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March 16, 2011
MeadWestvaco Investment Thesis
Portfolio of good to great niche businesses
Packaging Specialty Chemicals Office Supplies
Ticker: “MWV” Stock Price: $27.42 Recent Valuation Multiples:
13.71 x ‘11E Earnings 4.4 EV / 2011E EBITDA (ex-land)
Company recently implemented a number of operational improvements and divested several low-earning assets resulting in much more profitable, higher margin business Embedded in the company are significant hidden real estate assets that are not fully appreciated by the market
Owns ~900k acres of rural and HBU land located primarily in the Southeastern United States
Capitalization: Equity Market Value: $4.6bn Enterprise Value: $5.9bn
Intrinsic value of the business not currently reflected in the market
Significantly undervalued on a sum-of-the-parts basis Spin-off or sale of non-core businesses a potential catalyst for share price appreciation
The Mead Paper Company was founded in 1846. In 1957, the company acquired the pioneer of the sixpack bottle carrier to become the largest supplier of paperboard beverage packager. In 1966, Mead acquired Westab Inc, the inventor of the spiral notebook. Over the years, Mead further diversified into a number of other businesses. In 1958, it bought Data Corporation (the predecessor to Lexis Nexus) for $6mm and later sold it in the mid 1990’s for $1.5bn. In 1968, the company acquired the Woodward Company, a manufacturer of iron castings and rubber products and in 1977 it bought Gulf Consolidated Services, a pipe valve fittings and electric supply company. Over the course of its history, Mead even held interests in furniture, coal and reinsurance. During the recession of the 1980’s, Mead shed many of these businesses to focus on its core operations. Piedmont Pulp and Paper Co. was founded in 1888 and became the West Virginia Pulp and Paper Co. in 1929 (rebranding itself “Westvaco” in 1969). Over time, Westvaco grew to become one of the largest paper and packaging companies, while acquiring huge tracts of land assets in the process. In 1953, the company acquired Rigesa, a Brazilian paper box business. In 2002, Mead and Westvaco merged, forming MeadWestvaco. In 2005, MeadWestvaco divested its paper business to Cerberus Capital in order to become a more focused packaging company. Today, after a series of acquisitions and divestitures, MWV remains one of the largest packaging companies in the world and operates in five different businesses segments.
CNK linerboard. office products and planning and organizational tools Specialty Chemicals Manufactures specialty chemicals derived from byproducts of the papermaking process ~44% of Revenues ~10% Operating Margins ~12% of Revenues ~19% Operating Margins ~11% of Revenues ~21% Operating Margins MWV also operates a Community Development and Land Management (CDLM) segment whose purpose to maximize the value of the company’s significant real estate assets. 4 Note: Revenue proportions are pre-corporate .MWV’s Business Lines MWV operates in four “main” business segments Packaging Resources Produces bleached paperboard. home and garden and other markets ~30% of Revenues ~7% Operating Margins Consumer & Office Products Manufactures school supplies. and other packaging products Consumer Solutions Produces multipack cartons for the beverage take-home market and plastic packaging for personal and beauty care.
44% MWV) Second largest player in SBS market. tobacco. CNK is used for a range of packaging applications.Packaging Resources Segment Products include bleached paperboard ("SBS") and Coated Natural Kraft paperboard ("CNK") and corrugated packaging. disposable cups. the largest of which for MWV is multi-pack beverage packaging and food packaging. SBS is used for packaging highvalue consumer products including frozen and dry food packaging. MWV's corrugated packaging business is focused on fresh produce. frozen meat and consumer products markets in South America Operates in consolidated industry with rational pricing despite commodity product Economies of scale result in wide moat and high barriers to entry Modest growth business with high growth potential in Brazil Second largest player in most markets Duopoly business with CNK (GPK 56% has market share. healthcare and apparel 5 . with 24% market share Third largest player in the folding carton market Used primarily in food markets (frozen food. take out containers. cosmetics and pharmaceuticals. etc) as well as non-food industries such as automotive.
