MeadWestvaco: Ride Along Starboard For Profit (MWV)
June 19, 2014 - box office
On Jun 2nd, Starboard Value LP filed a 13D with a SEC saying that they took a 5.6% seductiveness in MeadWestvaco (MWV). The shares are adult 18% given a start of a year and 53% over a final dual years. Still, a shares are significantly undervalued given a shares are radically prosaic given 1997 and a high luck that a association significantly expands a EBITDA margins towards where a foe are currently. As we will show, a marketplace is awaiting no offer enlargement in those margins. There are several levers that a association is pulling including shortening beyond expenses, cost resources programs to revoke companywide losses and bloat, while short-lived issues are now being ignored. Those embody weather-related vexed performance, softened pricing energy emerging, and new projects including their Covington and Brazilian mills entrance online.
MeadWestvaco is a diversified tellurian wrapping association formed in Richmond Virginia. They furnish packaging, specialty papers, consumer and bureau products and specialty chemicals. The association has operations worldwide handling in 30 countries and contracting over 16,000 people. The association has 5 handling businesses: 1) Food and Beverage, 2) Home, Health and Beauty, 3) Industrial, 4) Specialty Chemical, 5) Community Development and Land Management.
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The Food and Beverage shred designs and produces wrapping materials for a tellurian food, food service, beverage, diary and tobacco end-markets. The shred has a wholly integrated business model, including paperboard, crate design, and converting operations. The materials are done in a US and converted into wrapping solutions during plants located in North America, Europe and Asia.
The Home, Health, and Beauty shred designs and produces wrapping solutions for a tellurian personal care, home care, grass and garden, pharmaceutical, and health caring end-markets.
The Industrial shred designs and produces corrugated wrapping solutions, essentially for produce, meat, consumer products, and bulk goods. In Brazil, where many of a business is based, a integrated business includes forestlands, paperboard mills, and corrugated box plants.
Specialty Chemicals manufactures, markets, and distributes specialty chemicals subsequent from sawdust and other byproducts of a papermaking routine in North America, Europe, South America, and Asia. Products embody opening chemicals subsequent from hunger chemicals used in copy inks, pavement paving and adhesives as good for a agricultural, paper and petroleum industries.
The Community Development and Land Management shred is obliged for maximizing a value of their acreage in a Charleston South Carolina region. The company, by a partnership with Plum Creek, owns 109,000 enlargement acres where they rise genuine estate. They also owned another 500k acres in Alabama, Georgia, Virginia and West Virginia. In Oct of final year a association announced that they were offered their US forestland business to Plum Creek for $934 million and an seductiveness in a 109K acres in South Carolina for $152 million.
(Source: Company Website)
We are vast fans of shareholder activists who take stakes and titillate a house to take on certain operational improvements to their businesses. Starboard Value is an investment confidant that uses a “differentiated elemental approach” to investing in publicly traded US tiny tip companies. They are low value investors that typically take positions in companies where they can actively rivet with government teams and play of directors to brand and govern on opportunities to clear value for a advantage of all shareholders.
The investment confidant sent a minute where they minute a stairs they are propelling government to take in sequence to clear a value in a company. As is standard with organisation hierarchies, association beyond can get out of palm and margins depressed.
Improving handling margins are a primary motive for Starboard’s activism. Corporate beyond as a commission of sales is significantly aloft than their counterpart organisation during 4.2%. This compares to 1.4% for Packaging Corporation, 1.3% for Graphic Packaging and 1.2% for Aptar Group.
Meanwhile, their selling, ubiquitous and executive are extreme during 13.4% compared to 11.1% for Aptar Group, 7.7% for Graphic Packaging and 7.6% for Packaging Corp.
(Source: Starboard Letter to MeadWestvaco)
These aloft losses are joined with revoke handling margins within their segments due partly to cost allocation differences though some-more since of extreme overhead. Among their 4 handling segments, their handling domain normal is 10.3% over 2013, good subsequent their primary foe in those industries.
Their second area of activism rests in their enterprise for government to try a subdivision of their non-core businesses, genuine estate and specialty chemicals. They see singular synergies between a manifold businesses and that a corporate structure contributes to a “bloated cost structure.” We would determine with that comment as conglomerates frequency see softened synergies and cost efficiencies compared to standalone firms when a underlying businesses aren’t in a same attention verticals.
