Contract
Exhibit 99.1
January 11, 2013
Wausau Paper Corp.
000 Xxxxx Xxxxx
Mosinee, WI 54455
Attn: Xxxxxx X. Xxxxxx, Chairman of the Board
cc: Board of Directors, Xxxxx X. Xxxxxx
Dear Xxx,
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, Wausau remains meaningfully undervalued and much more can be done to unlock significant value for the benefit of all shareholders. Specifically, we believe that Wausau 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 Wausau 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 Wausau 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 Wausau and the opportunities that we believe exist to unlock value for the benefit of all Wausau shareholders.
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 New York on September 19 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, Wausau once again disappointed investors by announcing that it would miss its expectations for the quarter ended September 30 due to underperformance in its Technical Paper business.
The Company ultimately reported an operating loss of $7.9 million 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 Brainerd, Minnesota 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 Wausau was able to utilize only 47% of Brainerd’s available machine time for technical product in the second quarter, and expects to utilize only 60-70% by the end of the year. Wausau’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 Wausau can generate enough profitable revenue to fully utilize the Brainerd facility in any reasonable amount of time. Since 2005, we estimate that Wausau has spent close to $100 million 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 negative 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. Wausau even acknowledges this problem and stated in its September 19 investor presentation that, “Today’s Specialty is Often Tomorrow’s Specialized Commodity”. Wausau 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 Wausau will be able to generate acceptable returns on capital competing against much larger players in what is rapidly becoming a commodity business. Instead, Wausau needs to sell its Technical business and focus on its highly profitable and valuable Tissue business.
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In Wausau’s Fourth Quarter 2011 earnings release, CEO Xxxx Xxxxxx stated, “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 Wausau’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. Wausau’s Technical Paper business generated approximately $500 million of revenue in the last twelve months. Although Wausau 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 Wausau’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 Wausau as a paper company. We believe once the Technical Paper business is sold, Wausau, 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 $150 million in five years. In order to realize this goal, according to the slides accompanying Wausau’s Second Quarter 2012 earnings call, Wausau 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 Wausau 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 Wausau must exit the Paper business and focus on Tissue. In an October 2, 2012 report, Xxxx Xxxxx 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.
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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 Wausau, but continue to believe that such value is not likely to be recognized as long as Wausau 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:
Currently, Wausau 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 Kentucky and Ohio, 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 Wausau 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.
As Wausau’s largest shareholder, we are not pleased with the status quo. Our hope is that management and the Board are already taking the appropriate actions required to address our concerns. Despite the addition of two strong independent directors as part of our settlement last year, we believe the Board still lacks sufficient industry experience and certain members may have been on the Board too long to view certain strategic and managerial decisions objectively, or to fairly consider alternative perspectives. We have identified several highly qualified, independent directors with significant and successful experience in the tissue and paper industries who we believe will bring a fresh perspective into the boardroom and who can be extremely helpful in evaluating and executing on initiatives to unlock value at the Company. Further, we believe Wausau’s continued underperformance and management’s lack of discipline in capital allocation warrant the addition of a direct shareholder representative on the Board to ensure that all decisions are made with the best interests of all shareholders as the primary objective.
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Under separate cover, you will be receiving a formal notice of our intention to nominate three director candidates for election at the 2013 Annual Meeting. The biographies of each of these three director candidates can be found below. We remain open to working with you and look forward to continuing our dialogue.
Best Regards,
/s/ Xxxxxxx X. Xxxxx
Xxxxxxx X. Xxxxx
Managing Member
Biographies
Xxxx X. Xxxxxx, age 66, has been the President and Chief Executive Officer of JSK Associates, an entrepreneurial and consulting entity that included, at various times active, passive, and part-time ventures, since May 1999. He has been the Senior Advisor to Apex Resource Technologies, Inc. (“Apex”), a medical device manufacturing company, since August 2012, and has served on the Board of Directors of Apex since November 2012. Xx. Xxxxxx also serves as Senior Advisor to Garnet River LLC, an IT services and business consulting firm, a position he has held since September 2011. Prior to that, Xx. Xxxxxx served as Vice President and Chief Financial Officer of Xxxxx Paper LLC, a manufacturer and supplier of fine quality uncoated printing and writing papers, from February 2009 until his retirement in September 2011. Previously, he was the Vice President Business Development of SCA Tissue North America (“SCA”), a global Swedish paper and packaging company, from March 2001 until November 2004. Prior to SCA’s acquisition of Encore Paper Company (“Encore Paper”) in March 2001, Xx. Xxxxxx was Executive Vice President, General Manager and Chief Financial Officer of Encore Paper from October 1999 until the acquisition date. Prior to Encore Paper/SCA, Xx. Xxxxxx served as Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary of Garden Way Inc., from February 1997 until April 1999 and as Vice President and Chief Financial Officer of Xxxxxxxx Machinery, a global Finnish paper company, from August 1993 until February 1997. He also served on the Board of Directors of various domestic and international companies, including Xxxxxxxx Capital, a private investment company that focuses on active direct equity investments primarily in industrial companies, Xxxxxxxx Finance Ireland, Xxxxxxxx Kamyr Engineering, Queensbury Hotel, and Kamtech Construction. Xx. Xxxxxx currently serves on the Board of Trustees of the GF Hospital Foundation and the Industrial Development Agency. Xx. Xxxxxx earned his Bachelor of Science degree in Accounting and Master of Business Administration from St. John’s University. Additionally, he is a Certified Franchise Consultant and a Senior Counselor for SCORE (LOA), a nationally recognized not for profit organization that assists small businesses.
