Monday, September 16, 2019

Meredith's Time-Management Problem: The Largest Magazine Publisher Has Some Explaining To Do

Tom Harty sounds like a guy who thought he’d bought a shiny new car, only to find out the engine had been removed right before he wrote the check. And who then failed to report the theft to his insurance company in a timely manner.

Earlier this month, the Meredith CEO made some revealing statements about the mess Meredith inherited when it acquired fellow publisher Time Inc. (My article for Publishing Executive, Meredith Stumbles with Time Inc. Purchase, provides additional explanation and insights about Meredith’s announcements.):
  • “They were holding cash and not investing in the business.” 
  • “We had two years before we acquired it with their mismanagement, the business was down 25% year-over-year in print advertising,” Harty said. “And so the base of that advertising business is much lower than what we had expected at the acquisition.” 
  • “It has taken longer than we initially expected to elevate the print and digital performance of the Time Inc. assets.” 
  • “We acknowledge the challenges we face that resulted in a reset of EBITDA expectations for fiscal 2019 and going forward. Foremost, it took longer than expected to turn around advertising performance with the legacy Time Inc. brands.”
The trouble is that these revelations and acknowledgements came more than 18 months after Meredith plunked down $2.8 billion to buy Time Inc. and become the U.S.’s largest magazine publisher.

When Meredith released a revised forecast on Sept. 5 that announced the Time-acquisition troubles, its stock price dropped more than 26% in a matter of minutes, Wall Street cried foul, and trial lawyers started circling like sharks.

Meredith headquarters
“The Company made false and misleading statements to the market,” charges one of the many law firms that have announced or are considering class-action stock-fraud lawsuits. “Meredith overinflated the profitability of the Time Inc. merger. In fact, the Company was forced to make significant investments in the Time business to improve it. These investments negatively impacted the Company’s earnings.”

Most of Meredith's previous comments about the Time deal were far rosier. Ten months ago, Harty said, “We continue to expect to achieve our goals of reducing debt by $1 billion by the end of fiscal 2019 and generating $1 billion of adjusted EBITDA in fiscal 2020, meaningfully contributing to total shareholder return.” In the Sept. 5 announcements, Meredith dialed down its FY2020 EBITDA (earnings) forecast to the $640 million to $675 million range.

Just seven months ago, Meredith’s CEO said, “We are off to a strong start in fiscal 2019, delivering results that exceeded expectations. He added that, “We delivered significantly improved year-over-year adjusted EBITDA and margins, which we expect will continue through fiscal 2019.” There was no breakout of the former Time Inc. properties’ money-losing performance or references to the sad state of their ad-sales efforts and magazine-subscription lists.

Meredith now faces a few key questions about the Time Inc. acquisition:

Savings delayed or savings lost?
Meredith had projected $550 million in “synergy” cost savings from combining the two companies. Have those gains gone “poof,” as one stock analyst charged last week, or is it just that they will come later than originally projected?

Did Meredith understand what it was buying?
Some stock analysts now question whether Meredith conducted proper due diligence. I suspect much of the trouble happened after Time realized its sale was imminent, causing it to focus on short-term gains (by shrinking its sales staff and shifting to a cash-upfront subscription strategy, for example) rather than the long-term health of its titles.

Could it have prevented Time Inc.’s deterioration? 
Because it was purchasing Time with cash and not stock, it should have realized that Time no longer had an incentive to manage for long-term sustainability. But could it have built safeguards or incentives into the deal to ensure the Time titles didn’t deteriorate while awaiting new ownership?

What did it know about Time Inc.’s troubles, and when did it know it? 
Meredith dropped the first hints of trouble with the Time deal just three months ago, when Harty said, “We believe it will take longer than originally anticipated to achieve the remainder of the synergies.” But even then he added, “we remain confident we will achieve our $550 million cost synergy goal by the end of fiscal 2020.”

In hindsight, it’s easy to say that Meredith should have realized, and revealed, months ago that there was trouble in paradise. But the acquisition was massive and complex – Time Inc. after all was bigger than Meredith – and there was the difficult matter of splitting off the operations of titles like Time and Sports Illustrated for sale to other parties.

Could Meredith have been so consumed simply with keeping the newly acquired titles running that it didn't at first notice that in Time's last days advertising sales had been neglected and many multi-year, low-profit subscriptions had been sold?

Meredith’s Fiscal Year 2019 annual report, released Friday, said that it recently discovered “incorrect coding of certain magazine subscriptions by Time” – more than a year after it acquired Time. That gives you some idea of the challenges it faces in combining the two companies’ operations, systems, and data.

Did Time cheat Meredith?
Meredith has referred to Time as a sick “patient” that was mismanaged, but it hasn’t given any indication that Time violated the terms of the acquisition deal. Still, you have to wonder whether there will be claims that Time failed to disclose information or violated terms of the deal by allowing its business to deteriorate.

Stay tuned in the coming months (and years?) as high-powered lawyers for Meredith and its investors attempt to answer these questions.

