UPDATE 2-Starboard reports stake in MeadWestvaco, says stock undervalued

Mon Jun 2, 2014 2:05pm EDT

(Adds MeadWestvaco and analyst comments; updates shares)

By Sagarika Jaisinghani

June 2 (Reuters) - Activist investor Starboard Value LP reported a 5.6 percent stake in MeadWestvaco Corp and said the packaging materials maker's stock was "deeply undervalued".

MeadWestvaco's shares rose as much as 6.5 percent after Starboard, in a letter to the company, also said its management should take steps to improve operating margins and capital allocation and consider separating non-core assets. (r.reuters.com/nep79v)

"(We) will consider Starboard's suggestions as we would if received from any other shareholder," MeadWestvaco said in a statement on Monday.

Starboard said that improving MeadWestvaco's cost structure and capital allocation could boost its share price to $52-$69 from about $43 now.

"Starboard is being a bit aggressive in its numbers," Vertical Research Partners analyst Chip Dillon said. "But there are possible actions that management can take to better the company."

Dillon said he had a 12-month price target of $43 on MeadWestvaco's stock, which could be raised to $50 if the company was broken up or sold.

MeadWestvaco has an intrinsic value of $36.85, as measured by Thomson Reuters StarMine. The model is a measure of how much a stock should be worth currently when considering expected growth rates over the next 15 years.

MeadWestvaco has the highest ratio of selling, general and administrative expenses to sales in the industry due to excessive corporate expenses and higher-than-average operating costs, Starboard said.

About 12 percent of the company's revenue went into selling, general and administrative expenses in 2013 compared with about 9 percent for rivals Packaging Corp of America and Graphic Packaging Holding Co.

MeadWestvaco, which makes packaging materials for the healthcare, personal care, food and beverage, and agricultural industries, has a market value of about $7 billion.

LEANER BUSINESS

MeadWestvaco said in January that it would cut costs and target savings of $100 million to $125 million by the end of 2015.

The company could slash costs further by "consolidating regional headquarters, reducing duplicative administrative staff, and flattening the organization structure," Starboard said.

It should also consider selling or spinning off its specialty chemicals business, the hedge fund said.

The business, which makes chemicals derived from sawdust and other byproducts of the papermaking process, accounts for about a fifth of MeadWestvaco's total revenue.

"There's nothing strategic about the specialty chemicals business being tied into the other parts of MeadWestvaco," Dillon told Reuters.

MeadWestvaco's stock, which trades at 20.9 times the company's 12-month forward estimated earnings, is expensive compared with shares of International Paper Co, Packaging Corp, Graphic Packaging and Clearwater Paper Corp, which trade at an average 14.3 times, according to StarMine.

Richmond, Virginia-based MeadWestvaco's shares were up 5.6 percent at $42.84 in afternoon trading on the New York Stock Exchange. The stock has risen about 26 percent in the past year. (Editing by Kirti Pandey)

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