Starboard Value LP, the activist hedge fund headed by Jeffrey Smith, has a new target—this time it is MeadWestvaco Corp. (NYSE:MWV), a global packaging company that provides solutions to the agricultural, food and beverage, beauty and personal care, home and garden, health care and other industries.
The activist hedge fund recently acquired 9.35 million shares or a 5.6% stake in MeadWestvaco Corp. (NYSE:MWV) based on its most recent 13D filing with the Securities and Exchange Commission (SEC).
Starboard Value suggests cost-cutting
In a letter to the board of directors of the global packaging company, Smith emphasized that Starboard Value invested in MeadWestvaco Corp. (NYSE:MWV) because it is “deeply undervalued” and “a number of opportunities exists to create significant value for shareholders.”
Smith emphasized that the combined value of assets of the global packaging company” far exceeds its current share price,” which is obscured by its excessive corporate overheads and conglomerate structure.
According to Smith, Starboard Value believes that the management of MeadWestvaco Corp. (NYSE:MWV) needs to take appropriate actions such as reducing its corporate overheads to unlock value/improve operating margins.
The activist hedge fund noted that the operating margin of the global packaging company is significantly lower than its peers, and estimated that reducing its corporate overhead to be inline with its peers will result in a $160 million cost savings.
“MeadWestvaco’s ratio of corporate expense to sales is over three times higher than its peer group, which spends an average of 1.2% of sales on corporate expense. We believe that there is an opportunity to reduce corporate overhead by consolidating regional headquarters, reducing duplicative administrative staff, and flattening the organization structure,” according to Starboard Value.
Starboard Value also emphasized that MeadWestvaco Corp. (NYSE:MWV) should immediately execute and expand its previously announced restructuring program. According to the activist hedge fund, it is important for the company to quickly achieve its $125 million cost saving target and continue to find new areas of cost reduction.
Starboard suggests separation of businesses
The activist hedge fund also suggested that MeadWestvaco Corp. (NYSE:MWV) explore a separation of its non-core specialty chemical business and monetize its real estate, Brazilian timberland and pension assets.
Starboard Value pointed out that the company “operates disparate businesses in five distinct reporting segments with limited synergies.” The activist hedge fund believes that the conglomerate structure of MeadWestvaco Corp. (NYSE:MWV) contributes to its general lack of operational focus and bloated cost structure. It believed that a sale or spinoff of MeadWestvaco’s valuable but non-core businesses, particularly its Specialty Chemicals business, could unlock significant value. Such a move will also enable management to better focus on focus on right-sizing cost structures while improving the operations of its core packaging business.
Starboard Value also suggested that the company could sell its Brazilian timberland assets without impacting its container board production operations and estimated that the timberland assets could be worth as much as $310 million.
In addition, the activist hedge fund noted that MeadWestvaco Corp. (NYSE:MWV)’s pension assets are overfunded by $1.5 billion, which also provides an opportunity to unlock value by merging with or selling to a competitor with an underfunded plan
Furthermore, Starboard Value pointed out that 2014 is a critical year for the ompany citing the upcoming changes in its organizational structure. The board of directors of MeadWestvaco Corp. (NYSE:MWV) started the process of developing a CEO succession plan. The activist hedge fund emphasized that it is imperative for the board to fully evaluate all internal and external candidates and choose a leader with the required skills to execute on the company’s substantial opportunities.