The specialty chemical business has grown significantly over a final several years and carries many aloft EBITDA margins than a core wrapping business. Revenue from a chemicals business has grown from $503 million with shred distinction of $56 million in 2009 to $980 million with distinction of $229 million. This equates to a CAGR on income of 18.1% while handling distinction margins have left from 11.1% to 23.4%.
Starboard believes a subdivision of their chemicals business, structured as a tax-free spin-off to existent shareholders would emanate poignant value as a new open standalone association that would trade during a vast reward to a stream multiple. They also remarkable that a association would make a good taxable sale claimant to a incomparable chemical association that could supplement synergies to their stream business model.
Lastly, while they didn’t call for an undisguised sale of their South Carolina genuine estate assets, they pragmatic that a value of a land would pierce in poignant after-tax money per share and refocus a core of their business behind to packaging. Their estimates call for bottom cases of $2.02 per share in after-tax value for their South Carolina genuine estate and $1.30 for their Brazilian Timberlands also after-tax.
The association expelled a response on Jun 2nd arising a following statement:
MWV welcomes open communications with shareholders, values submit toward a common idea of enhancing shareholder value, and will cruise Starboard’s suggestions as we would if viewed from any other shareholder.
As partial of MWV’s vital transformation, a company’s house of directors and government group have taken a series of actions that have significantly extended shareholder value:
- Divested some-more than $6 billion of non-core assets, including well-timed and artistic exchange involving a company’s Printing and Writing Papers and Consumer Office Products businesses, and many recently a U.S. forestlands;
- Returned some-more than $4 billion directly to shareholders by a mixed of unchanging and special dividends, share repurchases and spin-off distributions; and
- Reduced costs and softened margins in a wrapping and specialty chemicals businesses, including finished and ongoing programs that are approaching to grasp some-more than $200 million of permanent annual resources by a finish of 2015.
While a association believes it has done a suitable stairs to residence their underperformance, a association still has copiousness of low-hanging fruit they can collect to urge their handling performance. They bring their bonds opening over a final year and 5 years, that has dejected a SP 500 as evidence. However, that doesn’t meant they should leave chips on a list forgoing intensity profitability enhancements.
Margin Improvement Potential
We consider a association has been foul punished by a romantic investors (Starboard, Trian, and others) for their revoke domain levels. We determine with Starboard that domain alleviation is a pivotal to unlocking shareholder value though some of that alleviation requires collateral in sequence to be realized. Recent margins have been vexed not usually since of surplus corporate beyond though also investments done to urge their business operations. While these investments do not impact EBITDA in a normal sense, they do supplement to corporate losses and uncover adult in cost of products sole as aloft losses from outage times and revoke efficiencies. For instance, over a final integrate of years they invested scarcely $300 million to erect a new, state-of-the-art biomass boiler and ascent compared energy infrastructure during a Covington, VA facility.
The devise allows a indent to work some-more good apropos self-sufficient in electrical energy and steam era and significantly shortening ongoing handling and upkeep costs as good as outage times. The boiler would bake renewable biomass such as tree bark, timber residues mostly left behind from logging operations, and residuals from a rubbish H2O from a papermaking process.
The boiler went operational in a fourth entertain of final year with government saying that they began realizing a advantages from a new facility, nonetheless they were “modest.” But a vast ramp adult into a initial entertain to about $7 to $8 million of advantage was reported. This advantage has helped a Food and Beverage shred supplement 180 bps of domain in a initial entertain of 2014 over a before year’s quarter. More alleviation in EBITDA and net margins are approaching as they put weather-related issues that occurred in a initial entertain behind them and pierce behind towards tip line enlargement and a handling precedence from it.
In Brazil, they announced a poignant investment in a nation to enhance and ascent their corrugated wrapping over 3 years ago. The association invested $480 million over that time support to enhance their operations in a country. The new trickery significantly strengthens a Rigesa (Brazil) operations as a wholly integrated wrapping solutions company. In a end, they will be means to precedence a trickery in sequence to offer a whole continent, a quick flourishing shred with rebate competition. The indent went online final year and a advantages are already apparent. Management settled that a full intensity will not be satisfied for a few buliding as they ramp adult prolongation and supplement new customer relations in a region. The domain alleviation will be seen within a Industrial shred essentially over a march of this year.
This investment helped subdue giveaway money upsurge as they sought to double a ability and ascent a comforts in their Tres Barras mill. For instance, in 2011, a association had collateral spending of $286 million for a Brazil ascent in serve to $51 million for Covington. In 2012, collateral spending for Brazil was $243 million with another $131 million going to a ascent during Covington.
