UK recycled-packaging manufacturer DS Smith is set to buy SCA Packaging, a division of Swedish Svenska Cellulosa Aktiebolaget (SCA), in a deal worth €1.6bn.

DS Smith said the acquisition, which excludes the kraftliner assets, will be financed through a combination of debt and £466m from a nine-for-eight rights issue at 95p a share.

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The deal will merge the second and third largest packaging producers by volume in the European market, giving DS Smith a 14% share in a sector currently led by Irish firm Smurfit Kappa with 17%.

The deal will also deliver estimated pre-tax cost synergies from procurement and operational efficiencies of at least €75m per annum, in addition to cumulative capital expenditure and working capital benefits of at least €40m by the end of the third full financial year.

DS Smith chairman Gareth Davis said: “This acquisition is a unique opportunity, offering the combination of a clear strategic rationale, potentially excellent financial returns and a step change in DS Smith’s capabilities to deliver the recycled packaging service that our customers increasingly want on a pan-European basis.”

DS Smith Group chief executive Miles Roberts added that the transaction builds on the company’s strategy following the acquisition of French packager Otor. “SCA Packaging is a well invested business with long positions in recycling and packaging and short paper capacity that is very complementary to our strengths,” he said.

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According to the company, SCA Packaging had net sales of €2.5bn in 2010.

The acquisition will require certain regulatory clearances and is expected to be complete during the second quarter of this year.