L’Oreal. and garden and lawn maintenance products Paperboard and plastics are converted into innovative end-market consumer packaging solutions Primary markets are beverage. low-margin media and DVD business.Consumer Solutions Segment Manufactures multi-pack cartons primarily for the global beverage take-home market. skin care and fragrance applications Tobacco converting. MWV sold its declining. Scott’s. and dispensing and sprayer systems for personal care. Avon. soda and beer Dispensers sprayers and pumps for cosmetics. used to administer pills) Attractive client list: Coca-Cola. Clorox. Chanel. fragrance. more fragmented regions Operational improvement from closing equipment unit. Hermes. triggers and hose end sprays Adherence packing (Shellpak. injection-molded plastic packaging for prescription drugs. home and garden and healthcare Multi-pack cartons for wine. high-end packaging for the global tobacco market. tobacco. personal care. scaling up relatively new healthcare 6 business and focusing on higher margin products . healthcare. P&G. ABInBev. Phillip Morris In 2010. home cleaning. helping boost the earnings profile of the Consumer Solutions segment Moving towards being more value-added business by working with clients on crafting creative solution designs to meet their marketing needs Switching costs elevated due to integration with clients’ respective businesses Potential to move into fast-growing.
commodity-like envelope business. sources. which should drastically raise the segment’s operating margins to an attractive ~19% in 2011 Significant growth potential in faster growing emerging regions Somewhat cyclical business due to back to school season 7 . Five Star. markets and distributes school and office products and time-management products Owns some of the leading brands in office supplies including Mead. AT-A-Glance and Day Runner that garner premium prices In late 2010. MWV sold its low-growth.Consumer and Office Products Segment The Consumer & Office Products segment manufactures. Trapper Keeper.
autos. asphalt paving and adhesives as well as other applications in the agricultural. paper and petroleum industries (70% of total) Activated carbon used in gas vapor emission control systems for automobiles and trucks. etc. as well as for air. food and water purification (30% of total) High-margin business Complimentary unit helps drive efficiency by monetizing byproducts of the core business Cyclical business which should benefit from economic upswing (roofing. markets and distributes specialty chemicals derived from sawdust and other byproducts of the papermaking process Products include: Performance chemicals used in printing inks.Specialty Chemicals The Specialty Chemicals segment manufactures.) Somewhat inflation protected Exposure to emerging economies in need of asphalt to improve 8 infrastructure .
Operations of the segment include real estate development.Community Development and Land Management Segment The Community Development and Land Management segment is responsible for maximizing the value of the company's landholdings in the Southeastern region of the U.S. forestry operations and leasing activities Segment formally set up in 2007 to manage MWV’s significant land assets Owns ~740k acres in the US (company owns an additional 130k acres in Brazil) Land acquired throughout the early to mid 20th century resulting in low tax basis Little to any land is currently used in any of MWV’s core businesses 9 .
CDLM Segment (cont’d) Primary operations: Real estate development – selling non-core forestlands for recreational and residential uses. CDLM has sold 105k acres for total gross proceeds $250mm since 2008 10 . entitling and improving high-value tracts and master planning select landholdings Forestry operations – growing and harvesting softwood and hardwood for external and internal consumption Leasing activities – leasing land to third parties for mineral extraction as well as recreational use Assets are largely non-cash flow generative and are comprised mainly of land undergoing commercial development and rural tracts that are being sold off on a piecemeal basis Management has spent several years segmenting which land assets it intends to keep and which it intends to sell off After a large land sale of 385k acres in late 2007 for a total consideration of $500mm.
amount and use 11 Source: JP Morgan .Community Development and Land Management A snapshot of MWV’s land holdings by location.
South Carolina. Owing to its attractive demographics. Boeing will begin building 787 Dreamliners at a 240 acre.Charleston. Charleston’s economy is buzzing and its real estate assets (both industrial and residential) are in high demand. accommodative economic policies and proximity to ports. $750m facility in Charleston 12 . Low tax rates Young. South Carolina Much of MWV’s HBU land is located in Charleston. skilled manufacturing work force Access to transportation Example: Beginning in July 2011.
Charleston Area Developments Master Planned Communities East Edisto 80.000 acre Master Planned Community that will be developed into residential communities and office parks while preserving much of the areas natural lands over the coming decades The Parks of Berkley 5000 acre Master Planned Community near Summerville that will provide Class A office space. retail stores and restaurants 13 .
400.000 to 1. aviation or other industries Colleton County Commerce Center Can accommodate buildings ranging from 100.000 square feet and is well suited for distribution facilities 14 .MWV Foreign Trade Zone 400 acre project that will host a 1.Charleston Area Developments Industrial Parks Rockefeller Group .1mm square foot distribution facility for the TBC corporation with space for multiple similar facilities Camp Hall Commerce Park 4750 acre site that will include a rail-served mega industrial site which can accommodate a major manufacturing facility for the automotive.
Why Are These Businesses Together? 15 .
Failing to pursue these alternatives would leave in place MWV’s complicated structure and result in a share price that remains materially beneath its intrinsic value. a number of them are largely unrelated. today MeadWestvaco’s shares trade at a deep discount to their estimated intrinsic value. the value of the company’s real estate assets is completely ignored by the marketplace. causing confusion amongst investors when trying to determine the company’s true underlying value. While these businesses are attractive on a standalone basis. These businesses serve no strategic benefit nor do they drive any revenue or cost synergies. MWV management should consider spinning off both the Consumer and Office Products segment as well its Community Development and Land Management segment in order to unlock shareholder value. 16 .Some Ideas For Value Creation Despite owning a number of good to great businesses. mostly due a lack of transparency and limited disclosures in the segment’s financial reporting. Additionally.
acres sold and total acres owned. presenting an additional catalyst Management has been slow to monetize its rural land When MWV carved out its CDLM segment in 2007. it announced multi-decade approach to monetizing and developing its real-estate segment For many investors. the company provides little transparency regarding the nature of the assets owned by shareholders.The value of the CDLM segment is not currently reflected in MWV’s stock price At today’s levels. largely due to management failure raise awareness regarding the underlying value of the company’s land holdings MWV fails to provide pertinent information regarding the company’s real estate assets Lumping together MWV’s land assets with its packaging assets is illogical and creates a complicated story The problem is compounded by a lack of financial disclosure about the business Aside from total sales proceeds. this represents an unnecessarily long horizon for value creation 17 . the market is ascribing zero value to MWV’s significant real estate assets. the company’s strategy regarding these assets and projections on the potential value of the company’s commercial developments The company has acknowledged this shortcoming and is working on becoming more transparent.
MWV should consider spinning off its real estate segment A tax-efficient separation of MWV’s CDLM segment. makes sense for a number of reasons Highlight the intrinsic value of the embedded real estate assets that is otherwise ignored by the investment community Allow investors to determine the fair value of the company’s real estate assets. not earnings. coupled with detailed financial disclosures. as MWV’s land assets currently generate little cash flow Land is not the company’s core competency and the segment serves as a distraction Give MWV shareholders the opportunity to realize the fair value of their ownership today rather than being subject the management team’s more glacial approach to monetizing the real estate portfolio Let shareholders decide which business(s) they want to own Create a simpler structure that would enable the market to more easily determine the intrinsic value of the consolidated business 18 .
MWV should consider spinning off its Consumer and Office (C&O) Segment A tax-efficient separation of MWV’s Consumer & Office segment makes sense for a number of reasons Coupling the C&O segment with MWV’s remaining businesses unnecessarily complicates the company’s consolidated financials and masks C&O’s underlying profitability MWV’s C&O segment is deserving of a higher multiple due to operating margins that are nearly double those of the core packaging business Few synergies exist between the C&O business and MWV’s other businesses Limited cross selling opportunities. more understandable structure 19 . MWV should also consider spinning out these units as well in order to create an even simpler. no marketing leverage Depending on the level of overlap between the customer bases of the remaining Consumer Solutions and Specialty Chemicals businesses as well as their level integration with the company’s core operations.
distribution and EM exposure while improving leverage ratios Merger expected to close 1H 2012 Given its complex nature. total consideration of $1. which could provide a further catalyst for MWV in the future 20 .3x 2011E EBITDA Sale improves the growth profile of remaining MWV business Transformational deal for ACCO. providing it with increased scale.2bn or ~8. MWV announced a spin-merge transaction whereby it effectively sold its consumer & office business in a tax efficient manner via a Reverse Morris Trust to ACCO Brands. including a possible land spin The January 2012 acquisition of Avery Dennison’s office supplies business by 3M highlights the consolidation currently going on in the office supplies segment.Update: MWV Announces Spin-Merge Transaction with ACCO Brands In mid-November. deal is not fully reflected in MWV’s share price Transaction hints at the potential for further value unlocking initiatives at the company. a leading office products company MWV will receive a consideration of $460mm in cash as well as~57mm shares in the newly merged entity Excluding ~$30mm of expected synergies.
So. what is the company worth? 21 .
