By Yadarisa Shabong and Ananya Mariam Rajesh
(Reuters) -U.S.-based International Paper on Tuesday agreed to an all-share deal to buy DS Smith, valuing the British packaging firm at 5.8 billion pounds ($7.2 billion) and edging out a bid by Mondi (LON:MNDI).
DS Smith said it had recently received proposals from both International Paper and Mondi, but the U.S. company was now in a position to make a firm offer.
The two suitors earlier had an April 23 deadline to make a firm offer or walk away. Mondi declined to comment on the deal.
DS Smith's shares, which have gained about 46% since Mondi first made its interest known in early February, fell as much as 4%, before paring losses to be down 2% by 1020 GMT.
DS Smith said revenue in the year to date has declined, mainly due to lower volumes and a fall in packaging and paper prices.
International Paper late last month had offered a higher counter-bid as it sought to expand its European presence at a time of consolidation in the sector.
Upon completion of the combination, DS Smith shareholders would own about 33.7% and International Paper shareholders would own the rest of the combined company, which plans to seek a secondary listing in London.
If the deal closes "it would be a mini boost for the London Stock Exchange which has been labouring under a crisis of confidence as firms appear to be deserting the index," said Susannah Streeter, head of money and markets at Hargreaves Lansdown (LON:HRGV).
Late last year, Ireland's Smurfit Kappa (LON:SKG) agreed to buy U.S. rival WestRock in an $11 billion deal, which is expected to close in July.
UK firm Mondi last month reached an agreement in principle to buy DS Smith in an all-stock deal of 5.14 billion pounds, with the purchase price representing a 33% premium at that time and DS Smith shareholders getting control of 46% of the enlarged group.
"There is still time for Mondi to make a counter bid, but it would have to seriously sweeten the pot," said Danni Hewson, AJ Bell's head of financial analysis.
DS Smith said it would recommend shareholders to back the deal with International Paper.
The U.S. firm said that about 400 roles across the combined company may be at risk, but added any lay-offs would be subject to review.
Goldman Sachs (NYSE:GS), Citi and J.P. Morgan advised DS Smith. BofA Securities acted as sole financial adviser to International Paper.
The deal is expected to close in the fourth quarter of this year.
($1 = 0.8050 pounds)