Sohn Conference: Jeff Smith Pitches Depomed (DEPO), Westrock (WRK)

Insider Monkey was in attendance at the Next Wave Sohn Conference in New York today and we have all the details from Jeffrey Smith‘s presentation, in which the head of Starboard Value pitched his bullish theses on Depomed Inc. (NASDAQ:DEPO) and WestRock Co (NYSE:WRK), two of his fund’s top positions.

Mr. Smith began by detailing his firm’s rationale insofar as how it selects companies to invest in, which not only includes finding undervalued companies, but also companies in which the firm believes it sees a clear path to value creation. Mr. Smith added that his activist firm has been successful in replacing 162 board members at companies in the past 10-to-12 years.

Mr. Smith’s first pitch was on Depomed Inc. (NASDAQ:DEPO), a company in which his firm just recently took an activist position in, consisting of 5.64 million shares, with economic exposure to an additional 375,000 shares. Starboard Value expressed wide-ranging concerns about the company’s governance and some of its initiatives along with the initial 13D filing on its position and immediately signaled its intention to try and add to its impressive total of replaced board members by announcing its plans to nominate a slate of director candidates for the company’s board at a special meeting.

Speaking of Depomed’s growth potential at today’s conference, Mr. Smith said:

“[…] we believe Depomed has several sources of growth within its portfolio, including treatments for shingles pain, migraines, and breakthrough cancer pain.”

Mr. Smith did however express concern over the pharmaceutical company’s lack of scale, which he believes could be forcing it to make poor capital allocation and/or strategic business decisions. Among other things he cited the debt that the company took on last year to help fund its acquisition of the rights to NUCYNTA, which has an alarming interest rate of nearly 11%. The company has also expressed its desire to make further acquisitions rather than pay down its expensive debt load, which Mr. Smith does not believe is in the best interests of shareholders.

Furthermore, Mr. Smith was critical of Depomed Inc. (NASDAQ:DEPO)’s refusal to engage with Horizon Pharma PLC (NASDAQ:HZNP) last year, after that company made a generous buyout offer at a 60% premium to Depomed’s share price at the time. Mr. Smith detailed some of the questionable actions that Depomed management took afterwards to insulate itself, some of which he had expressed in the aforementioned filing and in a letter sent to the company’s board some time after said filing, and asserted that shareholders need to ensure that Depomed has a board looking out for their interests, while stating his firm’s attempt to overthrow said board.

We’ll discuss Mr. Smith’s presentation regarding WestRock on the next page.

Mr. Smith then moved on to WestRock Co (NYSE:WRK), a company which he says he has had a much more amiable and constructive relationship with. As of December 31, Starboard Value owned 4.52 million shares of the packaging company, worth over $206 million.

Starboard initially took a position in MeadWestvaco (which would merge with Rock-Tenn to become WestRock in mid-2015) in 2014, believing that the company’s underlying value was being obstructed by its conglomerate structure and overhead. Mr. Smith sent a letter to MeadWestvaco’s Chairman and CEO in mid-2014 detailing some of the steps that he believed the company could take to improve its value, including a separation of the company’s non-core assets, and the improvement of its operating margins, both of which were achieved through its merger with Rock-Tenn according to Mr. Smith today.

Speaking of the company’s businesses, which includes making cereal boxes, beverage cartons, and plastic packaging such as pump sprayers, Mr. Smith said:

“Collectively, these are defensive businesses with ample room for growth. Over 90% of sales are from stable end-markets, which is food and beverage and consumer staples. In addition, WestRock has significant, non-core commercial and residential real estate holdings in Charleston, South Carolina; and they just spun off a valuable specialty chemical business called Ingevity.”

Mr. Smith cited the company’s dividend yield of 3.85% as being appealing and not only safe, but with the potential to actually increase over time. The company also trades at over 15% free cash flow yield, which is well below its peers. Mr. Smith stated that the undervaluation of the company would typically suggest that investors believe a company’s business is in secular decline, which he does not believe to be the case with WestRock Co (NYSE:WRK). He did add that containerboard prices have declined by 2% and that investors may be expecting them to decline further. However, Mr. Smith asserted that prices would have to decline by about another 16.5% to justify the current value of WestRock, which he believes would be unprecedented.

Mr. Smith closed by saying that once the spin-off of Ingevity is completed next week and fears over containerboard prices begin to subside, investors should begin to better appreciate the value of the company’s assets. He believes shares of WestRock could nearly double by the end of next year.

23 investors in our database were long Depomed on December 31, holding 14.5% of the company’s shares, while 35 funds had positions in WestRock totaling $971.18 million in value. Jim Simons‘ Renaissance Technologies owned 1.16 million shares of WestRock on December 31, but sold out of its position in Depomed during the fourth quarter, which had contained 104,146 shares on September 30.

Disclosure: None