Overall, collateral spending is already subsiding over a final few years as these projects hurl off and aren’t being transposed by other collateral complete investments. This can be comprehended by looking during sum collateral spending over a final several years. In 2010 and years prior, they typically spent between $200 million and $350 million with an normal of $275 million per year on capex. Then in 2011, they began their trickery upgrades and other vital investments for destiny enlargement that pushed collateral spending adult to $670 million in 2011, $656 million in 2012 and $506 million in 2013. Starting in 2013, those investments began to recede and government expects offer rebate in capex this year with an approaching collateral spending bill of $350 million. This should continue into 2015 exclusive any astonishing announcements of new investments.
(Source: Author’s Calculation Using Bloomberg Data)
Management has been criticized from investors about their revoke margins though they are an comparison association and are doing what they need to do to redress a problem – origination these investments in sequence to ascent their operations to state-of-the-art prolongation capabilities. This will assistance them strech their goals for EBITDA margins within their wrapping operations. Investors are approaching to start realizing that a increasing collateral spending is rolling off improving giveaway money upsurge and margins are approaching to urge companywide as their capability is enhanced.
Corporate beyond and sales and ubiquitous administration costs are clearly extreme given their commission of sales compared to their primary competition. The minute from Starboard was not some strange information for a company’s house and management. In fact, a association had announced their resources devise 6 months before to Starboard arising their minute and mentioned corporate responsibility rebate final year during several of their discussion calls.
In a fourth quarter, their practiced SGA losses were reduced in an comprehensive clarity by $34 million from $184 in a fourth entertain of 2012 to $150 million in a fourth entertain of 2013, a rebate of 18.5%. Overall, 2013 SGA losses declined 8.6% to $617 million. As a commission of sales, a association reduced them by 140 bps during a calendar year.
From their initial entertain call:
To accelerate a swell in achieving this goal, we announced specific actions in Jan to facilitate classification design, labour a appearance in some markets and resize a corporate cost relations to a income bottom following a Consumer Office Products and forestland transactions.
By a finish of a initial quarter, we had mostly finished all of a actions, enabling us to grasp cost resources of $9 million. These resources were a primary motorist of a 6% rebate in SGA and resulted in 80 basement points of alleviation to handling margin. The resources from this module will grow as we pierce by a year and strech during slightest $75 million in sum resources by a finish of 2014.
If a association can continue shortening their SGA responsibility during half a gait this year, they should be mostly in line with their competition. Similarly, their corporate overhead, during 4.2% of sales, shouldn’t be too formidable to revoke significantly. The corporate exchange they finished final year including a sale of their US forestlands should assistance revoke losses significantly. If they can revoke their corporate beyond by 2% of sales to 2.2% over a subsequent dual years, that we consider is doable given a ordering of their US forestlands and a company’s settled objectives into completing these responsibility reductions, they can supplement over $109 million to EBITDA and enhance EBITDA margins by those 200 bps.
First Quarter Metrics
Even before Starboard released their letter, government was on lane to improving their opening by cost reductions and potency progress. This alleviation stems from an responsibility rebate module announced in Jan that skeleton on saving between $100 million and $125 million annually by a finish of 2015. Half of a rebate will come from corporate beyond reductions and a other half will come from a particular handling segments shortening their expenses.
You can start to see a improvements in their business metrics in a draft subsequent during a finish of a initial quarter. In a final year, they have softened practiced EBITDA margins by 270 bps. Some of a alleviation came from product brew and cost change and not softened efficiency, that is a certain sign.
(Source: First Quarter 2014 Presentation)
Improvements have been opposite their whole wrapping shred with margins jumping between 180 and 440 bps. Productivity has jumped though still has copiousness of room to continue to grow. This is generally loyal in their Food and Beverage business which, during 14.3% is over 400 bps subsequent a EBITDA domain turn of Graphic Packaging, their many approach competitor. Home, Health, and Beauty is another area where they still have a lot of work to do as Aptar, their closest foe in that space, has EBITDA margins that are 500 bps above MeadWestvaco.
(Source: First Quarter 2014 Presentation)
They delivered on several elements of a domain alleviation module announced in January. They generated $9 million of resources in a final entertain and government settled they are assured in reaching their idea of during slightest $75 million in resources for a year. As government minute on a discussion call:
There’s some-more we will accomplish as partial of a cost fortify that’s now inbred opposite a company, as good as tentative actions such as a preference to sell 2 tiny comforts in Europe. This preference is important not for a distance of a transactions, though for a dynamic concentration that we have on improving margins by optimizing a brew of products and services.
