Starboard Value LP, together with its affiliates, currently owns 14.8% of the outstanding common stock of Wausau Paper Corp. (" Wausau" or the "Company"), making us the Company's largest shareholder. Prior to our settlement agreement, dated February 12, 2012, we sent the Board of Directors (the "Board") a series of letters outlining our views and perspectives on (i) the opportunities that exist to significantly improve the value of the Company and (ii) Board composition and corporate strategy. In addition, following the Company's second quarter 2012 earnings report, in which it became clear that the Technical Paper business was continuing to underperform despite significant new capital investment, we sent you a private letter discussing the need to sell the Technical Paper business.
As we have stated on numerous occasions, we are excited about the opportunities for growth and increasing profitability in the Tissue business. However, we remain concerned with the continued underperformance of the Technical Paper business and believe that it is a non-core business that poses a significant distraction to management and the Board, particularly in light of the important transition underway in the Tissue business. While we appreciate the fact that the Company has taken some of our previous suggestions and has sold its timberlands and money-losing Print and Color assets,
remains meaningfully undervalued and much more can be done to unlock significant value for the benefit of all shareholders. Specifically, we believe that
should explore a sale of the Company's Technical Paper business in order to focus singularly on its leading and highly valuable Tissue business.
Despite our repeated requests for
to explore such a transaction, to our knowledge, no action has been taken. We are therefore taking action today to nominate three highly-qualified director candidates who, if elected, will help to guide the Company through this transition period and execute on the opportunities ahead. We believe that each of these director candidates has the background necessary to ensure that
is run in the best interest of all shareholders and that maximum value will be realized for the benefit of all shareholders. If elected, these candidates will work with management and the Board to immediately engage a reputable investment bank to advise the Company on a potential sale of the Technical business while also soliciting offers for the entire Company, so that the Board can fully understand all of the alternatives and choose the option that will create the most value for shareholders.
For the benefit of management, the Board, and our fellow shareholders, we have outlined our high-level views on the issues that face
and the opportunities that we believe exist to unlock value for the benefit of all
Exit Technical Paper:
For the quarter ended
June 30, 2012
, the Technical Paper business generated an operating margin of less than 2%, before allocation of corporate expenses (after allocating corporate expenses, we believe the Technical business would have lost money for the quarter). Shortly following this report of dismal performance in the Technical Paper business, the Company hosted an Analyst Day in
to discuss its expectations for improved performance for the remainder of the year, even highlighting its full-year guidance. Less than two weeks after the Analyst Day,
once again disappointed investors by announcing that it would miss its expectations for the quarter ended
due to underperformance in its Technical Paper business.
The Company ultimately reported an operating loss of
in the Technical Paper business for the third quarter (again, before corporate allocation). The Company has attempted to explain these poor results by stating that the transition away from Print & Color forced its
mill to produce low-to-negative margin Coated & Liner and Specialized Commodity products in order to increase utilization and absorb overhead. However, even with these products
was able to utilize only 47% of
's available machine time for technical product in the second quarter, and expects to utilize only 60-70% by the end of the year.
's current strategy of filling excess capacity with low-to-negative margin products will result in continued underperformance, and the Company's hope of growing out of the problem with higher margin product is not realistic.
We do not believe that
can generate enough profitable revenue to fully utilize the
facility in any reasonable amount of time. Since 2005, we estimate that
has spent close to
in capital expenditures to fix and grow the Technical Paper business. Yet, over that time, the Technical Paper business' revenue has been stagnant, while operating margins have declined from just 2.3% in 2005 to
6.8% last quarter (and negative 1.5% over the last 9 months) – again, prior to any allocation of corporate expenses. Given the fact that a number of large players in the printing and writing industry have begun to move into technical paper as a way to diversify and improve their own margins, the technical paper industry is becoming more competitive and commoditized. We believe that this will only result in more aggressive pricing, lower margins and declining revenue.
even acknowledges this problem and stated in its
investor presentation that,
"Today's Specialty is Often Tomorrow's Specialized Commodity"
needs to heed its own advice and recognize that it is simply not realistic to believe that any plan centered on accelerating growth in Technical Paper will be successful, or that
will be able to generate acceptable returns on capital competing against much larger players in what is rapidly becoming a commodity business. Instead,
needs to sell its Technical business and focus on its highly profitable and valuable Tissue business.
's Fourth Quarter 2011 earnings release, CEO
2012 is about growth, as we target… technical market sales increases of …13 percent.
