Value Investing Congress: Using Board Dynamics to Enhance Returns

Jeffrey Smith of Starboard Value presented a stock pick to the Value Investing Congress audience based on his firm’s practice of improving companies’ dynamics by replacing underperforming board members:
Wausau Paper (NYSE: WPP)

  • Former paper business from Wausau, Wisconsin
  • Starboard owns 15% of the company
  • Has become a towel and tissue product business in the last couple years. Traditional paper is declining; with tissue paper, there is no such threat. As Smith put it, “Last I checked, we’re going to be using toilet paper in the bathroom, not iPads.”
  • Starboard replace several directors on the company’s board to help it become more of a pure-play tissue business. Consequently, WPP sold the printing and writing portion of the business. Eventually sold off their technical paper business – which was losing money – for $100 million.
  • Still an opportunity to dramatically improve company’s cash flow.
  • In the last two years, under Starboard’s tutelage, WPP’s margins have improved from 7.4% to 28.6%. Net debt has fallen from $345 to $103.
  • Four of the nine members of the company’s board are true paper and tissue industry experts and not merely “friends of the former chair,” Smith said.
  • Business is now stable, with opportunity for growth, capital improvement and cost improvement. One major cost the company can shed is by closing its Wisconsin headquarters. Most of its operations are in Kentucky. That will save more than $30 million for Wausau.
  • Currently trading at 12 times cash flow, seven times implied EBITDA.
  • Needs rebranding: “Why would you call yourself Wausau Paper if you’re no longer a paper company and no longer in Wausau?” Smith asked. A name change could jumpstart interest in a little-known, sleepy company.
  • Could potentially buy back stock and implement a dividend based on strong cash flows
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