Starboard Value pushed MeadWestvaco to explore options such as a spinoff or sale to unlock significant value for shareholders

Starboard Value LP, the activist hedge fund headed by Jeffrey Smith bagged another victory after MedWestvaco entered into a merger agreement with Rock-Tenn Company to create the second-largest packaging company worldwide.

Starboard Value owns 9.35 million shares or 5.6% stake in the shares of MeadWestvaco based on its 13D filing with the Securities and Exchange Commission (SEC) on June, last year.

Starboard Value invested in the company because it believed that its shares were deeply undervalued, and a number of opportunities exist to create significant value for shareholders.

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Starboard suggested spinoff of MedWestvaco businesses

Last year, Starboard Value recommended the separation of the non-core specialty chemical business of MeadWestvaco and to monetize its real estate, Brazilian timberland and pension assets.

At the time, Starboard Value emphasized that MeadWestvaco “operates disparate businesses in five distinct reporting segments with limited synergies,” and its conglomerate structure is one of the reasons behind its lack of operation focus and bloated cost structure. The activist hedge fund pointed out that a sale or spinoff of its valuable, but non-core could unlock significant value.

MeadWestvaco followed Starboard’s proposals

The management of MeadWestvaco followed the recommendations of Starboard Value. Earlier this month, the company announced its decision to separate its specialty chemicals business, which is expected to be completed by the end of 2015.

MeadWestvaco Chairman and CEO John A. Luke Jr. previously stated, “Following a thorough strategic review process, MWV’s board and leadership team determined that a tax-free spinoff of Specialty Chemicals presents the best opportunity to create the greatest value for our shareholders.”

Last week, MeadWestvaco also announced the sale of its European-based tobacco folding carton business to AR Packaging Group AB. The company did not disclose the terms of the agreement.

Details of MeadWestvaco merger with Rock-Tenn

Today, the company announced that its $9.2 billion merger deal with Rock-Tenn Company was unanimously approved by the board of directors of both companies.  The combined company is expected to generate $15.7 billion in net sales and $2.9 billion in adjusted EBITDA.

Under the terms of the agreement, the shareholders of MeadWestvaco will hold 50.1% of the new company while the investors of Rock-Ten will own the remaining stake. The merger is expected to reduce $300 million of costs annually and will create further financial flexibility.

Rock-Tenn CEO Steve Voorhees said, “We’ll have the financial strength to grow beyond our current footprint by investing in new assets, including acquisitions that improve our business.”

The shares of MeadWestvaco climbed more than 14% to $51.35 per share today.

Separately, Starboard Value stated last week that Yahoo! needs a leadership change. The activist hedge fund sent a letter to Yahoo CEO Marissa Mayer pushing for the search company’s merger with AOL.