March 21 (Reuters) - Wausau Paper Corp said it intends to sell its specialty paper business to funds controlled by private equity firm KPS Capital Partners LP for about $130 million in cash, following pressure from activist investor Starboard Value LP.
KPS Capital would set up a new company to acquire Wausau's Rhinelander and Mosinee mills in Wisconsin.
The New York-based private equity firm also signed a separate letter of intent to buy another company and combine its specialty business with the Wausau assets.
Hedge fund Starboard, Wausau's largest shareholder with a 14.80 percent stake, urged the paper products maker in January last year to sell its paper segment or itself and demanded a board reorganization. The company earlier this month agreed to nominate two members recommended by Starboard to its board.
The specialty business, Wausau's biggest source of revenue in 2011, makes paper for food packaging, labels and writing.
Wausau, which will now concentrate on its tissue business, has an option to own up to 25 percent of the new company. It can scale that up by another 5 percent, depending on the new company's performance, Wausau said.
Contribution of "green" tissue products to sales rose to 54 percent in 2012, from 34 percent five years ago, the company said in its fourth-quarter earnings release.
The Mosinee, Wisconsin-based company said in February it would shut its specialty paper mill in Brainerd, Minnesota, in the second quarter of this year. The company sold its print and color paper brands last year.
Shares of the company closed at $10.31 on the New York Stock Exchange on Thursday.