Acquisition

Smith (DS) PLC
01 February 2008



                                                                 1 February 2008



                       DS SMITH TO INVEST £104 MILLION IN

                HIGH-QUALITY LIGHTWEIGHT CORRUGATED CASE MATERIAL

             AT ITS PRIME UK PAPER MANUFACTURING FACILITY AT KEMSLEY



Summary

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 UK
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:

-    provide DS Smith with 260,000 tonnes per annum of high-quality
     lightweight CCM to satisfy the Group's own growing demand and that of its
     customers; currently, DS Smith has very limited capacity to produce this
     product;

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

-    create one of Europe'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 Europe 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.'



Enquiries

DS Smith Plc                                                       020 7932 5000
Tony Thorne, Group Chief Executive
Gavin Morris, Group Finance Director
Peter Aubusson, Group Communications Manager

Financial Dynamics                                                 020 7269 7140
Andrew Dowler



A conference call briefing for analysts and investors, hosted by Tony Thorne and
Gavin Morris, will take place today, 1 February, at 9.00 GMT.  The dial-in
numbers are:

UK participants: 020 8817 9301

International participants: [phone]

Alternative back-up number: [phone]



The presentation slides for this briefing will be posted on the Presentations
page of the Investor Relations section of the Group's website www.dsmith.uk.com
at 8.45 GMT.



A recording of this conference call will be available by telephone from two
hours after the call has ended until 17.00 GMT on 8 February 2008.  The dial-in
numbers for this recording are:

UK callers: 020 7769 6425

International callers: [phone]

Replay security code: 1155382#



A recording of the call will also be available through the Investor Relations
section of our website: www.dssmith.uk.com from 14.00 GMT today.



                       DS SMITH TO INVEST £104 MILLION IN

                HIGH-QUALITY LIGHTWEIGHT CORRUGATED CASE MATERIAL

             AT ITS PRIME UK PAPER MANUFACTURING FACILITY AT KEMSLEY




The Project



DS Smith Plc has agreed with M-real Corporation and its subsidiary, M-real UK
Holdings Limited (M-real), the terms of the acquisition of the whole of the
issued share capital of M-real New Thames Limited and the balance of the shares
in Grovehurst Energy Limited not already owned by DS Smith Plc.  The facilities
of M-real New Thames Limited include the New Thames Paper Mill (NTPM), together
with the land and associated buildings, warehousing and infrastructure, and a
recycled fibre (RCF) plant.  NTPM and the RCF plant are located adjacent to DS
Smith's existing St Regis paper mill on a combined site at Kemsley, near
Sittingbourne, Kent.  Grovehurst Energy Limited is also located on the Kemsley
site and provides energy and other services to the entire site through a 50:50
joint venture between DS Smith Plc and M-real.



The consideration of £60 million on a debt free basis will be paid in cash on
completion and funded through DS Smith's existing debt facilities.  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 value of the gross assets acquired as at 31 December 2007, as
extracted from the management accounts, was £49.1 million.  In the financial
year to 31 December 2007, the profit attributable to the acquired assets, as
extracted from the management accounts, was £0.9 million.



NTPM currently produces 230,000 tonnes per annum of fine uncoated business and
graphic paper per annum.  During the course of the next 12 months, using the
latest paper-making technology, DS Smith intends to modify the NTPM paper
machine (PM6) to enable it to produce approximately 260,000 tonnes per annum of
high-quality lightweight recycled CCM and to install a new high-specification
stock preparation plant to supply the feedstock required for this production.
It is planned that NTPM will convert from production of fine uncoated paper in
autumn 2008 and commence production of lightweight CCM in January 2009.



The total capital expenditure associated with the project, which will be funded
from the Group's existing debt facilities, is expected to amount to
approximately £37 million and will be incurred very largely in financial year
2008/09.  It is envisaged that there will be opportunities to reduce costs on
the Kemsley site which will result in potential restructuring charges of circa
£5 million in total during 2008/09 and the two subsequent financial years.
These charges will be more than offset by the income from the transitional
supply arrangements agreed with M-real, which are detailed below





Background to and reasons for the project



High-quality lightweight paper - a growing segment of the CCM Market



This acquisition and investment project will enable DS Smith to establish a
competitive position in high-quality recycled lightweight CCM (testliner of 100
grams per square metre or lighter and fluting of 90 grams per square metre or
lighter), a differentiated and fast-growing segment of the overall CCM market.



The total demand for CCM in Europe is approximately 25 million tonnes and is
estimated to have grown by circa 2.5% in 2007.  Approximately 80% of the CCM
used in Europe is made from recycled fibre.  Taking into account recent economic
forecasts, DS Smith estimates that annual growth in the European CCM market
during 2008-2010 will be circa 2.0% per annum; within this, growth in western
Europe is expected to be circa 1.5% per annum while growth in central and
eastern Europe is expected to be 6-7% per annum.  Based on this forecast, DS
Smith estimates that there will be an increase in demand for recycled CCM of 1.5
million tonnes by 2010.



There is a trend across Europe towards the greater use of lighter-weight
corrugated boxes, for cost and environmental reasons.  The UK remains at the
forefront of this trend, which is particularly significant in the important
fast-moving consumer goods (FMCG) sector of the market.  The availability of
lightweight recycled CCM with good strength characteristics is a key element in
enabling box manufacturers to produce packaging with high performance
characteristics while reducing the weight of material used.  Lightweight
recycled CCM is estimated to account for circa 7% (circa 1.8m tonnes) of the
total European CCM market currently and this share is expected to rise to circa
15% (circa 4 million tonnes) by 2010, representing a growth of circa 2 million
tonnes.



