Printing's New Odd Couple Leaves Some Questions Unanswered

The American printing industry's new Odd Couple provided some insight today into Quad/Graphics' proposed purchase of Worldcolor but left several key questions unanswered.

At the companies' joint presentation to stock analysts, Mark A. Angelson did most of the talking even though his company is to be the acquiree rather than the acquirer. But that made sense given the need to communicate that the deal is favorable for Worldcolor and Angelson's experience in selling major mergers and acquisitions in the industry.

"Let's just say I've been to this movie before on multiple occasions," said Angelson, referring to his extensive merger and acqusition experience in the printing industry. "This is the most compelling combination that I've seen."

When the merger is completed this spring or summer, Angelson will give up executive duties to "lend integration and public company expertise" to Quad as a member of its board, according to the presentation.

The combined company will be led by the other member of the Odd Couple, Quad CEO Joel Quadracci, who by all accounts has proved to be a capable leader of the company his father founded. But he has never made a major acquisition or faced Wall Street's scrutiny.

Quad "built itself from greenfield growth" and has always emphasized that "our private status meant that we could manage for today but also for the long term," Quadracci said. He promised that the company would continue to focus on the long term and "the values that have made us successful."

The two CEOs could hardly be more different. Originally an M&A lawyer, Angelson, in his late fifties, has been the printing industry's Great Consolidator, responsible for rolling up such companies as Moore Wallace, Banta, Perry Judd's, and von Hoffman. The 39-year-old Quadracci was born with printer's ink in his veins and groomed to head up Quad -- no doubt with many a sermon from his late, colorful father about the benefits of being privately held and of building rather than buying.

But after numerous discussions that started with a lunch back in August, just a month after Worldcolor emerged from bankruptcy protection, the two apparently began to see eye to eye about the future of their companies. They spoke admiringly of each other at today's presentation.

Some of the questions still to be answered about the deal include:

• Sale Price: The Wall Street Journal put the price at $1.4 billion, but "that's not our number," Angelson said. "We're not going to know until we see how the shares trade between now and the closing."
• Synergies: The stated synergies of $225 million in the first 24 months ("I find Joel's number to be a touch conservative," Angelson noted.) no doubt include some plant closings, but that subject was avoided at the presentation. Not so on Web forums like Topix, where Quad and Worldcolor employees traded speculations about who would get the ax. Most assumed that only Worldcolor plants would be closed (which I don't think is a safe assumption).
• Change of Control: I'm told that many major print buyers have change-of-control clauses in their contracts, giving them the right to get out of or renegotiate their contracts if the the printer changes hands. It's not clear whether Quad's going public would trigger those clauses.
• Anti-Trust Challenges: By Angelson's estimate, the combined company's $5 billion in annual revenue will give it only 3% of the U.S. market, meaning that the printing industry will still be "highly fragmented". But a quick-print shop that produces menus for local restaurants is hardly in the same business as an outfit that prints, binds, mails, and ships millions of Parade magazines or L.L. Bean catalogs. Pressed for the combined company's market share in long-run printing, Angelson responded, "That's not a market, it's a segment." My guess is that anti-trust authorities won't block the deal outright but might require one or more plants to be sold off, just as Abitibi had to sell its Snowflake, AZ mill before merging with Bowater.
• A Good Deal? Both CEOs said the deal would be good for their companies, but analysts and investors will have difficulty deciding for themselves until Quad issues public financial statements, which could take at least a month.
  
• Print Pricing: Overcapacity has been steadily forcing print prices down, but that could change in parts of the market if there is one less supplier and not so many empty presses.
  

For more information, see:

• An old-fashioned merger at World Color: The Toronto Globe and Mail's analysis of the deal, which accompanies a fairly detailed news story.
• Hell Freezes Over: Quad/Graphics Wants To Buy Worldcolor and Go Public: Dead Tree Edition's initial thoughts on today's announcement.
  
• Quebecor World: Has the Stalked Become the Stalker? Angelson's hiring as Worldcolor's CEO signaled that the company was ready to talk M&A when it exited bankruptcy protection.
  
• The transcript of today's presentation.