DS Smith is buying the recycled packaging operations of Svenska Cellulosa Aktiebolaget (SCA) for 1.6 billion euros (1 billion pounds) to win more business from the world's top consumer goods companies.

DS Smith said it would finance the acquisition with a combination of debt and 466 million pounds from a nine-for-eight rights issue priced at 95 pence a share.

It said buying the operations would give it a footprint across northern Europe and the Nordic area, where its main consumer goods customers already operate.

Customers like Procter & Gamble
, Nestle , Kraft , Reckitt Benckiser and Unilever wanted us to replicate the success we have in the UK and France of using recycled packaging across Europe, DS Smith Chief Executive Miles Roberts told reporters on a conference call on Tuesday.

Manufacturers are increasingly using recycled cardboard rather than virgin paper, plastics and wood, he said, creating a bright spot in a paper sector long beset by overcapacity and swings in demand.

The deal excludes two Swedish mills that make kraftliner, the lining paper made from virgin pulp used in some types of corrugated board.

Roberts said the price paid for SCA, which works out at a multiple of about six times core earnings, reflected the precarious state of the wider European economy.

The macro economic situation is uncertain, and we haven't made any heroic assumptions, particularly on revenue, he said.

I think most people recognise in terms of multiples, that it is towards the lower end for what is an outstanding asset.

The deal was welcomed by investors in both SCA, which will use the proceeds to invest in its hygiene business and DS Smith, including its largest shareholder, Standard Life .

Shares in DS Smith, which competes with Ireland's Smurfit Kappa , were up 4.6 percent at 213.1 pence at lunchtime, while SCA's rose more than 10 percent in Stockholm to a near four-year high.

Analyst David O'Brien at broker Goodbody said it would make DS Smith the second-largest corrugated player in Europe, with close to 3 million tonnes capacity, and noted that the price tag was in middle of the 5-7 times multiple range for the sector.

We believe the deal will be well received as DS Smith demonstrates its ambition and makes significant strides in reaching its strategic goals, he said.

Overall, such large-scale consolidation within the industry is a positive for the sector.

Paper industry players and analysts have for years talked about the need for consolidation to deal with overcapacity.

Tuesday's news sparked hopes for more mergers, with paper products maker M-real's shares gaining 7.5 percent, while UPM-Kymmene and Stora Enso were up 4.8 percent and 3.1 percent respectively.

SCA's deal highlights the fact that we will have M&A activity in this sector, said Cheuvreux analyst Mikael Jafs.

CONSUMER ORIENTED

SCA, which last year dismissed market talk it would sell the long-struggling packaging business, said it would focus on its tissue and personal care units, which compete with rivals such as Kimberly-Clark Corp and Procter & Gamble.

Analyst Jafs said the share reaction was fair. This means SCA becomes more consumer oriented, he said.

It's reasonable that SCA be valued higher, since consumer products are overall valued higher than the bulk businesses.

SCA's Chief Executive Jan Johansson said the group could make acquisitions to grow its hygiene business.

(The focus is) certainly on emerging markets, and there are opportunities, he said on a conference call.

In some markets personal care will be preferable, in other markets it will be tissue, depending on where the market is in its development.

After the sale, SCA's tissue and personal care units, whose products range from diapers and incontinence care to tissue brands such as Tena, Libero, Edet and Tempo, will account for 80 percent of sales against more than half before.

DS Smith, which bought French packing group Otor in 2010, said it was not planning large-scale job cuts or closures at the packaging operations, which employ about 12,000 people and had net sales of 2.5 billion euros in 2010, some 22 percent of SCA's total.

This isn't going to be a crashing together of two businesses, Roberts said, adding that the larger scale of the group would deliver savings of about 75 million euros in three years.

As a result of the sale, SCA said it would take a writedown on its remaining kraftliner operations of about 4 billion Swedish crowns (371 million pounds) in its fourth-quarter results.

(Additional reporting by Anna Ringstrom, Mia Shanley and Christopher Jungstedt; Editing by Will Waterman and Erica Billingham)