Other Dead Tree Edition articles on Meredith and the magazine industry in general include: 

Tuesday, July 23, 2019

'Weak' Quad and LSC Offered to Shed Assets, But Feds Said No
"A printing press is a printing press."
Update: About two hours after this article was published, Quad and LSC announced they were calling the deal off. More to come.

Quad and LSC Communications offered to divest assets to win approval of their proposed merger but were unable to reach a deal with the U.S. Justice Department.

Quad (AKA Quad/Graphics) revealed the offer last week in its response to Justice’s lawsuit that seeks to block the merger of the two large printing companies on antitrust grounds.

Quad’s response denies that the deal would be anti-competitive, stating that “Quad and LSC are currently, and in the future will increasingly become, weaker competitors than they have been in the past.” And even if the deal would violate antitrust laws, Quad argues, it should not be killed.

U.S. District Court Judge Charles R. Norgle “instead should allow the proposed transaction to close, subject to the divestiture package that the Quad Defendants have proposed to the Division,” Quad’s filing says. A list of the properties that the printing companies offered to sell or spin off has not been revealed publicly.

Quad argues that printing is a single market because “a printing press is a printing press; in other words, the same equipment that is used to print the pages in a magazine can also be used to print the pages in a catalog, the pages in a trade book, and the pages in an education book. And the same equipment can also be used to print newspaper inserts, direct mail, phone books, professional books, children’s books, calendars, and commercial brochures, along with many other forms of printed products.”

That contrasts to Justice’s view that the production of magazines, catalogs, black-and-white “trade” books, and textbooks are all distinct markets – in which a combined Quad-LSC would have near monopolies.

It also ignores the reality that such factors as press configurations, paper selection, color requirements, bindery equipment, and distribution networks generally make it impractical to produce, for example, textbooks in a printing plant that specializes in magazines or to print catalogs in a directory operation.

Objecting to a dramatic chart included in Justice’s complaint (See "How the Feds Used Quad's and LSC's Own Words Against Them".), Quad claims “there is no such thing as ‘magazine and catalog presses’ and that “the chart excludes at least 140 commercial printers in the United States that also own web offset presses.”

Among other notable comments in Quad’s filing:

• “Quad and LSC Communications, Inc. (“LSC”) together represent less than 10% of the overall U.S. commercial printing industry. This industry is under assault. Between 2010 and 2018, print advertising—a category that includes magazine ads, catalogs, direct mail, and newspaper inserts—fell from a $55 billion industry to just a $19 billion one, a decline of over 65%.”

• “The Complaint . . . ignores that any attempt to raise print prices above competitive levels would only accelerate the movement of customers and products from print version to an online or digital format.” (Justice argues that, with a Quad-LSC merger, there would be no longer be “competitive levels” of pricing for some printing customers because there would be no viable competition.)

• Quad claims Justice is overly focused on multi-year printing contracts with large customers: “In actuality, the vast majority of Quad’s (and, on information and belief, its print competitors’) magazine, catalog, and book customers are relatively small customers that only buy print services on a transactional, or ‘spot’ basis, as opposed to doing so with multi-year contracts.”

• The “small number of ‘major’ customers are readily able and incentivized to protect themselves, among other ways, by sponsoring (or threatening to sponsor) competitors’ entry or expansion; by integrating (or threatening to integrate) vertically; and/or by moving (or threatening to move) all or part of their print work to other print formats or to alternative channels like digital formats.”

• Countering Justice’s claim that there are high barriers to entry for some printing markets: “To the contrary, high-quality printing and binding equipment is readily available for purchase on either a new or used basis, and can be purchased and installed in a matter of months.”

• It points out an apparent omission in Justice’s case: “Rotogravure presses are largely used for printing products like newspaper inserts.” Although a combined Quad-LSC would own every publication rotogravure press in the country, Justice failed to point out that the company would have a virtual monopoly for printing some types of newspaper and free-standing inserts.

• “Catalog customers are increasingly employing advanced personalization strategies where different versions of a catalog are customized for particular customers or customer segments or the catalog customer elects to use a direct mail product instead of a catalog . . . . This trend is driving catalog printing away from the presses traditionally used for longer-run print jobs and instead driving it towards digital presses.”

• “As more and more print customers have shifted to digital channels, Quad and LSC both have significant excess capacity; Quad therefore plans to use the acquisition of LSC to effect the orderly reduction of excess capacity in a way that (i) achieves more cost savings for customers than the two companies could achieve on their own; (ii) minimizes the burdens imposed on customers; and (iii) ensures that the best and most efficient capacity remains in operation after closing.”

• “Competing printers currently have excess capacity as well. . . . . This excess capacity in the industry will not only continue to exist after the transaction closes but will only grow as demand for printed products continues to decline.”

• “Many customers have expressed their support for the proposed acquisition.”

Related articles: 

Sunday, July 14, 2019

Judge Delays Quad-LSC Merger

Printers' request for expedited trial is rejected.

In another sign that Quad’s proposed acquisition of rival printer LSC Communications isn't going as planned, a federal judge has rejected the printers' request for an expedited trial.

