Starboard's Jeff Smith has a new target

Starboard Value CEO Jeff Smith has two new targets.

Depomed, a specialty pharmaceutical company that makes painkillers and other drugs, was Smith’s first idea.

Smith said that Depomed has not scaled the business to an appropriate size, leading to a mis-allocation of capital on drugs that are not valuable.

By making these investments, the leverage of the company is 4 times its income and management has no plans to change this according to Smith.

Depomed should be attractive to an acquirer, according to Smith. There are strong drugs in the company’s portfolio and chances to scale up.

The problem, according to Smith, is that Depomed has resisted takeover chances before and the management team has disrespect for shareholders.

The head of the activist fund, Smith is best known for his targeting of Yahoo, leading to a recent board shakeup, and Darden Restaurants.

Smith also touted his investment in WestRock, a paper producer, a company that Starboard has had an investment in for some time. Smith said, however, that there is more room for improvement.

WestRock currently trades around $38 a share, said Smith, much lower than its peers and has room to run up.

Smith said that business of cardboard and paper is not in secular decline and macro-risks are already prices in. Smith had a higher opinion of management and believes that it has a “strong track record.”

The market has been weighed by “over-blown” macro-concerns according to Smith, but that will pass and the stock will stage comeback.

More to come…

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