Shares of MeadWestvaco Corporation (MWV) climbed nearly 6% and scaled a new 52-week high of $45.77 on Jan 9, after the company’s board approved plans to spin off its Specialty Chemicals business into a separate, publicly traded company.
MeadWestvaco’s specialty chemicals business is a provider of performance chemicals used in printing inks, asphalt paving and adhesives, as well as in the agricultural, paper and petroleum industries. The business also produces activated carbon products used in gas vapor emission control systems for automobiles and trucks, as well as applications for air, water and food purification.
In Jun 2014, investment management firm Starboard Value LP (Starboard) had acquired approximately 5.6% stake in MeadWestvaco (later increased to 6.1%), becoming the company’s fifth-largest shareholder.
Subsequently, Starboard has been pushing MeadWestvaco for changes on the premise so that the combined value of MeadWestvaco’s assets far exceeds the company’s current share price, and this value is being obscured by MeadWestvaco’s excessive corporate overhead and conglomerate structure.
MeadWestvaco has been advised to repurchase about $500 million of its stock in order to boost shareholder value. Starboard had also suggested sale or spin-off of its non-core businesses such as the specialty chemicals business and advised to look for options to get more value out of its real estate assets.
The separation of specialty chemicals reflects MeadWestvaco’s response to Starboard’s proposal. The spin-off will establish two companies, better positioned to compete and profitably grow in their targeted markets.
The separation, along with the organizational redesign, also reveals that MeadWestvaco’s management and board are strongly commitment toward creating value for shareholders and establishing a business model that will significantly improve the profitability and cash flow profile of the packaging business.
The tax-free transaction is expected to be completed by the end of 2015. MeadWestvaco will utilize the cash from the spin-off to primarily pay down debt to maintain its investment grade credit rating. The company intends to carry on paying a strong dividend, with the final rate to be determined post-separation.
The spin-off demonstrates MeadWestvaco’s strong record of returning value to shareholders, which has exceeded $4 billion over the last 10 years. The company has divested more than $6 billion of non-core assets, including well-timed and creative transactions involving the company’s Printing and Writing Papers and Consumer & Office Products businesses, and the most recent U.S. forestlands.
The company has also reduced costs and improved margins in its packaging and specialty chemicals businesses, including completed and ongoing programs that are expected to achieve more than $200 million of permanent annual savings by the end of 2015.
MeadWestvaco in its third-quarter earnings call guided fourth-quarter 2014 earnings to be above the year-ago level driven by benefits from commercial and operational excellence strategies, as well as continued contributions from growth and productivity improvements and cost-savings initiatives.
However, continued weak global economic conditions, especially in Brazil and the Eurozone, demand challenges in liquid packaging and North American frozen food markets, sustained higher costs for wood fiber and negative impact from foreign currency exchange, mainly the Euro and the Real, will act as headwinds.
Richmond, VA-based MeadWestvaco is a global packaging company that provides innovative solutions to the world’s most admired brands in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco and agricultural industries. The company also produces specialty chemicals for automotive, energy and infrastructure industries.
At present, MeadWestvaco has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include AptarGroup, Inc. (ATR), Sealed Air Corp. (SEE), Bemis Company, Inc. (BMS). All these stocks carry a Zacks Rank #2 (Buy).
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