Growth in the high-performance lightweight segment of the CCM market will
continue to be limited by the available supply of lightweight paper as the
majority of the existing CCM machines are unable to manufacture lightweight
papers cost-effectively or to an acceptable quality.



Lightweight CCM accounts for approximately 25% (approximately 150,000 tonnes per
annum) of the CCM usage of DS Smith's UK corrugated packaging operations.  Total
UK demand for lightweight recycled CCM is estimated to have been 400,000 tonnes
in 2007 and is expected to grow to over 600,000 tonnes by 2010.  At present, UK
demand is very largely met by imports from continental Europe as total UK
manufacturing of this product is less than 100,000 tonnes per annum and DS Smith
has very limited capacity to produce lightweight CCM.



A number of European recycled CCM producers have announced their intentions to
invest in new capacity, which will be capable of producing lightweight CCM.
These machines, to be located in Germany, Poland and Hungary, are scheduled to
start production from the third quarter of 2009.  The new capacity, including DS
Smith's investment at Kemsley, will produce circa 1.8 million tonnes per annum
when it is fully operational, which will represent an overall increase in
capacity of approximately 7%.  It is expected that the production from the new
machines will principally be targeted at satisfying the rapidly growing European
demand for lightweight paper.





Investment strengthens DS Smith's competitiveness



The project is expected to strengthen the long-term competitiveness of DS
Smith's important UK Paper and Corrugated Packaging business, which represented
approximately 50% of the Group's operating profits and cash flow in financial
year 2006/07.



In particular the project will:



•   provide the Group with 260,000 tonnes per annum of high-quality
    lightweight recycled CCM product to satisfy DS Smith's own demand and that of
    its customers;

•   enable this capacity to be added at an investment cost per tonne which
    is substantially lower than that of building a new machine, benefiting from 
    the existing infrastructure on the site;

•   increase the efficiency of DS Smith's prime paper mill at Kemsley which
    is already well-invested and in the top quartile of European
    cost-competitiveness.  Kemsley will in future produce over 850,000 tonnes per
    annum, accounting for over 75% of the Group's UK paper output; it will be one 
    of the two largest recycled CCM manufacturing sites in Europe and the 
    foremost CCM mill in the UK;

•   enable DS Smith to recycle, through its own mills, more of the waste
    paper collected by its Severnside Recycling business.  Recycling on the 
    Kemsley site will increase by over 30% to 1.2m tonnes per annum;

•   create at Kemsley a CCM manufacturing site which will provide the
    flexibility for further operational improvement and development of DS Smith's
    paper manufacturing in the medium- and longer-term.


Financial benefits of the project


During the transitional period until Autumn 2008, while NTPM continues to
produce fine paper by M-real under the commercial arrangements described below,
the acquisition is expected to make a small contribution to the Group's
operating profit.  Once PM6 is producing lightweight CCM, its revenue, based on
the current selling price of CCM, will be over £70 million per annum.


Good financial returns


The project is expected to generate good financial returns. In particular it is
expected, in its first full year of operation (2009/10) to:


•  enhance earnings;

•  produce a return on capital employed equal to DS Smith's cost of capital
   (estimated to be circa 12% before tax) and over the long-term on average 
   produce returns in excess of the Group's cost of capital;

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



DS Smith has a strong balance sheet.  Throughout the period of investment in
this project, the Group's borrowing level is expected to remain well within its
existing facilities.


Commercial and other transitional arrangements


As part of the acquisition agreement, DS Smith has entered into certain
commercial arrangements with M-real to enable M-real to continue its involvement
in the supply of fine uncoated paper.  DS Smith will provide to M-real, under a
supply contract, fine paper produced on PM6 for a period until the end of
November 2008.  The sale and marketing of fine paper will be the responsibility
of M-real.   Following the expiry of this supply arrangement, DS Smith will
provide to M-real's French operation, for a period of three years, the feedstock
produced by the RCF plant.  DS Smith will also provide M-real with fine paper
converting services on the Kemsley site for the same period.



Environmental benefits of the project



DS Smith makes a major contribution in the UK to conserving resources and
reducing landfill waste through its businesses Severnside Recycling, which is
the leading UK collector of waste paper for recycling, and St Regis Paper
Company, which is the largest UK producer of recycled paper. As noted above, the
project will further increase the proportion of the waste collected by
Severnside Recycling that is recycled through the Group's own paper
manufacturing facilities.



The Group continually seeks to increase the energy efficiency of its operations
and is looking further to reduce its use of fossil fuels.  The full ownership of
Grovehurst Energy is expected to facilitate faster implementation of projects to
improve energy efficiency, use alternative energy sources and enhance the site's
existing combined heat and power and waste-to-energy facilities, thus further
reducing the site's environmental impact.


Completion



Completion of the transaction is subject to obtaining German anti-trust approval
and is expected to take place within 30 days.



Current trading



As stated at the time of the Group's interim results in December 2007, the Board
remains confident that the Group will make substantial progress this financial
year.  DS Smith will be announcing its Quarter 3 interim management statement,
in respect of the period from 1 November 2007, on 5 March 2008.



Note to Editors

On the Kemsley site, M-real's New Thames Paper Mill employs 282 people,
Grovehurst Energy Limited employs 27 people and DS Smith's St Regis Paper
business employs 270 people.




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