Industry Reports

Deutsche Bank Reports Summaries

080407 Deutsche Bank Report - MWV Sells Charleston Mill

Deutsche Bank - Equity Research

MeadWestvaco {Ticker: MWV.N, Closing Price: USD 28.98, Target Price: USD 30.00, Recommendation: Hold}.

At last! Ending years of speculation, MeadWestvaco has announced the sale of its Charleston , SC linerboard and kraft paper mill for $485MM. The buyer is Kapstone Paper (KPPC), a company controlled by former Stone Container CEO, Roger Stone. From a valuation perspective, MWV is suggesting that Charleston is being sold for roughly 7x 2007 EBITDA. This implies that the mill had approximately $70MM in EBITDA - $82/ton on 833K tons of 2007 production. Since industry prices rose $40/ton in the autumn of 2007, the implied multiple of estimated 2008 EBITDA would be lower, suggesting that the deal is likely to be dilutive in the near-term. MeadWestvaco is targeting proceeds at debt reduction and expects the deal to close during Q3. Kapstone has committed financing for the deal.

We think this is a reasonable outcome for MeadWestvaco shareholders.

Charleston didn't "fit" with MeadWestvaco's new focus on downstream packaging and the mill was completely nonintegrated. The deal looks considerably better than the sale earlier this decade of MWV's Stevenson , AL containerboard to Smurfit-Stone. After adjusting for the value of timberlands and converting plants, we think that the similar-sized Stevenson mill went for approximately $300MM. Burned by criticism over that sale, we think that MWV has been much more disciplined in the Charleston mill. It is worth noting that the deal does not include any of MWV's 400,000 acres of South Carolina timberlands.

When coupled with its Roanoke Rapids, NC mill, Charleston will make Kapstone an important merchant seller of kraft paper & kraft linerboard. Although public press releases are pointing to only limited synergies, 1,100 employees on 833,000 tons/yr looks like a relatively heavy labor load on a mill of this scale.