Why RR Donnelley Is Splitting Into 3 Companies

After hearing the U.S.’s largest printing company talk for years about the synergies among its various divisions and acquisitions, securities analysts were dumbfounded last week when the company announced it would split into three.

 “So I thought part of the reason that the conglomerate made sense was that you could share a lot in terms of back office and operations and transportation and that kind of stuff,” Doug Wooden of Fort Warren Capital said to RR Donnelley’s executives during the company's quarterly earnings call. “Is it going to be difficult to separate into these three businesses given sort of integration that I thought was in the business?”

His fellow analysts (and some of my publishing colleagues) seemed especially surprised that RRD’s logistics arm would not end up in the same company as the publication-printing plants. They understand that, when everyone has basically the same presses, dropshipping and other logistics services are a major competitive battleground and point of differentiation for printers of catalogs and magazines.

Like Tuesday’s press release announcing the break-up, the explanations of Donnelley executives were barely intelligible except to native speakers of Corporatese. But amidst such happy-talk phrases as “more focused brand strategy” and “greater flexibility to execute tailored business strategies,” a few important clues to the break-up emerged:

Stock Price
Do you think of Donnelley as a high-tech company? No? Well neither does anyone else, including Wall Street. That’s why RRD wants to spin its “financial communications” ventures off into a separate firm that for now is being referred to as FinancialCo.

FinancialCo brings in about $1 billion annually from managing data, generating complex financial reports, translating documents, and providing similar services to the financial sector. But Wall Street still associates it with the dying business of printing prospectuses, quarterly reports, and other ink-on-paper reports than with its services like Edgar, a popular online repository of corporate financial filings.

“You look at FinancialCo and you think about what some of their trading comps might be,” said CEO Thomas Quinlan. “I mean some of those comps are trading at two plus times where we trade today as one entity.”

Translation: Though it represents less than 10% of Donnelley’s annual revenue, the equity value of a spun-off FinancialCo might exceed the value of all current RRD’s.

Today, FinancialCo venture is locked up inside what Wall Street views as a print-centric manufacturing company where “successful year” means “no decrease in revenues.” But as a separate company, FinancialCo would be able to attract money from investors willing to make risky bets on high-tech companies with strong growth prospects.

Acquisitions
Besides FinancialCo, the other company that will be spun off has the sexy temporary moniker of PRSCo, for Publishing and Retail-Centric Print Services Company, which will print and distribute “periodicals, catalogs, inserts, books, office products and directories.”

“PRSCo is going to grow through making the supply chain more efficient for publishers, merchandisers and retailers and through acquisitions,” said CFO Daniel Leib.

Consolidation is a textbook strategy for gradually shrinking industries, but Donnelley has a problem: As by the continent’s largest printing company, acquisitions of other printers are likely to face increasing scrutiny from and interference by federal regulators.

But though it would still have a sizable presence in certain corners of the publication-printing industry, a spun-off PRSCo would be less of a target for the antitrust police, who don’t necessarily understand that there are a wide variety of printing markets rather than a single market.

Debt and Pensions
Donnelley has more than $3 billion in debt and estimates its pension and other retiree benefits are underfunded to the tune of $677 million. Those obligations will stay with the company that will remain after FinancialCo and PRSCo are spun off, which will be known as CMCo (Customized Multichannel Communications Management Company).

That means that, like its high-tech peers, FinancialCo won’t be weighed down by debt or defined-benefit pension obligations. And PRSCo will be able to take on a lot of new debt to pursue acquisitions.

Strange bedfellows
Through aggressive acquisitions, Donnelley has brought a wide array of printing ventures into its tent. It prides itself on providing a one-stop shop that can – and does -- meet diverse printing needs of the most complex organizations.

But like many other producers of direct mail and short-run commercial printing, the “CMCo” part of Donnelley has branched out into offering email marketing, website management, and other services that don’t involve ink on paper. Some of CMCo’s competitors in the commercial printing arena have even dropped the “printer” moniker and call themselves "marketing service providers."

FinancialCo has morphed even more radically from its printing roots. It’s not even clear whether what’s left of Donnelley’s financial-printing plants will be part of FinancialCo or will instead go with one of the more print-oriented sister companies.

With both shopping-mall-sized printing operations that produce millions of copies and living-room-sized pressrooms with print orders of 1, having such a wide variety of printing operations in one company has always been a bit of a stretch.

And now that they are they becoming less about printing and more about “omnichannel,” the various parts of RR Donnelley are finding they have even less in common – and fewer benefits from being under the big Donnelley tent.

“Printing conglomerate” is no longer a logical organizing principle for a multichannel communications company.

Other articles about R.R. Donnelley:

• A Transformative Separation: Jim Hamilton of InfoTrends provides details on Donnelley's plan to split into three companies.  
• Rival Print Giants Donnelley and Quad Not Looking To Get Hitched 
• R.R. Donnelley Ready To Deliver When the Postal Service Doesn't

Rival Print Giants Donnelley and Quad Not Looking To Get Hitched

R.R. Donnelley and Quad/Graphics, the USA's two largest printing companies, apparently have their sights set on gobbling up more competitors -- but not each other.

Quad's CEO, Joel Quadracci, was caught off guard on Tuesday by a question from a Goldman Sachs analyst at the end of Quad's quarterly earnings conference call.

"I’d kind of love to hear your thoughts on potential regulatory pushback or maybe lack thereof on a tie-up between your company and your biggest competitor," said Fred Krom. Quadracci at first thought the question was about Courier Corp., which Quad recently planned to acquire until Donnelley stepped in with a higher offer.

Krom clarified: "I was actually referring to you and/or Donnelley but . . ."

"Oh, so me acquiring Donnelley?" Quadracci asked.

"You or vice-versa."

"We haven’t done any work on that and that’s not in our plans," Quadracci responded.

Donnelley officials were not asked the same question at their conference call Wednesday. But it's clear they have their hands full with Courier and several other acquisitions.

Though the U.S. printing industry is highly fragmented, certain segments are a true duopoly of only Donnelley and Quad. For example, they have North America's only rotogravure publication presses, making them the only real players that can compete for catalogs and magazines that have print orders in the millions.

