Wednesday, May 13, 2009

R.R. Donnelley Stalks Quebecor World

For many large American publishers there are only three printing companies. Soon, there may be only two.

R.R. Donnelley stunned the printing and publishing industries today by announcing its offer to be the "stalking-horse" bidder for rival Quebecor World, which is about to emerge from bankruptcy reorganization. It offered Quebecor's creditors, who essentially own the company, everything they would receive from the reorganization (which for many unsecured creditors is at most 50 cents on the dollar) plus 15% ownership of Donnelley. Donnelley stock closed down 9% today, making the stock being offered to the Quebecor creditors worth about $360 million. (See also "Q&A on the Donnelley-Quebecor Deal".)

Donnelley's proposal letter expressed confidence that the deal would be approved by the U.S. and Canadian governments, but the word "antitrust" was on the minds and lips of many major buyers of printing today.

Donnelley may point out to government agencies that the United States has thousands of printing companies. But only three -- Donnelley, Quebecor, and the privately held Quad/Graphics -- have rotogravure publication presses. And only those three have co-mail pools that typically contain at least several million magazines and/or catalogs. As good as they may be, "second-tier" printers with only offset presses and smaller co-mail pools simply cannot compete with the Big Three for much of the long-run catalog and magazine work in the U.S.

For parts of the market, such as for rotogravure magazines inserted into newspapers (like Parade and American Profile) and for telephone directories, it's really the Big Two, with Quad mostly or completely out of the picture. Quad has been trying to break into the newspaper-insert magazine market for years and reportedly built its Martinsburg, WV plant because it (mistakenly) thought it had a deal to print USA Weekend.

But a foray into coupon printing years ago that nearly bankrupted the company has engraved a commandment into Quad's corporate DNA: Don't get into price wars on printing. The Wisconsin-based company tends to compete instead with features like high-speed binderies and efficient co-mail pools -- which are irrelevant in the if-we-get-this-business-at-this-price-will-we-have-any-profit-margin? world of printing Sunday newspapers.

With its stalking-horse bid, Donnelley would set the bar for anyone wanting to buy all or part of Quebecor World, though the creditors would still be able to seek better deals. Even if the proposal does not pass anti-trust muster, it could be a winner for Donnelley by preventing competitors from buying Quebecor plants at fire-sale prices and then using their nearly debt-free status to undercut Donnelley.

I would love to hear your concerns, questions, or insights about the Donnelley proposal. Please email them to Dead.Tree.Edition@gmail.com. I promise not to attribute any comments to you or your company without your authorization.

1 comment:

Justin said...

The printing industry, at least as far as catalouges and magazines go, is quite dead as the internet continues to wipe out the need for catalouges. Most magazines have free online editions, so why buy the print?

So in other words, let R.R Donnelley purchase Quebecor World. The bondholders will be paid out, and this chapter can finally, and mercifully, be closed.