As we remarkable above, they have done poignant swell in their Home, Health, and Beauty segment. The shred had a care change final year and a new blood seems to be origination a disproportion with practiced EBITDA margins reaching 14% in a initial entertain due to stretched marketplace appearance with a new innovative product line that carries aloft margins. Additionally, they have softened on their prolongation height and have a leaner cost structure.
Outside of a issues surrounding their cost structure, a organisation is premier in a attention with clever marketplace share gains. We design to see substantial alleviation within their EBITDA margins in a second quarter, generally within Food and Beverage as a entertain was impacted by weather-related issues. Robert Beckler, a firm’s President, settled on a call that gain in a entertain within Food and Beverage were impacted by an estimated $25 million from continue and that though those adversities, EBITDA domain would have risen 300 bps instead of 180 bps.
The other certain enlargement is their pricing realizations. Over a final few years, they have been incompetent or reluctant to boost prices for fear of income detriment to foe within a hyper-competitive industry. However, in a initial quarter, they saw pricing adult $22 million as a outcome of “pricing according to a value they broach to customers.”
Fiber costs have been rising and a firm’s ability to equivalent that submit acceleration with aloft prices allows them to stay forward of a aloft costs and say or urge on their margins.
Mr. Beckler also stated:
In a second quarter, we design Food Beverage increase to be significantly above final year’s levels. Our paperboard sequence reserve should sojourn really strong, and we will continue to advantage from aloft pricing opposite mixed product lines. Margins will also advantage from a ongoing capability impact from a Covington biomass boiler, as good as revoke outage losses compared to final year.
Overall, EBITDA domain softened 24% in a initial entertain flourishing 600 bps yoy and usually subsequent their aim of 25% to 30% that government expects to grasp by a finish of this year. Our estimates consider a 30% turn is really practicable and approaching tolerably understated.
Return Of Cash from CDLM
The agreement with Plum Creek to sell all of a US forestlands and deposit in a South Carolina partnership unbarred some value for shareholders. For one, a agreement netted MeadWestvaco $1.1 billion consisting of money and an installment note. MeadWestvaco intends to lapse a vast fragment of a money apportionment behind to shareholders, amounting to approximately $700 million.
The sum money that came into a association was approximately $965 million, of which, approximately $210 million was used to repay an superb tenure loan in sequence to revoke debt superb and say their investment class credit rating. They used another roughly $175 million ($1.00 per share) in a form of a special division that was paid in March. Another $394 million was to be used for share repurchases including $300 million underneath an accelerated share repurchase agreement, and $94 million pursuant to open marketplace purchases, with both approaching to be finished during a second quarter.
The indicate in charity this is to denote a company’s joining to returning money to shareholders while conducting vital changes in sequence to urge a opening of their share price.
Management already had targeted market-leading margins in any business. They remarkable that this includes expanding their blurb and origination efforts to win in selected tellurian markets, capturing a value of their new investments and removing some-more fit and prolific by shortening costs and improving prolongation performance.
The dual charts subsequent uncover some of a areas and values they are regulating to urge their margins. The second draft shows a sources of both certain and disastrous effects on EBITDA over a qoq period. Instead of $191 million in EBITDA (adjusted), they could have generated EBITDA closer to $275 million had they been during their design target-margins for a underlying businesses and tertiary issues not been apparent.
(Source: First Quarter 2014 Investor Presentation)
(Source: Author’s Calculation)
Their EBITDA levels are now being vexed by a factors we explained above including emasculate handling segments from old-fashioned record and manufacturing, magisterial corporate expenses, continue disruptions, and pricing power. We consider a association can enhance their margins significantly via a year with a low-hanging fruit being a continue turnaround, aloft pricing and a potency gains from a collateral spending and other investments profitable off. For example, in a initial draft above, if a continue intrusion and other acceleration are equivalent (presumably by a miss of bad continue and aloft pricing that we’ve already seen starting), afterwards EBITDA would have been $230 million [$191+$25+$14]. At $230 million, EBITDA margins are already during 17.4%.
The company’s longer-term ability to strech a 20.8% aim therefore is many aloft than perceived. For one, government is focussed on reaching their objectives, and in some cases, aloft levels of shred margin. Second, a new prolongation apparatus is many some-more efficient, obscure costs while pulling a organisation into some aloft priced, and softened margin, products. That new apparatus is usually entrance online and is therefore not wholly reflected in their handling results.