So it's understandable that Quadracci wouldn't even dream of a linkup with his arch rival getting the approval of antitrust authorities.

But Goldman Sachs isn't known for asking idle questions.

Perhaps Goldman has noted that antitrust decisions involving print-media industries aren't necessarily logical: For example, the government took a full year to approve the merger of almost-bankrupt Verso Paper and just-out-of-bankruptcy NewPage, forcing a reshuffling of the industry that did little to preserve competitive markets for coated paper. But it didn't issue a peep last year when Quad bought Brown Printing, the duopoly's biggest competitor in the large-publication market.

Donnelley May Have Acquired EPA Trouble

Barely a month after doubling the size of its office-products business, printing giant R.R. Donnelley was cited for selling office products with “unregistered pesticides.”

On May 8, the company received a notice from the U.S. Environmental Protection Agency alleging that its ”distribution and sale of certain office products involving antimicrobial properties violated the Federal Insecticide, Fungicide, and Rodenticide Act (‘FIFRA’) because they constituted unregistered pesticides,” the company revealed last week. “The EPA is seeking civil penalties for the alleged violations.”

Esselte sells a line of antimicrobial file folders.

The revelation, buried on page 57 of the company’s quarterly financial report, said Donnelley “anticipates having discussions with the EPA regarding a potential resolution” of the issue, which “is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.”

On March 25, Donnelley completed the acquisition of Esselte, which makes office and stationery products, including some “antimicrobial” products that resist mold and mildew. As a result, Second Quarter office-products revenue for the U.S.’s largest printing company increased 141%, to $158.6 million, over the same period in 2013.

Donnelley’s statement does not indicate exactly which office products are involved in the EPA complaint or whether they are part of the Esselte division. Nor does it indicate whether the EPA singled out Donnelley or is investigating other companies as well.

“Antimicrobial products kill or slow the spread of microorganisms,” says the National Pesticide Information Center. “If a product label claims to kill, control, repel, mitigate or reduce a pest, it is a pesticide regulated by the U.S. EPA.”

Related articles:

• R.R. Donnelley Ready To Deliver When the Postal Service Doesn't 
• 6 Challenges Facing the Commercial Printing Industry
• A Shortage of Paper? You've Got To Be Kidding!

A Shortage of Paper? You've Got To Be Kidding!

Demand for graphic papers keeps dropping, usually faster than the industry can reduce capacity. Struggling paper mills are often playing a giant game of chicken, scuffling along on thin margins (or negative margins) in hopes that a competitor will shut down a machine to balance the market.

So why are paper companies suddenly announcing price increases for coated paper, and why is the biggest printer in the U.S. worried about possible paper shortages?

SAPPI surprised nearly everyone late last week by announcing a $40/ton price increase on coated freesheet (CFS) in the U.S. Then Verso delivered an even bigger shock this week with $40 hike not only on CFS but also on coated groundwood (CGW), which is in even greater oversupply than CFS.

But, first, let’s look at the rather cryptic statement from a recent R.R. Donnelley filing with the Securities and Exchange Commission:

“Management believes that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products,” the document said. “Contractual arrangements and industry practice should support the Company’s continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Company to successfully do so.”

What does Donnelley know that the rest of us don’t? With or without consolidation, how do you run out of something when demand for it is declining?

Donnelley seems to be worried about the proposed merger of Verso and NewPage, North America’s two largest makers of coated paper. “NewVerso" would control half the continent’s capacity for coated paper, which could stifle Donnelley’s legendary ability to negotiate very huge and very sweet deals.

The paper giant could play the “Our way or the highway card,” as NewPage has often tried to do (usually more to its own detriment than that of its customers). And it may be in a position to balance markets by aggressively idling or shutting capacity.

If the merged company is successful, smaller competitors might give up on certain parts of the market. Then a single NewVerso miscalculation – about demand or imports, for example – could quickly lead to shortages.

And if the highly leveraged company isn’t successful, Donnelley’s (and everyone else’) ability to secure coated paper could depend upon the mercurial moods of a bond market that cares nothing about the health of the paper, printing, or publishing industries.

Or maybe Donnelley is saying, “We really don’t know what consolidation of the paper industry will mean to us, but it could be a big deal. So our lawyers told us we’d better cover our donkeys in case a few know-it-all private-equity boys screw everything up.”

As for the nearer term, market participants say SAPPI’s move is a bit early and aggressive, but there is some hope that capacity reductions, the strong euro, a decent economy, and this year’s election will bring the CFS market into balance later this year. SAPPI is trying to set the table for a July 1, or maybe an Oct. 1, price hike for contract customers who have quarterly price protection.

“They’ll need others to follow and for demand to pick up for it to succeed,” one paper broker commented.

But Verso’s move on CGW seems to be more a matter of wishful thinking by a money-losing supplier. And so far it’s been met with silence by competitors. CGW faces two challenges that CFS doesn't: 1) High-quality supercalendered (SC) paper, which increasingly competes with CGW for some applications, but at a lower price. 2) The weak loonie (Canadian dollar), which means Canadian CGW and SC makers are happy to grab market share in the U.S. by pricing more aggressively than their American counterparts.

Here’s how one paper-market veteran summed up the pricing announcements: “Watch everyone announce, then [watch] the guessing game of who actually went up and who maneuvered for market share. All in all, they probably each have some bottom business they can raise, and that's who it [the price hike] will be applied to.”

Related articles:

• Untangling the Verso-NewPage Deal
• Odd Verso-NewPage Structure Eyed Warily by Wall Street
• 10 Reasons Coated Paper Is Ripe for Collusion  

R.R. Donnelley Ready To Deliver When the Postal Service Doesn't

If Congress decides to allow private delivery of newspapers and magazines on Sundays, the nation’s largest printing company is ready to step in.

“We are looking at alternative delivery methods for content, for physical content,” Thomas J. Quinlan, CEO of R.R. Donnelley, told financial analysts this week. (SeekingAlpha has the complete transcript.) “With the platform that we've built . . . with the addition of [recently acquired competitor] Consolidated Graphics, we've got the ability to be in the majority of populated cities in the United States.”

Thomas J. Quinlan

Quinlan expressed interest in the recent proposal by influential Congressman Darrell Issa, R-CA, that would “permit periodicals, newspapers and unstamped mail to be placed in mailboxes on days when the Postal Service does not provide mail delivery.” Current law gives the U.S. Postal Service a monopoly on delivery to mailboxes.

Issa’s proposal, especially if coupled with curtailment of Saturday USPS delivery, “creates an opportunity for us,” Quinlan declared.

He indicated that Donnelley’s interest is as much about keeping its publishing customers in business (and perhaps gaining a competitive advantage over other printers) as it is about actually making money on the delivery service.

“It's all about our customers and how can we reduce their overall total cost, make them more efficient,” he said. The Postal Service’s recent price hikes and reductions in service are forcing Donnelley to think that way.

Just not sustainable
“Look what USPS is doing to the mailing industry. It's just not sustainable. There's significant cost increases that they've put through. They're shifting cost to the players in the mailing industry, Quinlan said. “All these things, these are costs for the mailing industry that, quite frankly, we and other people like us have to go ahead and mitigate to our customers because our customers can't go ahead and aren't going to take the additional cost and look for people like us to, again, go ahead and mitigate those.”

“You look at Ladies' Home Journal that was announced by Meredith earlier this week [would be shutting down]. I mean, 40 to 47 percent of their cost was related to postage. It was nothing to do with electronic content.”

Issa’s proposal is no slam dunk. It’s sure to face a full-court press from postal unions and front-line employees who fear it would cost jobs and undercut the Postal Service.

USPS's position on the proposal is not as clear. The agency doesn’t want to give up the mailbox monopoly. But if it really loses money on delivering periodicals, as it claims, then perhaps it would welcome the opportunity to lose some of that business to the private sector [though methinks the alternate-delivery services would cherry-pick the most efficient periodicals mail and leave the dregs to USPS].

For a few years during the early 1990s, two alternate delivery networks that used newspaper publishers to deliver monthly magazines to driveways and front doors grew rapidly. But USPS won the magazines back – and squashed the private services -- by introducing more rate incentives for efficient Periodicals class mailers.

Related articles:

• Postal Service Dragging Its Feet on Fixing Periodicals 
• 6 Challenges Facing the Commercial Printing Industry 
• Old Ladies' Journal Sent to the Home

 

What the Quad/Graphics-Brown Deal Tells Us About U.S. Printing, Publishing, and Postal Services

Although Wall Street mostly yawned when Quad/Graphics announced this week it is acquiring Brown Printing, the pending transaction is a big deal for many major publishers. And it provides some interesting insights into the U.S. printing and publishing industries and even into the U.S. Postal Service.

For publishers of major magazines and catalogs – those with a print order of at least, say, 200,000 copies – the country’s third largest magazine printer has been the chief supplier of Duopoly Insurance. When Quad acquired its larger rival Worldcolor in 2010, Brown’s business reportedly surged as the big publishers worried about being at the mercy of printing giants Quad and R.R. Donnelley.

“Brown prints titles like Elle, Esquire, Family Circle and glossy catalogs for Macy's, Lord and Taylor and Saks Fifth Avenue,” noted the Milwaukee Journal Sentinel’s John Schmid (the only mainstream U.S. reporter who regularly covers the printing and paper industries, as far as I can tell).

Few other U.S. printers have the equipment or capacity to handle such large print runs of publications. And as part of Gruner + Jahr, a huge German printing and publishing firm, there was little concern about Brown’s financial strength or its ability to stay current with technology.

An underdog run by German engineers
Brown seems to have performed admirably. I don’t recall hearing anything really negative about the company, perhaps reflecting Americans’ natural tendency to root for the underdog. German engineers have been in key management roles at Brown, and it shows – in precise procedures and practices as well as in a nearly obsessive focus on plant loading (that is, smooth, predictable workloads rather than peaks and valleys).

Rather than trying to squeeze more years out of ancient equipment, as some Worldcolor plants used to do, Brown kept pace with Quad and RRD when it came to investing in new presses and bindery lines. But it wasn’t enough.

Installing the latest 64-page offset press was just table stakes when it came to competing with the Big Boys for prestigious publications. Brown’s investments kept it in the game but gave it no “sustainable source of competitive advantage,” as the MBA-types would say.

Brown may have had a true competitive advantage for awhile in the tabloid magazine market that was dominated by trade publications. Colleagues describe an unusual configuration of its press folders (there’s that German engineering at work) that enabled Brown to run magazine-formatted and tabloid-formatted pages on the same press.

Combined with Brown’s expertise in producing small-circulation weekly magazines (many of the tabloid trade magazines were weeklies) and its infrastructure for delivering them, Brown seemed to have a sizable market share in the niche.

A drooping niche
Then came the droop test. (See Viagra to the Rescue? Postal Regulations Are Taking the Life Out of Tabloid Magazines.) USPS instituted regulations in 2010 penalizing flat mail that wasn’t stiff enough to be handled efficiently by sorting machines. In advances of the new regulations, B2B publishers rushed to transform their tabloids to the shorter, less droop-prone magazine format.

Rising postage rates, a challenging advertising market, and improvements in browser-based magazine formats have meant continuing declines in B2B print orders. (Despite all the hype about iPads and fancy e-magazines, I suspect fewer Americans read magazine apps than read the more pedestrian browser-based page-flip magazines.)

Brown also has another distribution challenge: scale. “In every printing-contract negotiation I’ve witnessed, distribution has been the tie breaker,” a publishing colleague tells me.

When every printer in a market has the same or similar presses and bindery lines, the ability to provide co-mailing, dropshipping, and other distribution options tends to become the chief differentiator. In fact, much of Quad’s growth in its early days came from focusing more on distribution than the competition did.

Brown has plenty of equipment and expertise devoted to distribution. But without the volume that Quad and RRD have, it struggles to provide the same kinds of postage discounts and shipping efficiencies that they offer.

Brown's spokesperson acknowledged the issue in a statement to the Waseca County News that "Customers will have a lot of opportunity to benefit from this acquisition" because of Quad's "robust distribution service."

Ultimately, what may have caused Brown to be labeled “non-core” by Gruner + Jahr and sold for “only” $100 million was the realization that the U.S. isn’t Europe.

Schmid notes that, as a printing company owned by a publishing firm, Brown is “an anomaly” in the U.S. But that’s standard practice in Germany, where G+J is both the largest publishing company and the largest printer. (I don't pretend to understand why vertical integration of printing and magazine publishing is so common in Europe but virtually non-existent in the U.S.)

G+J was once a major player in the U.S. magazine market as well, with titles like Family Circle and Fast Company, and did much of its printing at Brown. But after several big deals turned into disasters, it turned tail and exited the U.S. publishing market in 2005.

You would think Wall Street would view the removal of a competitor as a favorable event for Quad, but the company’s stock is actually down a bit since Monday’s announcement. Standard & Poor's downgraded Quad, focusing not on competitive gains from the Brown acquisition but rather on Quad’s increased indebtedness amid “lower industry capacity utilization and aggressive pricing tactics by market participants that have eroded profitability.”

Related articles:

• Hell Freezes Over: Quad/Graphics Wants To Buy Worldcolor and Go Public 
• In Closing 5 Locations, Quad/Graphics Sticks With Its 'Mega-Plant' Strategy  
• 6 Challenges Facing the Commercial Printing Industry

 

6 Challenges Facing the Commercial Printing Industry

The two largest American printing companies recently presented similar lists of the major challenges they face -- and similar strategies for growing in the face of declining demand.

“The highly competitive market conditions and unused industry capacity will continue to put price pressure on both transactional work and contract renewals across all segments,” R.R. Donnelley stated in its 2013 annual report. Translation: Underused presses + shrinking demand = lower print prices.

It was basically same blues, different tune from Number 2 printer Quad/Graphics in the annual report it also released last week: “The industry has excess manufacturing capacity created by declines in industry volumes during the past recession which, in turn, has created continued downward pricing pressures.”

Both annual reports are more straightforward about the companies’ challenges than the accompanying, and more widely reported, press releases that announced their annual results. (Note to business journalists: If you’re just republishing press releases, you’re not really practicing journalism, are you?)

Besides overcapacity and declining prices, the two printing giants spelled out four other key challenges:  

• Postal rates: Both printers believe the recent 6% increase in most postal rates will put a significant dent in the amount of mailing their customers do. Thus, expect less demand for printing,  even more overcapacity, and weaker prices.

• Digital substitution: “Digital delivery of documents and data” are cutting into demand for print in certain categories, especially directories, financial documents, and books. That's leading to more overcapacity and lower prices.

• Erosion of print-based marketing: “Marketers and publishers [are] allocating their marketing and advertising spend across the expanding selection of digital delivery options,” Quad said. That means shrinking magazines and fewer catalogs being mailed, resulting in less printing demand, more . . . you get the picture.

• Customers’ use of print management firms, which, as Quad noted,“look to streamline processes and reduce the overall print spend of the Company’s clients.” 

Both companies are responding to the challenges via aggressive consolidation, with RRD buying Consolidated Graphics and Quad getting Vertis last year. And both are expanding beyond their U.S. base.

The two are acquiring not only competing printers but also non-print media providers, such as a translation service (by Donnelley) and a maker of point-of-purchase displays (by Quad).

RRD says the motive for such moves is “to provide a larger share of its customers’ communications needs.” In other words, customers may be printing less, but they still need to communicate, so the idea is to become a broad-based communication enabler, rather than solely a printer.

Related articles:

• A Funny Thing Happened on the Way to the Funeral of Print Media 
• After Massive Cutbacks, Quad/Graphics Investing in 'Redefining Print' 
• Affordable Postage A Key To Printing Industry's Future, Quadracci Says

Mine's Bigger Than Yours: Quad and Donnelley Squabble Over Co-Mail

The country's two largest publication printers sparred this week over who has the biggest, baddest programs for helping customers save money on postage.

Quad/Graphics fired the first salvo yesterday when it announced that "it is now breaking company and industry records for co-mail pool sizes, aggregated volume and customer postage savings."

“We now have more volume, co-mail equipment and capacity than any of our competitors," said Dave Riebe, Quad's President of Logistics & Distribution."But the key isn’t just size, it’s our unique co-mail optimization software that analyzes multiple cost components of the process – manufacturing, inline/offline co-mail, distribution and postage – to produce the maximum savings.”

It took only a day for North America's largest printing company to respond.

"We're operating the most full co-mail production lines in the industry," Thomas J. Quinlan, R.R. Donnelley's CEO, said today during the company's quarterly earnings call. "Our offer is unmatched distribution that includes co-mailing of Standard, Periodicals, and tabloid products and a co-pallet program that has the largest number of participants and the highest volume. For standard letter-size mailers, we offer tray co-palletization."

Co-mail and co-palletization are methods of combining catalogs, magazines, and letters from various customers in ways that help them take advantage of postage discounts.

When an analyst goaded Quinlan to talk about how Quad is integrating its acquisition of Worldcolor, he declined, saying "we don't talk about people outside the family." But he couldn't avoid comparing Donnelley's status to the Wisconsin-based upstart.

"We're building brand loyalty and we're driving growth. And this is done across technology immediate for print, web, mobile and social networks around the globe. No one else has that. No one else has that platform, and it's going to take them years and a heck of lot of money to try to build what we've built," Quinlan crowed.

One point on which the two companies agree is the strategic importance of mailing their customers' products in the most efficient manner possible.

“Mailing and distribution represents more than half the cost of typical catalog and magazine programs, so our ability to save money for customers in this area is a critical value,” said Joel Quadracci, Quinlan's counterpart at Quad. “Given the potential for more changes in postage rates and services in the near future, that advantage will become even more important for our customers.”

Related articles:

•  Dueling Bindery Breakthroughs: Three years ago, it was Quad that fired back with its own announcement after Donnelley unveiled a breakthrough in co-binding, another method of reducing postage costs.
• How about some free printing?: The postage savings available from co-mailing a magazine can exceed the cost to print it.
• Hell Freezes Over: Quad/Graphics Wants To Buy Worldcolor and Go Public: Donnelley tried first to buy Worldcolor, but Quad ended up taking over the rival printer.

In Closing 5 Locations, Quad/Graphics Sticks With Its 'Mega-Plant' Strategy

Quad/Graphics’ announcement of five plant closings this week provided reminders that its success has relied mostly on innovation and huge printing plants -- but not on acquisitions.

Quad bought one of the five plants, in Reno, NV, barely four years ago, fulfilling the company’s years-long dream to have a West Coast presence. It tried to "Quadracize" Reno by replacing most of the equipment with newer presses and binding lines moved from other Quad plants, but then seemed to struggle selling business into Reno.

With the Quad purchase, the plant lost a major source of business – doing bindery and offset-press work for the Reno rotogravure plant owned by Quad’s rival, R.R. Donnelley. Reno is too far from Quad’s co-mail operation in Wisconsin to produce catalogs and monthly magazines efficiently and too small to develop its own co-mail pool.

Although the plant is close to California, customers with time-sensitive products were nervous about serving that huge market from Reno because of frequent highway closings in the infamous Donner Pass. Quad can now serve that business from the former Worldcolor plant in Merced, CA, and has also picked up Worldcolor’s rotogravure plant in Fernley, Nevada, leaving no place for the little Reno operation.

Hurt by a Quad invention
The announced shutdown of the Corinth, Mississippi plant, however, results partly from Quad’s success as an innovator. For years, that plant seemed impervious to the ups and downs of the printing business because its key customer was National Geographic; no other rotogravure operation was configured to meet the magazine’s exacting demands.

Then Quad developed its patented triple-former folders, which gives a roto press the flexibility of an offset press, such as the ability to produce gatefolds and signatures with small page counts. The printing of National Geographic moved in 2002 to Quad’s Martinsburg, West Virginia plant, where the presses were specially designed to produce the magazine.

The Thursday announcement included the shutdown of two plants -- in Clarksville (not Covington, as I originally wrote -- thanks, "Anonymous"), Tennessee and Lebanon, Ohio -- that, like Corinth, Quad acquired last month in its merger with Worldcolor. Quad also announced it would accelerate the closing of the Dyersburg, Tennessee plant that Worldcolor had already started.

One publishing executive noted that his company had become accustomed to the closure of printing plants in Tennessee. Work that it did in the now-closed Covington plant was shifted to Dyersburg last year and then a few months ago to Clarksville.

Another publishing executive noted that the operations being closed do not fit the Quad profile of an ideal printing plant.

“Quad/Graphics likes plants that are a minimum of one million square feet and can be expanded,” he said. Until the Worldcolor deal, Quad had built those mega-plants from scratch in stages, usually with heavy helpings of Quad-invented technology.

The five closed plants, the executive noted, average barely half a million square feet “and are either not expandable, are in overlapping geographic areas or in regions that don’t support the current business level.”

Other recent articles on the Quad/Wordcolor deal include:

• No Quad Blues, But Quadracci Upholds Another Tradition 
• The New Quad/Graphics Still Has The Blues -- and Soul, Too 
• Quad/Graphics Has Quarterly Loss, Eyes Plant Shutdowns 

Quad/Graphics Was Profitable in 2009 Despite Big Sales Decrease

Quad/Graphics eked out a profit last year despite a 21% drop in revenue, the privately held printing company revealed in the first public disclosure of its finances.

The company had net income of $52.8 million in 2009 on sales of $1.788 billion, a 3% margin, according to a report filed late Friday with the Securities and Exchange Commission.

Quad provided a peak at its finances as part of its effort to become publicly traded and buy rival Worldcolor, a transaction it hopes will occur this summer. The document reveals that Quad employees own nearly half of the company's stock via the company's "Personal Enrichment Plan", a 401(k) and profit-sharing program.

In contrast to Quad, larger and more diversified rival R.R. Donnelley suffered only a 15% drop in revenue last year but had its third straight unprofitable year in 2009. Quad has been profitable the past five years, though its profit has shrunk the past two years.

Quad, however, is more heavily leveraged, with a debt-to-sales ratio of 0.44, versus 0.30 for Donnelley. That is apparently a result of Quad's tendency to invest heavily in new equipment and technologies, which the company brags about in its SEC filing:

"Over the last 15 years, Quad/Graphics has made substantial, yet disciplined, investments in its manufacturing platform, creating what Quad/Graphics believes is the most efficient and modern manufacturing platform in the commercial printing industry. Quad/Graphics also has made substantial investments in research and development and other technological innovations. These investments have led to the development of various manufacturing process improvements, including innovative press and finishing control systems and material-handling equipment for use in Quad/Graphics’ own operations as well as for sale to other printers worldwide. Quad/Graphics believes that this ongoing innovation focus positions it on the leading edge of technology in the industry. Quad/Graphics believes that this continual investment and innovation and its modern manufacturing platform, together with its focus on customer service and its distribution capabilities, have resulted in Quad/Graphics being one of the most profitable commercial printing companies in the industry, as measured by EBITDA (net earnings attributable to common shareholders plus interest expense, income tax expense, depreciation and amortization) as a percentage of net sales. This profitability, in turn, allows Quad/Graphics to continue to invest in equipment, research and development and other technological innovations to benefit its customers."

Donnelley May Come Calling, But Will Worldcolor Answer?

The proposed deal for Quad/Graphics to buy rival printer Worldcolor makes it difficult for another bidder to step in, though stock analysts predict R.R. Donnelley will try.

The Quad-Worldcolor agreement says neither company can encourage a competing proposal or “knowingly participate in any way in discussions or negotiations with, or furnish or disclose any information . . . in connection with any Acquisition Proposal.” The one exception: if one of the companies receives a proposal that its board of directors deems better than the proposed Quad-Worldcolor deal.

That means Donnelley or any other suitor would have to make a superior bid without having the intimate knowledge of Worldcolor that Quad executives no doubt have gained the past few months. Donnelley has plenty of people who worked for Worldcolor’s predecessors, but they lack up-to-date information on customer negotiations, labor contracts, capacity utilization, and other important areas.

Stock analysts at RBC Dominion Securities praised the proposed deal but said Donnelley could top it, reports Andrew Willis of the The Globe and Mail of Toronto. They said Quad’s proposal for Worldcolor values it at up to $13.70 per share but that Donnelley could bid more than $15 per share “and still have a deal that makes economic sense,” Willis reported.

RBC noted that Donnelley competes with Worldcolor in more businesses than Quad does (such as telephone directories and short-run publications), creating more potential synergies from a Donnelley purchase of Worldcolor. Donnelley made three attempts last year to buy Worldcolor’s predecessor, Quebecor World, but that was complicated by Quebecor’s bankruptcy reorganization.

The RBC report was issued before the complex (118-page) agreement between Quad and Worldcolor had been made available on the Web sites of U.S. and Canadian securities regulators. The agreement indicates that Quad will establish a wholly owned subsidiary that will “amalgamate” with Worldcolor into a new company known as “World Color Press Inc” that will have its registered office in Montreal.

Don't read too much into that last statement. It says nothing definitive about what the parent company will be called or where it will be located. Perhaps it indicates that Quad will use the Worldcolor (brand name) and World Color Press (legal name) in Canada, where Quad is hardly known.

With the Quadracci family maintaining voting control of the new Quad, it seems likely that the headquarters will remain in Wisconsin.

"Quad is very invested in Wisconsin," Joel Quadracci, Quad's chairman and CEO, told the Milwaukee Journal Sentinel this week. "My hope is that we actually grow jobs in Wisconsin," Quadracci said, calling the company's five plants in the state among the company's most efficient.

Related Articles:

• Donnelley Takes Its Ball and Goes Home: After three tries in less than a month, Donnelley gave up on buying Quebecor World last June.
• Printing's New Odd Couple Leaves Some Questions Unanswered: There are still some unknowns regarding the proposed Quad-Worldcolor deal, which resulted from discussions between the two companies' contrasting CEOs.  

Hell Freezes Over: Quad/Graphics Wants To Buy Worldcolor and Go Public

Here are a few quick observations regarding today's stunning announcement that Quad/Graphics has an agreement to buy Worldcolor (AKA World Color Press) and that the combined company's stock will be publicly traded:

• Note the press release's reference to “capacity rationalization.” Translation: Some plants will be closed.
• Though it is the country's third largest printer, Quad's finances have always been a bit of a mystery. That will change in a month or so when it has to file detailed reports with the Securities and Exchange Commission. 
• Quad is apparently more profitable than Worldcolor even though it is a smaller company, the press release indicates. That's why Quad's owners will get 60% of the new company and Worldcolor's will get 40%.
• Worldcolor has a mix of unionized and non-unionized plants. Quad is non-union and is managed in a way to avoid unionization through employee ownership, generous benefits, etc.
• Worldcolor has a variety of cultures and perspectives, reflecting its history of acquiring plants from a variety of companies. In contrast, Quad employees joke about “drinking the Kool-Aid” because of the company’s strong, rah-rah culture -- though some of the plants have definitely developed their own personalities and cultures.
• Anti-trust challenges seem likely. Worldcolor has a broader portfolio of businesses; for example, Quad does not deal much with book printing, short-run publications, or telephone books. But they are perhaps the two strongest co-mailers of magazines and catalogs (in terms of the savings they can offer via huge pools). And R.R. Donnelley is the only other North American printer that uses rotogravure, which is especially efficient at huge print orders (more than 1 million).
• Another potential hurdle is that either company may entertain, but not solicit, competing offers. Paging R.R. Donnelley.
  
• Interesting quotation from the investor presentation: "Consolidation likely to continue as industry participants seek to streamline costs to increase efficiency, maximize profitability, improve credit profiles and adapt to an increasingly dynamic and challenging endmarket environment."

After I finish picking my teeth up off the floor, I'll be writing more about this proposed transaction.

Transcontinental and World Color Gear Up for Consolidation While Donnelley Inhales Helium

With Transcontinental borrowing money for possible acquisitions and World Color Press making it clear who is in charge, The Big Printer Consolidation Dance had some interesting moves this week.

Meanwhile, industry leader R.R. Donnelley, which tried to be the Great Consolidator a few months ago, has wandered off for a dose of Helium.

Transcontinental announced Thursday that it will try to raise up to $500 million via debt and preferred-shares offerings “for general corporate purposes, which may include the repayment of indebtedness and the financing of acquisitions and investments provided market conditions are favourable.” That is apparently enough cash to gain a controlling stake in the other big printer based in Canada, World Color Press. Or is it still Quebecor World? Or maybe Novink.

World Color Press hasn't completely worked out the name thing since emerging from bankruptcy in July with its new but old name. Its Web site is still Quebecorworld.com, and many of its legal entities include "Novink", which was chosen and then abandoned as the name of the revived company.

But WCP did clear something else up: Mark A. Angelson, the person most responsible for consolidation of the North American printing industry, is definitely running the show. The company announced this week that the former Donnelley chief is now the CEO as well as chairman of World Color Press. Those who know him say he's there to do deals, not to make incremental changes.

What kind of deals Transcontinental has in mind is not clear. Besides the traditional commercial-printing business, it's involved in outsourced newspaper printing, newspaper publishing, and new media.

There was some speculation that Transcontinental's prospects were strained by its deal to print the San Francisco Chronicle because it might be stuck with an idle $230 million printing plant if the money-losing Chronicle's abandoned ink on paper. Hearst threatened to close down the Chronicle earlier this year if it didn't get union concessions.

But the prospectus for Transcontinental's debt offering says the Chronicle contract "provides for indemnification from Hearst Corporation should the San Francisco Chronicle cease publication or be sold." It also says the "contract size is for more than US $1billion (excluding paper) in revenues over 15 years."

And what of industry leader R.R. Donnelley, which made three unsuccessful attempts a few months ago to buy what was then known as Quebecor World? So far this month, it announced it is getting into the printer business in the form of a joint venture with HP to make digital inkjet presses.

It also spent $4.4 million on a minority stake in Helium, a "social publishing platform" that links freelance writers with publishers. It's not clear why Donnelley's interest has turned from buying other printers to Helium.

Maybe some RRD executives still grieving over the Quebecor debacle thought they could console themselves by taking a few big puffs and talking like Donald Duck.

Quebecor World Exits Bankrupty With a Familiar Name

Quebecor World went back to the future today, emerging from bankruptcy protection under the new but old name "World Color Press".

World Color Press and Quebecor Printing merged a decade ago to form Quebecor World. The company is changing its name to distinguish itself from its former parent, Quebecor Inc., a Canadian media company whose stake in the old Quebecor World is now worthless.

The new World Color Press is now owned mostly by the former lenders and other creditors of Quebecor World. The largest stockholders are Societe Generale, a Montreal-based bank, and Catalyst Fund Limited Partnership of Toronto. With the emergence from bankruptcy reorganization, a new board of directors chaired by Mark A. Angelson -- former CEO of printing rival R.R. Donnelley -- is now setting the company's direction.

The company's announcement said it obtained $800 million in exit financing, about two-thirds of which was used to pay off the special debtor-in-possession financing that kept it going while in Chapter 11. It also said World Color Press stock should begin trading on the Toronto exchange within 30 days.

Quebecor World had originally chosen "Novink" as its new name, but a QW official confirmed to Dead Tree Edition on Sunday that it dropped that name because of negative customer feedback. "Novink" appears in the names of many World Color Press subsidiaries. For example, the legal name of Quebecor World Logistics is now Novink Logistics LLC, though I suspect "World Color" rather than "Novink" will be used in the branding of the subsidiaries.

Quebecor World Ready To Abandon "Novink" and Bankruptcy Protection

Quebecor World will exit from bankruptcy protection this coming week, but not under the widely reported name "Novink," according to a company official.

"We will exit in the coming week," the official told Dead Tree Edition today, taking issue with my article from two days ago suggesting that the company's bankruptcy reorganization has been delayed.

It's true that nothing in the court documents describing the July 27 hearing about the "$1 press" says that the hearing must be held before Quebecor World can exit from bankruptcy protection. It is common in Chapter 11 cases to have some individual claims settled after the company exits from bankruptcy protection, someone pointed out.

Given Quebecor World's size and apparent value, none of the claims to be resolved in the bankruptcy case seems large enough to be a show stopper. And nothing says Quebecor World will close up shop or turn into a pumpkin if its reorganization is not consummated by midnight Tuesday, when its debtor-in-possession financing is set to expire. Financing deals can be extended.

Responding to customer feedback, Quebecor World has decided not to rename itself Novink when it emerges from bankruptcy protection, the official said. Some reports indicated the name was to be prounounced "new-vink" as a bilingual combination of "nouveau" and "ink".

It seems that the name was about as popular as le turd dans le punchbowl, if you follow my attempt at combining French and English. (Perhaps QW officials were concerned that French-challenged Americans would mispronounce the name as "Newsweek", which according to Gawker has not exactly been a model of humane or rational management the past few days.)

What is clear is that this is a complex case involving scores of subsidiaries and pension plans, as well as the coordination of bankruptcy courts and laws in the U.S. and Canada. That complexity has often confounded observers, such as those of us who thought R. R. Donnelley's first "stalking-horse" bid was a slam dunk because we overlooked the critical issue of timing.

What also seems clear is that the company will be free of much that weighed it down before its Chapter 11 filing, including a heavy debt load and its money-losing European operation. And the choice of Mark A. Angelson, the acquisition-minded former Donnelley CEO, to become chairman of the new company suggests that things could get interesting for the North American printing industry.

Quebecor World's Reorganization Delayed?

Please see "Quebecor World Ready To Abandon 'Novink' and Bankruptcy Protection", which clarifies and updates the information in this article.

Quebecor World's emergence from bankruptcy protection has apparently been delayed a couple of weeks, at least partly by a $1 printing press.

The big printing company had hoped to exit Chapter 11 (and the Canadian equivalent) this week with a new name and new board of directors, but a U.S. bankruptcy court has scheduled a July 27 hearing in the case. That is six days after the company’s debtor-in-possession financing is scheduled to expire.

Quebecor World has been silent about the case since announcing on July 2 that U.S. and Canadian courts had approved its reorganization plan and that it "anticipates the consummation of the Plans to occur in mid-July 2009."

The mainstream news media widely reported that announcement without noting, as Dead Tree Edition did, that there were still hurdles to clear. (So this is business journalism in the 21st century: One of the biggest bankruptcies in Canadian history is covered by professional reporters relying solely on news releases -- and a sleep-deprived amateur trying to make sense of dense legal documents.)

Despite various motions and hearings this week, the status of the joint Canadian-U.S. bankruptcy case is a bit murky. Quebecor World worked out a disagreement with a group of lenders and has tweaked the reorganization plan to settle some small claims. But at least one settlement would apparently affect the creditors enough that they must be given a chance to object – thus the July 27 hearing.

The settlement involves Quebecor World’s lease of a flexographic press in Merced, CA from Banc of America Leasing & Capital (which, despite the half-French, half-English name, is neither Canadian nor affiliated with Bank of America). The leasing company had filed a claim saying Quebecor World had not honored terms of the lease, which expired last August.

World Color Press, which was later purchased by QW, signed the lease in 1994, apparently as part of a lease-purchase arrangement. Capital-intensive businesses often use such deals to finance equipment purchases.

The settlement calls for Quebecor World to pay $144,000 cash for outstanding lease payments and for the leasing company to be recognized as having claims in the bankruptcy case of more than $1.3 million. That would cut into the compensation to be received by other creditors; the hearing will give those creditors a chance to object to the settlement.

Quebecor World will also have the option of purchasing the Cerutti press for $1. Because the press was designed to produce telephone books, a declining market, it may not be worth much more than $1.

There is no word on whether Quebecor World has worked out or overcome all other objections to its reorganization plan or whether it can get its financing extended. And there's no word on whether Quebecor World leaders are calling R.R. Donnelley and saying, "Now about that last offer . . ."

Quebecor World: Has the Stalked Become the Stalker?

Even his initials are M&A.

Fresh from rejecting several acquisition attempts by rival R.R. Donnelley, Quebecor World stunned the Donnelley folks this week by announcing a new chairman who knows a thing or two about mergers and acquisitions in the printing industry. And about Donnelley.

Mark A. Angelson, who retired from RRD two years ago after leading a massive acquisition drive that turned it into the world's largest printer, is to become the new Quebecor World chairman when the company emerges from bankruptcy protection and changes it name, reportedly to Novink. That is supposed to occur next month, though the U.S. government threw a fly into the ointment this week by objecting to QW's reorganization plan in bankruptcy court.

A lawyer by training, Angelson seems to live for the deal.

After bringing about the merger that created the Moore Wallace printing company, Angelson engineered the combination of Moore Wallace and Donnelley. Then in just four years as CEO at Donnelley, he led its acquisitions of Banta, Perry Judd's, and Von Hoffman, among others. His protege, Thomas Quinlan III, now heads Donnelley.

All of this leads to the obvious question: What is Quebecor World up to?

A hint came in this statement by a spokesman for Angelson and the other new QW directors: "The highly fragmented printing industry must undergo further consolidation, and this company will be an important part of that process. We look forward to providing overall strategic guidance, best governance practices and oversight."

That Donnelley-esque statement is a wake-up call for the Donnelley folks, who thought they were the ones to pursue the "strategic initiatives" to consolidate the North American printing industry. Those who crafted the proposal that Donnelley become QW's stalking-horse bidder were reportedly caught off guard by QW's responses, which amounted to "No," "No," and "Hell, no!"

Is Quebecor World audacious enough to think it can raise the capital to make a run at buying competitors? Or do the banks and other creditors who essentially own QW want an M&A guy who can get the maximum value from selling off or breaking up the company? Will Angelson remain a non-executive chairman, or will he end up running the company?

Let the games begin!

Second Guessing on Quebecor-Donnelley

A creditor and a stock analyst are second-guessing Quebecor World’s decision to spurn R.R. Donnelley's acqusition attempts.

Quebecor World cannot show that it “fully cooperated with RRD and adequately considered the RRD offer in light of the best interests of the Debtors’ estates, rather than entrenched management’s best interests,” disgruntled creditor Riverside LLC stated in its motion to derail QW’s proposed bankruptcy-reorganization plan. Riverside, which bought unsecured claims against the big printing company from various creditors, also argued to a U.S. bankruptcy court that the plan improperly discriminates against holders of multiple claims.

A stock analyst who follows RRD predicted QW would face “a tough stretch” when it emerges from bankruptcy, scheduled for mid-July. Down the road, it may end up wishing it had accepted RRD’s offer last week to buy it, Charles Strauzer of CJS Securities told the The Canadian Press yesterday.

QW’s balance sheet will be stronger than when it filed for bankruptcy protection, but its ambitious goals will run smack into the reality of a difficult economy, the analyst said.

The court-appointed bankruptcy monitor in Canada, however, has endorsed the reorganization plan, on which creditor voting is scheduled to conclude on Monday. Ernst & Young told the court last week that the most recent Donnelley's offer "has some merit, but carries significant execution risks."

One risk to the merged company would be “a loss of customers seeking to diversify the supply chain,” the latest monitor’s report said. Indeed, some folks who do most of their printing with RRD and QW have told Dead Tree Edition they would try to move some business elsewhere so that the merged company would not have too much leverage over them.

Ernst & Young also noted that achieving regulatory approval might require that parts of QW be sold off, with unknown cost.

QW and RRD held "numerous meetings and discussions" during the four-week courtship, including an all-day meeting May 29 in Washington, DC, Ernst & Young reported. It described the discussions as "cordial and open.

QW insiders say the company's new name is to be revealed on Monday, presumably in conjunction with the reorganization plan being approved. Some media outlets have reported that the new name will be "Novink", but the insiders will only say that the name begins with "N" and has six letters.

One correspondent pointed out another name fitting that description: "NotRRD".

Donnelley Takes Its Ball and Goes Home

R.R. Donnelley announced late today that it is giving up, for now anyway, on its efforts to buy rival printer Quebecor World.

RRD's third offer in less than a month to buy QW expired, RRD announced today, even though the proposal was "undoubtedly" better for creditors than QW's plan to emerge from bankruptcy next month, a company-issued statement said. RRD made the third offer on Monday; QW's board rejected it the same day.

"This would have been an excellent fit for RR Donnelley and the best opportunity for the Quebecor World creditors. However, given our view of the Quebecor World operations, a transaction ascribing a higher value to Quebecor World than we offered in our last proposal is simply not in the interests of RR Donnelley,” RRD's president and CEO, Thomas J. Quinlan III, said in the statement.

And here is Quinlan's kicker: “We look forward to continuing to pursue other strategic initiatives."

What other "strategic initiatives" does he have in mind? Since part of Donnelley's stated interest in QW was entry into the Canadian market, will it go after the other big Canada-based printer, Transcontinental Inc.? Or how about a sizable U.S. rival, such as Cenveo or Vertis? Or what about a post-bankruptcy Quebecor World?

Or maybe "strategic initiatives" just means "ways to remain profitable while round-heeled competitors keep dropping prices to get their idle presses running again."

Donnelley Makes Another Pass at Quebecor World

Please see the June 9 update, "After 3 Swings at Quebecor, Has Donnelley Struck Out?

Printing giant R.R. Donnelley sweetened the pot today in making another offer for rival Quebecor World.

Donnelley will kick in another $100 million in cash and help pay for QW’s financing costs until the deal is closed, it said in a letter to QW that it also filed with the U.S. Securities and Exchange Commission.

The letter revealed that the two companies have been in discussions since RRD made its first offer for QW on May 12. It said that RRD had already agreed last week to assume some of QW’s pension liabilities and to structure the deal to avoid tax liabilities for QW.

“If you are interested in continuing to pursue this transaction, we ask that you let me know by the close of business on Wednesday, June 10th,” today’s letter states. RRD is apparently eager to head off or alter a scheduled vote next week by QW’s creditors on a plan to have QW emerge from bankruptcy protection as an independent company.

QW has expressed concern that if that vote failed or were delayed, the company could have trouble continuing to operate after its debtor-in-possession financing runs out on July 21. RRD offered today to cover 50% of the costs of extending that financing – or 100% if it is not able to complete the acquisition.

“There would be no financing condition to the Acquisition,” today’s letter says. “We have sufficient funds to pay the cash portion of the consideration from cash on hand and/or availability under our existing revolving credit facility.”

RRD is still proposing that it be QW’s “stalking horse”, which means QW creditors could seek a better offer.