" For the first three quarters of 2012, this business has grown only 1%, which includes the filler product discussed above. For the most recent quarter, Technical sales declined 8% year-over-year. This is yet another demonstration that management does not have its finger on the pulse of the Technical Paper business, and this business should immediately be divested.
Despite significant internal challenges for
's Technical Paper business, we believe there would still be strategic interest in acquiring this asset. As the market for technical paper continues to become more commoditized, resulting in significant pricing pressure, larger players must push additional production through existing facilities in order to maintain and grow revenue and profitability.
's Technical Paper business generated approximately
of revenue in the last twelve months. Although
has been unable to generate reasonable profitability from these revenues, we believe an acquirer with the benefit of scale and manufacturing, distribution and overhead synergies, as well as a superior record of execution in commodity-like paper businesses, could produce much more attractive returns in this business.
Focus on Tissue:
Despite the fact that the vast majority of the Company's earnings come from its highly valuable Tissue business, more than half of
's sales still come from its Paper business. In addition to creating complications and distractions for management and the Board, this conglomerate structure is also confusing for investors, who appear to be valuing
as a paper company. We believe once the Technical Paper business is sold,
, as a pure-play Tissue company, will trade at a significantly higher valuation.
Additionally, given an extremely aggressive capital investment plan and expectations for significant growth in revenue and profitability in the Tissue business, we believe management and the Board must remain laser-focused on this opportunity. The Company has already set an aggressive goal of doubling Tissue EBITDA to
in five years. In order to realize this goal, according to the slides accompanying
's Second Quarter 2012 earnings call,
needs to reduce costs, redesign its product, improve its product mix and, most importantly, penetrate the premium away from home market, a market in which
currently has no experience. Given Wausau's history of poor execution, we believe the Company must focus its efforts entirely on the Tissue business.
Even the Company's sell side analysts agree that
must exit the Paper business and focus on Tissue. In an
October 2, 2012
of Deutsche Bank, one of the most highly respected analysts in the paper and packaging sector, stated:
Sadly, the turnaround case in technical papers is looking like last decades' failed turnaround efforts in printing & writing papers. Even more disappointing, the new management teams' credibility has taken a big hit. For nearly a decade, we've argued that Wausau ought to exit all paper operations and focus on its tissue business. For this entire period, Wausau has continued to focus shareholder cash & managerial time on bailing out a sinking ship. In the meantime, the residual value of the paper businesses has continued to erode.
As we have said repeatedly, and as we made clear to you during our settlement discussions last February, we believe the Company needs to separate its Tissue and Paper businesses. We feel there is tremendous value at
, but continue to believe that such value is not likely to be recognized as long as
remains a conglomerate with a healthy, growing, and well-positioned Tissue business that is overshadowed by a struggling and underperforming Paper business.
Reduce Corporate Overhead:
is operated as a conglomerate with significant duplicative overhead costs. Upon the sale of the Technical Paper business, we would expect the company to reduce corporate expenses to a level more appropriate for a standalone Tissue business. With the pro forma Company's business in
, it would be highly inefficient for the Company to maintain its headquarters in Wisconsin. Additionally, there is no need for the Company to have a separate layer of executive management overseeing the business – as a pure play Tissue business there should be one management team operating the business. A streamlined structure will not only reduce costs, but will allow the Company's top management to focus squarely on the task of growing revenue and profitability in the Tissue business.
Explore Strategic Alternatives:
In order to assist
in evaluating all of the opportunities highlighted above, we believe the Company should retain a highly-qualified investment bank to advise management and the Board. This advisor should be tasked with evaluating any and all opportunities to maximize value for the benefit of all shareholders, including; (a) a sale of the Technical Paper business, (b) a subsequent sale of the Tissue business, or (c) a sale of the entire Company. While we believe the Tissue business would be an excellent pure-play public company, we also believe it would be highly attractive to both strategic and private equity buyers. In order for the Board to fully and fairly evaluate the value created through a sale of the Technical Paper business, it must consider all alternatives with an open mind, so that it can compare the value realized by selling the entire Company with the potential risk-adjusted value of selling the Technical Paper business and keeping the Tissue business as a standalone public company.
In case there is any doubt from the Board whether a sale process could generate sufficient interest in a transaction at this time, it is our understanding that numerous potential buyers have previously expressed a desire to acquire the Tissue business or the entire Company, but that management has not been willing to engage in discussions in furtherance of a negotiated transaction.