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Dont Miss The Forest For The TreesMarch 16, 2011
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MeadWestvaco Investment Thesis
Portfolio of good to great niche businesses Packaging
Specialty Chemicals
Office Supplies
Company recently implemented a number ofoperational improvements and divested severallow-earning assets resulting in much moreprofitable, higher margin business
Embedded in the company are significant hiddenreal estate assets that are not fully appreciated bythe market Owns ~900k acres of rural and HBU land located
primarily in the Southeastern United States
Intrinsic value of the business not currentlyreflected in the market Significantly undervalued on a sum-of-the-parts
basis
Spin-off or sale of non-core businesses a potentialcatalyst for share price appreciation
Ticker: MWV
Stock Price: $27.42
Recent Valuation
Multiples:13.71 x 11E Earnings
4.4 EV / 2011E EBITDA (ex-land)
Capitalization:
Equity Market
Value: $4.6bn
Enterprise
Value: $5.9bn
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Company History
The Mead Paper Company was founded in 1846. In 1957, the company acquired the pioneer of the six-
pack 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 1990s 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 ConsolidatedServices, 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 1980s, 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 largestpaper 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.
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MWVs Business Lines
MWV operates in four main business segments
PackagingResources
Produces bleachedpaperboard, CNK
linerboard, and
other packaging
products
~44% of Revenues
~10% OperatingMargins
Consumer &Office Products
Manufacturesschool supplies,
office products and
planning and
organizational tools
~30% of Revenues
~7% OperatingMargins
~12% of Revenues
~19% OperatingMargins
ConsumerSolutions
Produces multi-
pack cartons for the
beverage take-home
market and plastic
packaging for
personal and beauty
care, home andgarden and other
markets
Manufacturesspecialty chemicals
derived from
byproducts of the
papermaking
process
~11% of Revenues
~21% OperatingMargins
SpecialtyChemicals
Note: Revenue proportions are pre-corporate
MWV also operates a Community Development and Land Management (CDLM) segment
whose purpose to maximize the value of the companys significant real estate assets.
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Packaging Resources Segment
Products include bleached paperboard ("SBS") and Coated Natural Kraftpaperboard ("CNK") and corrugated packaging. SBS is used for packaging high-value consumer products including frozen and dry food packaging, disposablecups, tobacco, cosmetics and pharmaceuticals. CNK is used for a range ofpackaging applications, the largest of which for MWV is multi-pack beverage
packaging and food packaging. MWV's corrugated packaging business is focusedon 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, 44% MWV) Second largest player in SBS market, with 24% market share
Third largest player in the folding carton market
Used primarily in food markets (frozen food, take out containers, etc) as
well as non-food industries such as automotive, healthcare and apparel
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Consumer Solutions Segment
Manufactures multi-pack cartons primarily for the global beverage take-homemarket, high-end packaging for the global tobacco market, injection-molded plasticpackaging for prescription drugs, and dispensing and sprayer systems for personalcare, fragrance, healthcare, home cleaning, and garden and lawn maintenanceproducts
Paperboard and plastics are converted into innovative end-market consumer packaging
solutions
Primary markets are beverage, personal care, tobacco, home and garden and healthcare
Multi-pack cartons for wine, soda and beer
Dispensers sprayers and pumps for cosmetics, skin care and fragrance applications
Tobacco converting, triggers and hose end sprays
Adherence packing (Shellpak, used to administer pills)
Attractive client list: Coca-Cola, ABInBev, P&G, LOreal, Avon, Hermes, Chanel, Scotts,
Clorox, Phillip Morris
In 2010, MWV sold its declining, low-margin media and DVD business, 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, more fragmented regions
Operational improvement from closing equipment unit, scaling up relatively new healthcare
business and focusing on higher margin products
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Consumer and Office Products Segment
The Consumer & Office Products segment manufactures, sources, markets anddistributes school and office products and time-management products
Owns some of the leading brands in office supplies including
Mead, Five Star, Trapper Keeper, AT-A-Glance and Day Runnerthat garner premium prices
In late 2010, MWV sold its low-growth, commodity-like
envelope business, which should drastically raise the segments
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
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Specialty Chemicals
The Specialty Chemicals segment manufactures, markets and distributes specialtychemicals derived from sawdust and other byproducts of the papermaking process
Products include:
Performance chemicals used in printing inks, asphalt paving andadhesives 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, 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,
autos, etc.)
