts have pencilled in another drop of around 10pc for 2024, with the withdrawal from Russia a contributing factor.

However, the industry is not sitting still and suffering in silence.

Capacity is being taken out, and consolidation between major players offers the prospect of further rationalisation. Smurfit Kappa is merging with America’s WestRock and another transatlantic deal is on the cards, thanks to International Paper making an all-stock offer for DS Smith in March.

That trumped February’s all-share proposal from Mondi and also raised the prospect of a bidding war. The good news is that Mondi’s management decided to spurn such a contest and walked away. The shares quickly spiked in relief and such capital discipline should serve both the company and its shareholders well.

A trade deal should be carried out on the same basis as an investment purchase – the price and valuation paid are the ultimate arbiter of investment return. The lower the valuation paid, the greater the downside protection and the greater the upside potential, if all goes to plan.

The combination of a mid-teens percentage capital gain and a special dividend in the wake of last year’s sale of the Russian business means we have a total return of around 25pc following our initial analysis.

The final dividend for 2023, worth 40.3p per share, will be paid on May 14 to top up the pot, and analysts expect a broadly unchanged full-year payment in 2024, which equates to a near-4pc yield. That means investors are being paid as they wait for the cycle to turn and given time for Mondi’s investment programme to bear fruit – the bulk of the spending will be finished at the end of this year. This is one reason why analysts think pre-tax income will jump by a third in 2025.

In the meantime, the valuation and balance sheet will hopefully give us some downside protection. Mondi’s £6.6bn stock market value compares to £5.2bn of shareholders’ funds, for a “price-to-book” multiple of barely 1.25 times. The net cash position represents only 10pc of shareholders’ funds. Financial gearing is low and interest cover is good.

Questor says: hold

Ticker: MNDI

Share price at close: £15.33

Update: Anglo American

As it happens, Anglo American spun out Mondi back in 2007, and even more dramatic changes may now be afoot. Our thesis that the mining giant looked too cheap relative to the valuation of its assets (not to mention its average earnings power of the course of a cycle) looks to be playing out, with an opportunistic, all-stock bid from fellow digger BHP.

BHP’s plan is to get Anglo American to demerge the assets which are listed on the Johannesburg exchange, namely Anglo American Platinum and the Kumba iron ore business. The would then scoop up the rest with an offer that works out around £25 a share.

BHP, which still has a secondary listing in London after 2021’s switch of its primary listing to Sydney, is particularly interested in Anglo American’s copper mines, so other assets, such as the De Beers diamond operation, could be reassessed over time.

Anglo American’s chief executive, Duncan Wanblad, and the board are pushing back on the bid, in the view it is too low. We are inclined to agree but this initial sparring still leaves us sat on a paper gain of more than 40pc on Anglo American’s shares, with the spotlight shining firmly on the miner’s lowly valuation.

Risk-averse investors might like to lock in a quick gain and perhaps sell down to the value of their initial stake, to give themselves a free ride. More aggressive portfolio builders may prefer to hang on, in the view that a higher bid could be coming, or at least that BHP’s stratagem pushes Anglo American’s board into more dramatic action of its own.

Questor says: hold

Ticker: AAL 

Share price at close: £27.50

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