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Xxxxxx Xxxxxxx Xxxxxx, age 60, has been the Senior Operating Partner of Xxxxxx Ferry Capital LLC, a private equity firm, since January 2007 and has served as a member of the Executive Team of Advisors of Xxxxx Xxxxx, a private equity company, since December 2005. Previously, he served on the Board of Directors of Converting, Inc., a manufacturer of high quality, disposable food service products and one of Xxxxx Xxxxx’ portfolio companies, from January 2009 until April 2010 when the company was sold. Xx. Xxxxxx also served as a Strategic and Operational Advisor and a member of the Board of Directors of Advanced Modern Technologies Corporation, a leading designer and manufacturer of innovative, high quality washroom automation systems, accessories, and water saving devices, from May 2008 to January 2011. In November 2007, pursuant to a request by the new ownership of Atlas Paper Xxxxx LLC, Palm Beach Capital LLC, Xx. Xxxxxx joined the Board of Directors and assumed the role of Executive Chairman in March 2008. He served in those capacities until his resignation in September 2009. Prior to that, Xx. Xxxxxx was the President and later Chief Executive Officer of Technical Concepts LLC (n/k/a Xxxxxx-Rubbermaid Inc.)(“TC”), an international manufacturer and distributor of automated fixtures and dispensing systems, from April 1997 until his resignation in April 2005. He thereafter served as a Consultant to TC until April 2006. While at TC, Xx. Xxxxxx assisted in quadrupling the company’s equity value. Prior to TC, Xx. Xxxxxx was the Asia Regional Vice President and Business Leader of the Away From Home Division of Xxxxxxxx-Xxxxx Corporation (f/k/a Xxxxx Paper Company), a Fortune 100 company, from 1995 until 1996, when he was asked by the President of the Away From Home Division to lead the Sales, Channel Development and Marketplace Integration efforts in North America, a position he held until 1997. Prior to that, Xx. Xxxxxx served as Vice President Sales and Channel Development USA of Xxxxx Paper Company’s Away From Home Division, from 1991 until 1994. Xx. Xxxxxx currently serves as Vice Chairman of the Board of Directors of The Xxxxxxx Center for Ethical Leadership, a position he has held since January 2006. Xx. Xxxxxx earned his Bachelor of Science degree and Master of Public Administration from the University of Southern California. He also completed Executive Development Programs at the Xxxxxx School of Business of the University of Virginia and is currently enrolled in the Doctoral Program Leadership Studies, PhD Program, Gonzaga University.
Xxxxxxx X. Xxxxx, age 40, is a Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value LP (“Starboard Value”). Prior to founding Starboard Value, Xx. Xxxxx was a Partner Managing Director of Ramius LLC, a subsidiary of Xxxxx Group, Inc. (“Cowen”), and the Chief Investment Officer of Ramius Value and Opportunity Master Fund Ltd. Xx. Xxxxx was also a member of Xxxxx’x Operating Committee and Xxxxx’x Investment Committee. Prior to joining Ramius LLC in January 1998, he served as Vice President of Strategic Development for The Fresh Juice Company, Inc. (“The Fresh Juice Company”). While at The Fresh Juice Company, Xx. Xxxxx helped orchestrate three acquisitions quadrupling sales and doubling market value. He later initiated and completed the sale of The Fresh Juice Company to The Saratoga Beverage Group, Inc. Since October 2011, Xx. Xxxxx has served as a member of the Board of Directors of Regis Corporation, a global leader in beauty salons, hair restoration centers and cosmetology education. In connection with Regis’ 50% ownership in Empire Education Group, a private company that is one of the largest providers of beauty and cosmetology education in North America, Xx. Xxxxx serves as a member of the Board of Directors. Previously, Xx. Xxxxx served on the Board of Directors of Surmodics, Inc., a leading provider of drug delivery and surface modification technologies to the healthcare industry, from January 2011 until August 2012 and of Xxxxx Corporation, a leading provider of digital solutions in the digital entertainment and digital imaging market, from March 2011 until its merger with CSR plc in August 2011. Xx. Xxxxx was the Chairman of the Board of Phoenix Technologies Ltd., a provider of core systems software products, services and embedded technologies, from November 2009 until the sale of the company to Xxxxxx Equity Partners in November 2010. He also served as a Director of Actel Corporation, a provider of power management solutions, from March 2009 until its sale to Microsemi Corporation in October 2010. Xx. Xxxxx is a former member of the Board of Directors of S1 Corporation, Xxxxxx Xxxx Corp., The Fresh Juice Company, and Jotter Technologies, Inc., an internet infomediary company. Xx. Xxxxx also served as a member of the Management Committee for Xxxxxxxx.xxx, which provides internet domain name registration services.
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