MeadWestvaco: Don't Miss the Forest for the Trees Updated

8/2/2019 MeadWestvaco: Don't Miss the Forest for the Trees Updated

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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


~12% of Revenues


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


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


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


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


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%

MeadWestvaco: Don't Miss the Forest for the Trees Updated

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