Somewhat inflation protected
Exposure to emerging economies in need of asphalt to improve
infrastructure
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Community Development and Land Management Segment
Segment formally set up in 2007 to manage MWVs 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 MWVs core
businesses
The Community Development and Land Management segment is responsible formaximizing the value of the company's landholdings in the Southeasternregion of the U.S. Operations of the segment include real estate development,forestry operations and leasing activities
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CDLM Segment (contd)
Primary operations:
Real estate development selling non-core forestlands for
recreational and residential uses, entitling and improving high-value
tracts and master planning select landholdings
Forestry operations growing and harvesting softwood andhardwood 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 ofland 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, CDLM has sold 105k acres for total gross proceeds $250mm
since 2008
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Community Development and Land Management
A snapshot of MWVs land holdings by location, amount and use
Source: JP Morgan
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Charleston, South Carolina
Much of MWVs HBU land is located in Charleston, South Carolina. Owing to itsattractive demographics, accommodative economic policies and proximity to ports,Charlestons economy is buzzing and its real estate assets (both industrial andresidential) are in high demand.
Low tax rates
Young, skilled manufacturing work force
Access to transportation
Example: Beginning in July 2011, Boeing will begin building 787
Dreamliners at a 240 acre, $750m facility in Charleston
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Charleston Area Developments
East Edisto
80,000 acre Master Planned Community that will be developed into
residential communities and office parks while preserving much of theareas 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
Master Planned Communities
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Charleston Area Developments
Industrial Parks
Rockefeller Group - MWV Foreign Trade Zone
400 acre project that will host a 1.1mm square foot
distribution facility for the TBC corporation with space formultiple similar facilities
Camp Hall Commerce Park
4750 acre site that will include a rail-served mega industrialsite which can accommodate a major manufacturing facility
for the automotive, aviation or other industries
Colleton County Commerce Center
Can accommodate buildings ranging from 100,000 to1,400,000 square feet and is well suited for distribution
facilities
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Why Are These Businesses Together?
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Some Ideas For Value Creation
Despite owning a number of good to great businesses, today MeadWestvacos shares
trade at a deep discount to their estimated intrinsic value. While these businesses
are attractive on a standalone basis, a number of them are largely unrelated, causing
confusion amongst investors when trying to determine the companys true
underlying value.
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. These businesses serve no strategic
benefit nor do they drive any revenue or cost synergies. Additionally, the value of thecompanys real estate assets is completely ignored by the marketplace, mostly due a
lack of transparency and limited disclosures in the segments financial reporting.
Failing to pursue these alternatives would leave in place MWVs complicated
structure and result in a share price that remains materially beneath its intrinsicvalue.
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The value of the CDLM segment is not currently reflected in MWVs stock price
Management has been slow to monetize its rural land
MWV fails to provide pertinent information regarding the companys real estate assets
Lumping together MWVs 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, acres sold and total acres owned, the company
provides little transparency regarding the nature of the assets owned by
shareholders, the companys strategy regarding these assets and projections onthe potential value of the companys commercial developments
The company has acknowledged this shortcoming and is working on
becoming more transparent, presenting an additional catalyst
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, this represents an unnecessarily long horizon for value creation
At todays levels, the market is ascribing zero value to MWVs significant real estate assets, largely due tomanagement failure raise awareness regarding the underlying value of the companys land holdings
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MWV should consider spinning off its real estate segment
A tax-efficient separation of MWVs CDLM segment, coupled with detailed financialdisclosures, 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 companys real estate
assets, not earnings, as MWVs land assets currently generate little cash
flow
Land is not the companys 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 teams 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
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MWV should consider spinning off its Consumer and Office (C&O) Segment
A tax-efficient separation of MWVs Consumer & Office segment makes sense for anumber of reasons
Coupling the C&O segment with MWVs remaining businesses
unnecessarily complicates the companys consolidated financials
and masks C&Os underlying profitability
MWVs 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 MWVs
other businesses
Limited cross selling opportunities, no marketing leverage
Depending on the level of overlap between the customer bases of the remaining ConsumerSolutions and Specialty Chemicals businesses as well as their level integration with thecompanys core operations, MWV should also consider spinning out these units as well in orderto create an even simpler, more understandable structure
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Update: MWV Announces Spin-Merge Transaction with ACCO Brands
In mid-November, MWV announced a spin-merge transaction whereby it effectively sold itsconsumer & office business in a tax efficient manner via a Reverse Morris Trust to ACCO Brands,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, total consideration of $1.2bn or
~8.3x 2011E EBITDA
Sale improves the growth profile of remaining MWV business
Transformational deal for ACCO, providing it with increased scale,distribution and EM exposure while improving leverage ratios
Merger expected to close 1H 2012
Given its complex nature, deal is not fully reflected in MWVs share price
Transaction hints at the potential for further value unlocking initiatives atthe company, including a possible land spin
The January 2012 acquisition of Avery Dennisons office supplies business by 3M highlights theconsolidation currently going on in the office supplies segment, which could provide a furthercatalyst for MWV in the future
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So, what is the company worth?
