MWV spin-off a response to 'Dear John' letter

MeadWestvaco CEO John A. Luke Jr.

The "Dear John" letter arrived at MeadWestvaco just over seven months ago. The company, led by CEO John Luke, delivered its latest response last week by pushing one of its fastest-growing offspring out of the nest.

MeadWestvaco Corp. is proposing to spin off North Charleston-based MWV Specialty Chemicals into a separate, publicly traded business before the end of the year. At the same time, it put the subsidiary in play by saying it would consider "other value-creating alternatives" for the division in the months ahead.

The board already has approved the somewhat vague spin-off plan announced Thursday, which followed a "strategic review process," Luke said in a statement.

The corporate break-up was instigated, in part, by activist investor Jeffrey Smith of Starboard Value LP, whose involvement places Richmond, Va.-based MeadWestvaco in some interesting company.

Smith last year engineered the ouster of the board at Olive Garden owner Darden Restaurants, where he is now chairman. More recently, he's been in the news for rattling Yahoo CEO Marissa Mayer's cage and calling for the Internet pioneer to merge with AOL. Starboard did not respond to requests for comment.

Smith showed up on MeadWestvaco's doorstep - unannounced, naturally, - in June, when his New York fund disclosed that it had amassed 5.6 percent of the company's stock. That's enough to get any CEO's attention. Starboard bumped up its stake to 6.1 percent last month.

Smith's 12-page missive to Luke described MeadWestvaco as "deeply undervalued," saying the company should dismantle its costly "conglomerate structure" and focus on the high-end packaging it sells to makers of pharmaceuticals and other consumer products.

"MeadWestvaco operates disparate businesses in five distinct reporting segments with limited synergies," Smith says in the June 2 letter. "We believe that this structure contributes to a general lack of operational focus and a bloated cost structure."

It was a blunt assessment of a company that's been a pillar of the Charleston economy since the late 1920s, when a predecessor - the West Virginia Pulp & Paper Co. - opened its landmark mill on the Cooper River. MeadWestvaco sold that business in 2008, but has remained an influential employer in the region.

Its Summerville-based real estate arm is spearheading the development of more than 109,000 acres of former timberland across the Lowcountry.

Once an afterthought, the chemical business is now a star and is the parent company's second-largest subsidiary based on revenue. Through the third quarter last year, it generated sales of $800 million, up 7 percent from the same period of 2013. MeadWestvaco announced it would seek alternatives for the North Charleston unit in September, about three months after Smith chimed in.

The chemical division is based right across the road from its owner's former paper mill and employs about 450 area residents. It's adding a $9.3 million innovation center off Virginia Avenue.

Smith probably couldn't care less about those details. He has estimated that a sale or spin-off of MWV Specialty Chemicals could fetch as much as $3.5 billion.

MeadWestvaco provided no estimate Thursday, but it didn't disagree with what Smith was calling for when he fired off his "Dear John" letter.

Luke said the proposal to separate the businesses "will establish two strong companies that are better positioned to compete and profitably grow in their targeted markets."

"We are in a strong position to take this next step to maximize value for our shareholders," he added.

Contact John McDermott at 937-5572.