Thursday, January 19, 2012

Which of These 4 Print-Related Giants Is Headed for Bankruptcy? Cast Your Vote

It was one thing when weak companies like Borders and NewPage went Chapter 11 last year. But now the bankruptcy talk has spread to four print-related companies that once seemed invincible or eternal: the U.S. Postal Service, Barnes & Noble, Quad/Graphics, and Verso Paper.

Are things really so bad for print media that the companies we thought were victors of the competitive wars have now become victims? Dead Tree Edition isn't so sure, so we're turning to our readers to help us understand.

We have initiated a poll (in the right column, just below the first ad and above the "Popular Posts" listing), asking which, if any, of these four companies will end up in bankruptcy court during 2012. You may vote for more than one, or for "None of the above." In the early balloting, only 30% of the voters thought none of the four would face bankruptcy this year, while Verso and USPS were in a tight battle for the title of most likely to succumb.

Update: Final poll results are at A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say. Additional commentary: A Surprise Leader in the Print-Media Bankruptcy Sweepstakes.

Here's a quick rundown of the candidates: 

In just a few years, declining mail volumes and Congress' inability to make decisions have turned what was the federal government's cash cow into a multi-billion-dollar money loser. Gene Del Polito president of the Association for Postal Commerce, summed up the situation this week:

"The one significant challenge that's facing the U.S. Postal Service is a very simple to discern: Its costs outstrip by a significant margin its ability to cover those costs with postage-paid revenue. Set aside for a moment all the rationalizing as to why this is so. No matter the reasoning, the result is still the same. Too many costs; not enough revenue."

The agency met with restructuring (AKA bankruptcy) advisors last year, and the word "bankruptcy" keeps popping up in news reports. (See Could Forever Stamps Become Worthless? What Bankruptcy Might Mean for USPS.)

But what exactly would "bankruptcy" mean for the Postal Service? Its dominant creditor, the federal government, is required by the Constitution to provide postal service. If the feds shuts down USPS, who will carry out this duty? (And don't do a George Will and tell me it will be FedEx and UPS.)

Barnes & Noble
The big bookstore chain was supposed to feast on the ruins of its rival, Borders, because it moved to the web much quicker and has the growing Nook line of e-readers (and a significant cut of the sales of any Nook editions of books and magazines). But a research organization recently put it on a list of the companies most likely to run into financial distress, and it does appear headed for another money-losing year.

The revelation that it might spin off the Nook business fueled speculation that the company is in trouble. One theory was that, after the spin-off, B&N itself would go Chapter 11. But why would the bondholders allow a spinoff that would weaken the parent company that much?

I think the possible spin-off is about tapping into the kind of deep pockets needed for the Nook division to keep pace with the likes of Amazon and Apple.

Quad's relatively high profitability enabled it to swallow a much larger competitor, Worldcolor, 18 months ago. With its investments in training and new technology, high level of employee ownership, and a “drink the Koolaid” culture, Quad has been a favorite of management gurus over the years.

But Quad appeared right behind Barnes & Noble on that list of high-risk companies. The Worldcolor acquisition left it with lots of debt, lots of excess capacity, and lots of integration headaches.

With the continuing rise of digital media and growing uncertainty about the Postal Service’s fate, being the #1 or #2 printer in such fields as magazines, books, telephone directories, and catalogs doesn’t seem like a particularly inviting position. And despite numerous plant closures since the acquisition, Quad still finds itself facing overcapacity and declining prices in many of its market segments.

Verso Paper
Verso was spun off from the mighty International Paper and has been a force in the North American publication-papers business ever since. Like its chief rival, NewPage, it was taken over by hedge funds. But it avoided the excesses (arrogance, bad customer relations, debt) that dragged NewPage into Chapter 11 four months ago.

NewPage’s failure isn’t necessarily Verso’s gain. NewPage is still in business and is left with only low-cost mills. As long as it's in bankruptcy proceedings, it will run those mills to maximize short-term cash flow while ignoring market discipline.

Paper industry analyst Verle Sutton, writing in The Reel Time Report, recently summed up Verso’s predicament this way:

“Numerous reports indicate that Verso will have a very difficult time staying out of bankruptcy during the next couple of years. The company expresses much more optimism than I am suggesting here, and I wish the company well, but the odds are against avoiding bankruptcy. Shutting down capacity (permanently) in an attempt to balance supply and demand would be very costly for Verso, and . . . would likely drive the company into bankruptcy even sooner.”


Old Journeyman said...

I have been in the paper and printing business for over 47 years and understand the challenges we face from technology and the impact on our industries. What I do not understand is our industries' feeble response to the environmentalists. Abundant Forests was a failure and PAPER because will probably follow suit along with Two Sides. Certifications (FSC, SFI, PEFC) do nothing to slow the decline either. We do not need more PR and ad campaigns. My guess is that 25 - 30% of the decline in the consumption of paper is tied in to the public's being mis-informed and/or uninformed on the environment, especially the state of the forests. Rather thsn fight the bully too many have turned and run the other way. I'd say let's get in the game and fight.

Anonymous said...

I see B&N being next in line.

As for NewPage only having low cost mills left, I thought Rumford was one of the highest cost mills in its organization?

Mark Jamison said...

The Postal Service is not going to go bankrupt and should not even be discussed in those terms. It is well documented that the financial problems experienced by the Postal Service are directly attributable to mandates placed upon by Congress rather than a failure of operations.
There is a real danger that the actions of the institutions management will undermine the value of the postal network making it much harder to maintain the reach and breadth of this valuable asset.
Congress will address the issue within the next few months. The solutions they impose are unlikely to be thoughtful or based upon careful study but they will likely find a way to sustain the institution for several more years.
My recent piece on the Blog Save the Post Office offers an alternative vision that could be the basis of the kind of far reaching conversation we need to have about the value and potential of the Postal Service.

