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Blockbuster Trade for Quad, Transcontinental

August 2011

SUSSEX, WI—In the sport of professional baseball, July means—among other things—the celebrated trading deadline. By the 31st of the month, teams deal away or acquire players based upon whether they think their clubs will be competitive and have a shot at reaching the postseason. Some teams trade players to cut costs, while others build for the future.

Well, last month a pair of printing companies beat the nonexistent deadline for trading away facilities. Two of the industry's heavy hitters, Quad/Graphics Inc. and Montreal-based Transcontinental Inc., made a rare swap that is expected to benefit both organizations. Quad/Graphics will acquire Transcontinental's Mexican operations and sell its Canadian operations to Transcontinental, with the exception of Quad/Graphics' Vancouver, British Columbia, facility. As part of the deal, Quad also receives a portion of Transcon's Canadian book printing business that is produced for U.S. export.

The transactions have been approved by the boards of directors of both companies and are subject to customary regulatory clearances. The definitive agreement allows for the transactions to close independently of each other, but both are expected to close this fall. Essentially, they are an exchange of assets.

"This agreement is a win-win for Quad/Graphics and Transcontinental, and one that will create long-term value for both companies," contends Joel Quadracci, chairman, president and CEO of Quad/Graphics. "We have long recognized the high growth potential in Mexico and South America. This acquisition supports our strategy to grow profitably in geographies and segments where we can be a market leader through a diverse product offering and a superior operating platform."

Transcontinental currently employs approximately 900 people among its three facilities in Azcapotzalco, Toluca and Xochimilco, Mexico, and forecasts to generate approximately US$70 million of revenues for fiscal year 2011.

"Through this transaction, we will be redeploying our capital to the emerging market in Mexico, which has a growing middle class and a population more than three times the size of Canada," Quadracci points out. "To drive growth in Canada would have required a substantial capital investment. Canada is a lower growth, highly competitive print market with excess capacity. That market reality, combined with declining revenues and earnings, and along with the underfunded pension obligations of the Canadian business, makes Canada a less compelling long-term value creation opportunity for us compared to Mexico."

In the transaction, Transcontinental will also transfer to Quad/Graphics its black-and-white book printing business destined for U.S. export, which represents approximately US$25 million in sales.

 

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