Generally speaking, a organisation should be means to comprehend an altogether EBITDA domain that exceeds their foe given their scale and ability to widespread their bound costs opposite a incomparable base. At 20.8%, a association is earning approximately $1,217 million in EBITDA for 2015 formed on forecasted sales. Applying a reasonable 11x mixed to that figure and subsidy out net debt leaves an pragmatic equity of $10.67 billion. Using a 167.86 million share count, that has been disappearing as they buy behind their shares regulating a deduction from a US forestland’s sale, brings an unique value of roughly $63.60, or 46% above a stream trade price.
(Source: Author’s Calculation)
The displaying excludes other resources including an overfunded grant advantage that aided a bottom line by $85 million final year, $69 million a year before, and is approaching to enlarge a income matter by approximately $120 million in 2014. However, we don’t typically like to supplement a grant item to a unique value of a association given a assumptions that go into such a long-term foresee and how quick an overfunded grant can turn an underfunded one. For instance, a firm’s devise assumes a long-term rate of lapse on devise resources of 7.9%, and a reward of usually 4.9%. While a long-term lapse might be somewhat aggressive, a reward rate is really conservative. But for now, a combined grant income adds offer optionality to a share cost to a balance of approximately $6.43. [$120m * 9x mixed = $1080 / 167.9 m shares = $6.43].
Scenario research shows that a batch cost effectively discounts no offer alleviation in a EBITDA margins providing an uneven payoff. In fact, it even discounts a low-hanging fruit we mentioned above – a continue turnaround approaching and pricing energy offsetting cost inflation. Our downside forecast, regulating usually medium income alleviation over 2014 and 2015 is below:
(Source: Author’s Calculation)
The downside assumptions are usually 2% accumulative income enlargement from 2013 to 2015 with a 17% domain (40 bps subsequent a normalized stream level) that is driven only by a continue and pricing energy improvement. It assumes 0 corporate losses as a commission of sales alleviation nor any advantage from a revoke collateral spending and advantages of their new equipment.
We also design an combined advantage from giveaway money upsurge going from a disastrous $218 million in 2012 to a disastrous $69 million final year, to a certain $125 million this year. In fact, we feel giveaway money upsurge can grow to scarcely half a billion by 2016. This means increasing earnings to shareholders in a form of aloft division payouts and incomparable share buybacks than in prior years.
The association has a following catalysts that are approaching to significantly boost a share cost in a near-term:
- Second entertain EBITDA margins removing a vast boost from continue turnaround and aloft pricing.
- Near-term EBITDA margins expanding from collateral spending projects paying-off and a advantage of newer, aloft domain products.
- Starboard pulling government to continue to revoke beyond losses or find other shareholder-enhancing initiatives including a spin-off of their Specialty Chemical business.
The largest risk surrounding a upside box resides in management’s ability to govern on a initiatives for improving their EBITDA margins. The cost resources devise could destroy to manifest a resources they design or a shred managers could destroy to accommodate their benchmarks for domain encouragement in their particular divisions.
The company’s enlargement of their Brazilian paperboard devise might not furnish a formula they expect. Likewise, a weakening Brazilian economy could also bushel their results. Although, we would opposite that a Brazilian devise serves all of South America and so has bearing to a whole of a continent.
The final intensity risk is a inability to pass along cost increases via their supply chain, opening adult a disastrous widespread on their costs. This would be a headwind to their long-term objectives in reaching relation with their foe per EBITDA margins.
The marketplace is pricing in small to no additional domain enlargement that is doubtful in a opinion. There are several paths to offer value origination for shareholders though a indicate is that government is wakeful of a issues and are operative tough to lessen them. Some of a domain problems were short-lived and are now rolling off that should yield a organisation with poignant alleviation going by a rest of a year. Other issues are slower relocating tools including their corporate beyond reductions and other cost resources initiatives. The combined reward is that Starboard is on a box that will approaching light a glow underneath government gripping them on task. we consider there is a high luck is that a organisation is means to get a organisation far-reaching EBITDA domain above 20% by a finish of 2015 that means a share cost by a finish of this year or initial half of subsequent year around $60 per share or more, for upside of some-more than one-third.
Disclosure: The author has no positions in any bonds mentioned, and no skeleton to trigger any positions within a subsequent 72 hours. The author wrote this essay themselves, and it expresses their possess opinions. The author is not receiving remuneration for it (other than from Seeking Alpha). The author has no business attribute with any association whose batch is mentioned in this article.