Anonymous said...

I work at Rumford. It is one of the most efficient mills in its portfolio. However it does have high fiber costs due to fierce competition for open market wood from SAPPI and Domtar (Windsor QUE) in what was a traditionally cheap woodbasket( northern/central VT)

Anonymous said...

I buy my books and magazines from Amazon and read them on my Kindle and IPad. I can enlarge the type and photos to make it easy on my aging eyes. I grew up in the age of the composing stick and the flatbed Letterpress and moved on to photocomposition and indesign. Now is the best of times for readers and things will only get better. My money is on B&N to close its doors in 2012.

Anonymous said...

I agree that the postal service will never truly reach bankruptcy in the sense we know it now, but restructuring is inevitable. Unfortunately no one in the 2012 congress will have the ability to make the necessary moves. Apollo will keep Verso afloat this year, if only to have a play in the post-New Page world - some combination of these two groups will be the eventual endpoint.
B&N is only a matter of time - the Nook sell off will signal the end if or when it occurs. And Quad will hold on - for all their pompousness and overreaching, their plan is sound and they will continue to shrink and optimize over the next few years.

Anonymous said...

The wood basket in maine is a problem ,especially when competing against Sappi,Verso,Domtar....ect,but I dont think its as big a problem as the rumford mills age and lack of upgrades.Very old machines will not compete against the much larger and more efficient machines that newpage and Verso have in their portfolios.If you read N.P schedules and statements it will show you how poorly the rumford mill is doing against the other mills in the company.We can only hope for the best, but with demand shrinking faster than any one could have predicted,mills are going to close this summer.I expect Newpage and Verso will merge in some form(after more machine closures) and Rumford might not be part of the equation.

Anonymous said...

Have to agree about Rumford - they need capital for long term viability which NP will not be giving them - of course, when they are shutdown, the state of maine will give them breaks enough to survive short term under some guise (can you say millinocket), but life as they know it is coming to end in Rumford...

Gary said...

Who told you that Congress is REQUIRED to establish a post office? Read the constitution. It says

The Congress shall have Power To ...
To establish Post Offices and post Roads

This is not a requirement. I am disappointed that you pretend to quote the Constitution without reading it.

Anonymous said...

I sometimes wonder about all of these "industry insiders predict" articles. There was an excellent article in the NY Times recently about Esquire Mag and the fact that the boys at Wall St. 24/7 had them on their list of "brands" that would disapear in 2009. I looked at the list. Some of the brands did disapear, in 2011. Most of the brands, however, are still alive.

So someday, when I have the time, I want to look at a lot of these industry predictions: "250 BILLION TABLETS by 2013!!!!" "BEST TIME TO READ, EVER! IT"S ALL GONNA BE FREE!" "AMAZON IS PRINTING FREE MONEY FOR ALL CAUSE THEY'RE NICE!!!" and see how many are right.

Are these four giants in trouble. Yeah. And?....

Anonymous said...

I am like the Old Journeyman; I have been in the printing industry for 37 years. Been there done that. Printing in general is in big trouble! Will it survive? Yes in some form but the printing big boys are in trouble. They are going around buying smaller companies to make the bottom line "look" better. This will work for a while but it will catch up to them soon! I am hoping that smaller printers, the mom and pop shops, will make a come back? Remember I said I am hoping! But let’s get real, the tablets are going to kill the printing and publishing industries sooner than later! Paper companies and printers, we are living on borrowed time! I have been telling my kids for the last 10 years “DO NOT GET INTO THE PRINTING INDUSTRY IN ANY FORM! “ It is sad but true! The PO is like a cock roach, it will be around a lot longer than we will be and they are the worst workers in the world!

Anonymous said...

I think Verso survives very well. Sutton said about 400-600k of paper capacity in NA needed to be taken out. Port Hawkesbury of NP was mothballed, Stern Partners is still in negotiations to buy it. PH produced about 350k+ of supercalendared paper which is currently off line. Stern plans to run it but they need to get a good power contract and other concessions from the province before this is a done deal. Then Verso close sartell and bucksport which was most of their SC capacity. u take out that capacity and then u can potentially push up coated groundwood pricing.

in europe coated paper capacity is headed down too, UPM has been shutting a ton of plants.

Verso also has no near term maturities and an undrawn revolver.

Anonymous said...

It will be more likely that Verso Paper will go bankrupt than any of the others by virtue of the fact that it is a paper company. As more and more consumers switch to digital media, the need to use paper will decline. As for USPS going bankrupt, Congress will be forced to bankroll it no matter what because there will always be a need for a public delivery service to areas that the other services do not provide and never will; not to mention the thousands of mailbox services which depend on the USPS for survival. Barnes & Noble has been badly managed over the years but it is still the best competitor with Amazon. If BN is endangered or goes under, Amazon will achieve what it wants most of all: monopoly status; which means that the DOJ will have to move in and break it up into smaller, less threatening chunks. Never fear. The sky is not falling, it is just turning dark. The sun will still come up tomorrow.

Anonymous said...

Verso will not go bankrupt.I believe they are fast and furiously getting out of the coated market and turning to more specialty grades and food grades that will be around for many years to come. .The organization is managed very well and have invested heavily in their viable operations,not only equipment but also the power generation.I have invested in this company and think others should as well.They are here to stay.