533 $3.87 Packaging Corpof Am erica $2.648 $3.076 5.118 4.420 5.23 RockTenn $2.762 $3.310 $18.246 6.37 22 Data based on 3/16/11 closing prices .54 M edian $2.294 $3.593 5.21 Tem ple-Inland $2.Packaging Resources Peer Analysis M arket Cap(m ) m Enterprise Value EV/ 2011E EBITDA International Paper $11.
006 $4.445 $3.923 6.172 $3.722 $8.726 $4.Consumer Solutions Peer Analysis M arket Cap(m ) m Enterprise Value EV/ 2011E EBITDA Ball $5.90 23 Data based on 3/16/11 closing prices .150 7.757 6.74 AptarGroup $3.31 M edian $3.340 6.523 7.37 SonocoProducts $3.07 SealedAir $4.
128 6.64 M edian $2.383 $3.Consumer & Office Products Peer Analysis M arket Cap (mm) Enterprise Value EV / 2011E EBITDA Avery Dennison $4.39 ACCO Brands $483 $1.492 7.01 24 Data based on 3/16/11 closing prices .282 $5.310 7.
58 25 Data based on 3/16/11 closing prices .455 6.35 Kraton Polymers $1.165 $1.859 $3.B.455 6.121 6. Fuller $1.582 8.33 Median $1.000 $1.58 H.Specialty Chemicals Peer Analysis Market Cap (mm) Enterprise Value EV / 2011E EBITDA RPM International $2.165 $1.
a reasonable ballpark estimate is achievable. However. valuing the company’s land portfolio is somewhat difficult. using recent sales data from mwvlandsales.Community Development and Land Management Valuation Due to a lack of detailed breakdown of MWV’s real estate holdings.com and Wall Street research.com. mwvlandsales.3bn High 400000 240000 380000 150000 140000 75000 75000 390000 $1.85bn 26 Source: Company data. Location South Carolina East Edisto Other Developable Rural West Virginia Virginia Alabama Georgia Brazil Acres 80 80 190 150 140 50 50 130 Value Per Acre Low 3000 2000 1500 800 800 1000 1000 2000 High 5000 3000 2000 1000 1000 1500 1500 3000 Total Value Low 240000 160000 285000 120000 112000 50000 50000 260000 $1. Wall Street Research .
5x 8x 7.5x 6x 6x A dd: Land A ssets A dd: O verfunded P ension Less: N et D ebt E quity V alue S hares outstanding Im p lied p rice C u rren t P rice: $27.42 % U p sid e D ivid en d Y ield T o tal R etu rn 43% 3. estimates 27 .75x 6x 6x H ig h M u ltip le 6.6% 80% EV 2888 1925 1105 1148 900 480 1300 1052 1252 6785 173 39.6% 47% 77% 3.5x 7.5x 7x 6.4 Analysis suggests that MWV’s shares are currently undervalued by 43-77% Another way to look at is it that at today’s levels you are buying MWV’s packaging and chemicals businesses for a reasonable price and getting its market leading consumer & office segment along with ~900.2 EV 3413 2063 1360 1275 900 480 1850 1052 1252 8380 173 48.5x 6.000 acres of valuable forestlands and HBU assets for free (1) Based on Wall St.Sum-Of-The-Parts Analysis (d ata in m m 's) S eg m en t P ackaging C onsum er S olutions S pecialty C hem icals C onsum er & O ffice Less: C orporate E xpenses Less: P ension Incom e 2011E (1) E B IT D A 525 275 170 170 150 80 Low M u ltip le 5.
leading to an underappreciation of the company’s land assets and their potential value 28 . despite its various segments having different earnings profiles and growth trajectories Poor communication around the company’s significant noncore assets Management has failed to communicate to investors exactly what real estate assets the company owns and what the company’s vision is with regards to these assets Incomplete analyst coverage Packaging and paper products analysts covering the stock are not real estate experts.Why Does This Opportunity Exist? Complicated story Pairing of unrelated businesses inhibits analysis and causes MWV to be cast with a broad brush.
Conclusion 29 .
Conclusion Collection of good. high quality but somewhat unrelated niche businesses Company trades at attractive multiples on a consolidated basis Break-up value is materially higher than current share price Spin-off of non-core businesses and land assets presents catalyst to realize value Spin-merge of office supplies business already announced Land segment remains attractive spin-off candidate Upside potential: 43-77% 30 .