VIC — Jeffrey Smith (Starboard Value)

Sleepy Stock that is set up to grow, from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 17, 2013

Starboard Value is a company that looks for activist investment opportunities where there’s a clear path to potential success. Either they’re successful in working with management, or they try to go over management’s head and try to replace board members and management defends themselves by doing the right things to create value. They are the most active activist investing group — they do more proxy battles and get more board seats, they’ve changed 40 companies dramatically in the past decade.

Most of the companies are good core businesses with small capitalizations, and usually the challenge is a company that is chasing growth initiatives and wasting money to obscure the successful business that they already have.

Example: Wausau Paper (WPP)

This is a $600 million company that makes paper, tissue, and technical paper — the gem is the towel and tissue market for office buildings, a refill and recurring business.

They divested the print business in 2012 and the technical papers last quarter, they had been holding on to those divisions because they were holding on to their legacy, but now they have much less revenue and dramatically higher margins.

Starboard has been involved since 2011, urging them to divest those two failing businesses and create the pure play tissue business gem. They sold the printing and writing paper and the timberlands, Chairman and CEO retired and they promoted a new CEO from within, and Starboard got two directors.

Starboard said that was a good step, but they weren’t satisfied yet — they also wanted the divestiture of that other division, the technical papers. Starboard threatened to run another proxy contest, lifted holdings to 15%, then the technical papers business was sold and Starboard added more directors.

Today8? They are the leading pure-play away-from-home towel and tissue company, an oligopoly geographically, and they just refill those dispensers over and over. They also invested into new machines so they can expand to meet the demand.

Now the opportunity is about execution. They are underlevered, and they can dramatically improve the business by taking out costs.

Revenue has gone down in two years, from a billion to $350 million. Margins have gone from 7% to 17%, and net debt is much smaller, it’s now valued at 12X EBITDA and has an expert board with four experienced tissue industry experts and the opportunity to get another $100 million in cost savings. ...

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