Britain's Mondi said on Thursday it is in the early stages of considering a possible all-share bid for its smaller rival DS Smith, a move which could create a packaging giant worth more than 10 billion pounds ($12.6 billion).

DS Smith had earlier on disclosed that it received a highly preliminary expression of interest from Mondi, although no formal proposal, sparking a 13% jump in its shares which drove its market value as high as 4.49 billion pounds.

"Mondi believes that a possible all share combination with DS Smith represents an exciting opportunity to create an industry leader in European paper-based sustainable packaging solutions," the Weybridge-based company said in a statement.

A bid for DS Smith by Mondi, which under UK takeover rules has until March 7 to make a firm offer or walk away, would mark the second recent multi-billion attempt at consolidation in the paper and packaging industry.

Rival Smurfit Kappa is buying WestRock in a $11 billion deal that has not yet closed.

"Paper and packaging is a very fragmented industry(especially in Europe) and consolidation is inevitable," Barclays analyst Pallav Mittal wrote in a note, adding that Mondi's interest in DS Smith was not a surprise.

DS Smith's shares, which have nearly halved from an all-time high in 2018, were trading at 313 pence per share by 1258 GMT, while Mondi's stock slipped 3.7% on the London Stock Exchange.

Paper packaging firms have suffered from low volumes and prices in the past year as customers de-stocked amid tough market conditions. They had seen a pandemic sales boom before that on e-commerce demand as online shopping took off.

Mondi completed its exit from Russia last year, selling off its largest plant there for 80 billion roubles ($876 million) and three other packaging plants for 1.6 billion roubles.

"Mondi, in our view, needs to lay out its strategic vision to investors post the disposal of Russian assets," Mittal added.

DS Smith CEO Miles Roberts, who announced in December his plans to retire by no later than November 2025, had overseen the London-based company's expansion into Europe and the U.S.

(Reporting by Yadarisa Shabong in Bengaluru; Editing by Savio D'Souza and Alexander Smith)