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Packaging Resources Peer Analysis
Data based on 3/16/11 closing prices
International Paper Packaging Corp of America RockTenn Temple-Inland Median
Market Cap (mm) $11,310 $2,762 $2,533 $2,294 $2,648
Enterprise Value $18,118 $3,246 $3,593 $3,076 $3,420
EV / 2011E EBITDA 4.87 6.23 5.21 5.54 5.37
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Consumer Solutions Peer Analysis
Data based on 3/16/11 closing prices
Ball Sealed Air Sonoco Products AptarGroup MedianMarket Cap (mm) $5,722 $4,006 $3,445 $3,172 $3,726
Enterprise Value $8,523 $4,757 $3,923 $3,150 $4,340
EV / 2011E EBITDA 7.07 6.37 6.74 7.31 6.90
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Consumer & Office Products Peer Analysis
Data based on 3/16/11 closing prices
Avery Dennison ACCO Brands MedianMarket Cap (mm ) $4,282 $483 $2,383
Enterprise Value $5,492 $1,128 $3,310
EV / 2011E EBITDA 7.39 6.64 7.01
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Specialty Chemicals Peer Analysis
Data based on 3/16/11 closing prices
RPM International Kraton Polymers H.B. Fuller MedianMarket Cap (mm) $2,859 $1,165 $1,000 $1,165
Enterprise Value $3,582 $1,455 $1,121 $1,455
EV / 2011E EBITDA 8.35 6.58 6.33 6.58
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Community Development and Land Management Valuation
Due to a lack of detailed breakdown of MWVs real estate holdings, valuing thecompanys land portfolio is somewhat difficult. However, using recent sales datafrom mwvlandsales.com and Wall Street research, a reasonable ballpark estimate isachievable.
Source: Company data, mwvlandsales.com, Wall Street Research
Location Acres
South Carolina Low High Low High
East Edisto 80 3000 5000 240000 400000
Other Developable 80 2000 3000 160000 240000
Rural 190 1500 2000 285000 380000West Virginia 150 800 1000 120000 150000Virginia 140 800 1000 112000 140000Alabama 50 1000 1500 50000 75000Georgia 50 1000 1500 50000 75000Brazil 130 2000 3000 260000 390000
$1.3bn $1.85bn
Value Per Acre Total Value
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Sum-Of-The-Parts Analysis
Analysis suggests that MWVs shares are currently undervalued by 43-77%
Another way to look at is it that at todays levels you are buying MWVs packaging andchemicals businesses for a reasonable price and getting its market leading consumer & office
segment along with ~900,000 acres of valuable forestlands and HBU assets for free
(1) Based on Wall St. estimates
(data in m m's)
Segment
2011E
EBITDA(1 )
Low
Multiple
High
M ultiple EV EVPackaging 525 5.5x 6.5x 2888 3413
Consum er Solutions 275 7x 7.5x 1925 2063
Specia lty Chemicals 170 6.5x 8x 1105 1360Consum er & O ffice 170 6.75x 7.5x 1148 1275Less: Corporate Expenses 150 6x 6x 900 900Less: Pension Incom e 80 6x 6x 480 480
Add: Land Assets 1300 1850
Add: Overfunded Pens ion 1052 1052
Less: Net Debt 1252 1252
Equity Value 6785 8380Shares outstanding 173 173
Im plied price 39.2 48.4
Current Price: $27.42
% Upside 43% 77%Dividend Yield 3.6% 3.6%
Total Return 47% 80%
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Why Does This Opportunity Exist?
Complicated story
Pairing of unrelated businesses inhibits analysis and causes
MWV to be cast with a broad brush, despite its various
segments having different earnings profiles and growthtrajectories
Poor communication around the companys significant non-
core assets
Management has failed to communicate to investors exactly
what real estate assets the company owns and what the
companys vision is with regards to these assets
Incomplete analyst coverage Packaging and paper products analysts covering the stock are
not real estate experts, leading to an underappreciation of
the companys land assets and their potential value
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Conclusion
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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%