That could delay the deal’s closing until next year, months after the “mid-2019” date the companies’ leaders projected when they announced the deal on October 31, 2018. And it apparently means Quad will have to pay a $45 million “reverse termination fee” to LSC regardless of whether the deal is consummated.

Last week, Judge Charles R. Norgle set the trial date for November 14. It might actually start even later.

“The Court notes that there are multiple criminal cases involving incarcerated defendants scheduled for jury trial during the fall of 2019; in the event of a scheduling conflict, these criminal trials may take priority over the bench trial in this matter,” he wrote.

Quad and LSC had asked the court for an expedited process, pointing out that the U.S. Justice Department’s antitrust division had been investigating the deal for almost eight months before filing a lawsuit last month in opposition. They also noted that their agreement requires Quad to make the $45 million payment to LSC if the deal isn’t closed before October 30 of this year.

Justice objected, saying that “Investigations are not the same as preparing a case for trial. Investigations are focused on deciding whether to bring an enforcement action and, if so, the scope of the lawsuit.”

It also pointed out that the October 30 deadline is entirely within the control of Quad and LSC: They can renegotiate it without the court’s intervention. (But LSC may not be eager to budge.)

“Defendants’ proposal to short-circuit the ordinary judicial process and rush to a “mini trial” to accommodate their preferred schedule would deprive the United States, the Court, and the American public of a full and fair presentation of the factual and economic evidence, which will demonstrate that the proposed merger eliminates important competition,” Justice wrote.

The two megaprinters, as well as some analysts, had expected the deal to get easy antitrust approval because the Justice Department has previously viewed printing as a fragmented industry with thousands of competitors.

Justice, however, took a groundbreaking approach in this case, focusing on markets rather than an industry. It objects to the deal because the combined company would have a virtual monopoly in four U.S. printing (and distribution) markets – medium- to long-run magazines, catalogs, “trade” books (such as best sellers), and textbooks.

Related articles:

Tuesday, June 25, 2019

How the Feds Used Quad's and LSC's Own Words Against Them

The U.S. Justice Department's lawsuit seeking to block Quad's purchase of printing rival LSC Communications relies heavily on comments from the two companies themselves.

"As LSC CEO Tom Quinlan remarked to investors mere months before the current deal was announced, combining LSC and Quad would eliminate ‘battle[s]’ between the two and could help lead to ‘[p]ricing stability,’” Justice’s lawsuit says.

The lawsuit argues that the combined company would indeed have the power to stifle price competition in four markets – the production (and in some cases distribution) of magazines, catalogs, single-color trade books, and textbooks. The deal would “significantly increase concentration in already concentrated markets,” the lawsuit says.

“As Quad executives explained in an internal presentation, ‘we are the only printer other than LSC that can offer the largest [book] Publishers a complete solution,’” according to the lawsuit.

LSC has a similar view of the book business: “When LSC sales staff learned that one of the next largest printers might bid on a major account, they described that competitor as a ‘band of bandits’ and concluded, ‘it’s all about [Q]uad, nobody else.’”

A two-horse race
“Catalog printing services is a ‘two-horse race between LSC and Quad,’ with the two firms holding a combined 69% share of the market according to a Quad Board of Directors deck,” says the lawsuit. It also claims that the two companies “control ‘more than half of all publication printing’ for magazines, with LSC the apparent source of that claim.

“LSC dismissed the next largest catalog printer (behind Quad and LSC itself) as a niche firm that merely ‘lives off our scraps,’” says the lawsuit, without stating who at LSC made the “scraps” comment.

Justice says the two companies dominate the production of medium-run and long-run magazines and catalogs because “they control a particularly high percentage of web offset presses and all rotogravure presses in the United States.” The lawsuit includes an especially dramatic “Magazine & Catalog Presses” chart showing that Quad and LSC have a combined total of more than 270 web offset and rotogravure presses, while the next largest competitor has about 20 offset presses.

(Justice doesn’t define what it means by “publication printing” or “web offset presses.” Based on the context, it seems to include only presses that can print on coated paper and deliver product suitable for binding – excluding presses that produce such products as newspapers, brochures, or direct-mail inserts.)

One thing Justice definitely didn’t claim is that there’s any collusion between the two giant printers. The lawsuit cites several examples of Quad and LSC slashing prices or offering multimillion-dollar signing bonuses to steal or retain major publishing customers from the other printing giant.

"The intensity of competition has concerned many at Quad, including one senior executive who remarked, 'We’ve been in a price war with them for some time. Don’t see that changing.'”

Such price wars have benefited publishers, Justice points out. Allowing Quad and LSC to combine would not only end the price wars, it would enable Quad to raise prices in the four markets where it would have a dominant share, the lawsuit contends.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees," Quad countered in a press release last week. “The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies," it added -- as if every screen print shop and invitations printer competes with Quad and LSC.

On the contrary, Justice's opposition is right on target, ignoring the printing business as a whole and focusing on four print-related markets in which Quad and LSC have virtual duopolies.

Related articles: