The commercial printing industry is ripe for M&A. First of all, the market is highly fragmented, with 30,000 printers in the United States. About 400 companies control less than 30% of the market. Next, the printing industry has been undergoing significant change, as print media has declined because of the rise of the Internet. Finally, the global recession has been brutal and there is much overcapacity in the industry.So in this context, the merger of Quad/Graphics and World Color Press makes a lot of sense. The new entity will become the No. 2 player in the industry at $5.1 billion in revenues. The No. 1 company will remain R.R. Donnelley & Sons (RRD), which has roughly $10 billion in revenues.
The Largest Privately Held Printer
Founded in 1971, Quad/Graphics is now the largest privately held printer in the U.S. and focuses mostly on magazines, catalogs and direct mail. The company has 11 printing plants in the U.S., two in Poland and two in Latin America.
As for World Color, it is the No. 2 commercial printer in North America and has been investing aggressively in its infrastructure ($1 billion over the past six years). The company has 35 printing plants in the U.S., nine in Canada and seven in Latin America.
In other words, there is much synergy for a merger. The new company will have a multi-channel offering of print options and a blue-chip customer base that includes biggies like Sports Illustrated, Rolling Stone, Newsweek, GQ and the L.L. Bean catalog. At the same time, the plant infrastructure will be state of the art.
But perhaps the most important part of the deal is the cost savings. Within the next two years, the forecast is for annual savings of $225 million. Because of this, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins are expected to reach 17%.
Platform For More Deal-Making
This cash-flow potential will be important for paying down debt. Keep in mind that JP Morgan (JPM) and US bank have agreed to provide $1.2 billion in financing.
True, the market dynamics in the commercial industry continue to look dismal. Consider that it was in July of 2009 that World Color emerged from bankruptcy. And the bankruptcies should continue.
Then again, distressed assets can mean opportunities, especially for large players.
Besides, print is not going away. Interestingly enough, even dot-com players are starting to use print, such as catalogs.
However, it is likely that the M&A will come through purchasing traditional print assets. So, to pull this off, Quad/Graphics-World Color intend on becoming listed on a major American exchange (through an S-4 filing with the SEC). The company will have public stock to use as currency for deal-making and the valuation of the new entity is likely to be around $5 billion to $6 billion, which should be enough for more transactions and to continue the move towards consolidation in the industry.
Tom Taulli advises on business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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