Industry Consolidation -- A Quiet Buyer's MarketApril 2009 By Erik Cagle
One doesn’t need statistics to provide enlightenment as to the economic realities that 2009 will offer. But they do help to gauge expectations. Take Compass Capital Partners, publisher of the annual “Compass Report” scorecard of industry M&A activity, which has completed roughly 150 printing industry deals. Its chairman and CEO, Harris DeWese, points out there were 60-odd deals in the printing industry during 2008, a good 80 percent of which were printers; the rest, suppliers.
DeWese contends that virtually all of the deals were completed prior to August 31—before the economy went the way of the Titanic. Supply is far outpacing demand at this juncture, he says. It’s a familiar tale: Aging print shop owner needs a succession plan...children have no interest in continuing family legacy...shop may or may not need an infusion of new equipment because owner can’t or won’t invest at this point.
DeWese projects that the industry will see 25 to 30 significant deals in 2009, once the economy starts firing on all cylinders again. He sees multiples returning to the four-to-six times EBITDA range.
“The two sets of buyers, strategic and financial, were kind of quaking in their boots during the period of uncertainty,” DeWese says. “Everybody was just frozen in terms of buying anything, which is understandable.
“Now that we’re past the inauguration and the signing of the stimulus package, I’m a great believer in the theory of rational expectations. As people begin to see and hear about good things happening, we’ll start to see good things happen again. It’s not going to resume to the pace we saw in the late 1990s, but the industry still needs to consolidate.”
Roy Grossman, founder of MSP in New Canaan, CT, has re-entered the fray as an industry consolidator, expressly seeking digital printing companies primarily in the $7 million to $12 million annual sales range. It is a partnership model, with MSP seeking an 80 percent stake and the digital shop’s owner holding 20 percent.
“Our goal is to show an entrepreneur that, if we do our job right, their 20 percent stake will be a sizable second payday four or five years down the road,” asserts Grossman, a former Sandy Alexander senior executive.
“In the digital printing environment, there’s a ton of very successful entrepreneurs who use their own capital to build businesses. Now, they face two issues: One, access to capital is limited, so they’re having trouble growing the company. [Next], very often they don’t have the skill set or the inclination to bring the business to the next level. That’s where you need a partner,” he contends.
Grossman’s objective is to help guide these companies to the $25 million range, backed by MSP’s private resources and the think tank talent provided by fellow industry veterans Chip Stine and Jon Fogel. Not being at the mercy of third-party financiers is no small consideration, as those attempting to obtain conventional financing soon realize.
Offset printers that don’t enjoy a specialty niche, or at least dabble in the digital environment, stand to find the M&A landscape difficult to maneuver, according to Grossman. With heavy iron—particularly, web presses older than five years—often worth less than their payoff, it creates stress on the printer’s balance sheet. That can make closing a deal difficult.
“For many general commercial printers, these sellers need to realize they’ll have to hold paper to get a deal done,” he adds. “They’ll have to give the buyer a note, in most instances. So seller financing is going to become an important part of any deal, because of the credit market. Secondly, most of these companies will end up having a significant part of the consideration being a payout, an earnout.”
Another question buyers and sellers need to ask themselves: Should we regard the current conditions completely as a short-term byproduct of the economy, or has the game changed drastically for printing deals? Bob Cronin, managing partner of The Open Approach, which has directed multiple transactions, believes negotiators on both sides of the aisle are having difficulty finding common ground.
“Buyers expect sellers to realize that the value of their property has gone down, and that the multiples they will pay have gone down,” Cronin says. “Sellers may remember an industry deal from a year ago that was seven to eight times EBITDA; that’s just not happening these days.
“Both buyers and sellers are facing the shock value of the market itself. The buyers think they still have this great property that should have value. But, when you ask the question, ‘How do you perform in an economy that no one understands?’ no one has a good answer for that. It doesn’t bring comfort to the buyer, and without comfort on the buyer’s side, it hurts the multiple.”
Companies offering those long-preached value-added services are doing well, Cronin notes. Which printers operate in the most attractive vertical spaces? Which ones are in untenable positions? Financial services is under a terrible strain; print volume is down because there are fewer customer solicitations going through the mail. Advertising space for publications is off drastically, he notes, reflecting declines for traditionally stout bases such as automotive and financial services. Packaging labels for clients within the food industry are hot, he adds, along with point-of-sale materials.
Cronin expects to see more deals, where essentially the printer is only adding volume—asset deals where the only assets are salespeople and client lists. He’s not ruling out transactions being made by the majors, even though many of the publicly held printers are trading at around $10 to $15 a share.
“If you look at public stocks, and what the public stocks and printing industry are trading at as a multiple, they can’t do deals that aren’t going to be accretive to earnings. (Publics) can’t pay six times the multiple when they’re only trading at four times.”
Even if the current environment makes for a buyer’s market, not many deals are being closed. James Cohen, executive vice president of mergers and acquisitions for M&A powerhouse Consolidated Graphics (CGX), is seeing a tremendous amount of activity, but little consummation. The reasons: lack of financing for many buyers (not a problem for CGX, according to Cohen) and caution being exercised by buyers concerned that prospective acquirees could deteriorate as the recession deepens.
“Many sellers are in financial distress, actual or imminent, and several that do not think they are in distress are about to be, because their banks and other creditors have zero tolerance for covenant violations and/or defaults,” Cohen says. “Few buyers are interested in putting their own survival in jeopardy by buying a struggling competitor. But, for buyers willing to evaluate such opportunities, the negotiations are direct and to the point. No one can afford to waste time posturing. We are looking at many of these types of opportunities and expect to be looking at many more.”
Unfortunately, the economic realities of 2008 and 2009 are forcing printers to liquidate where, in the past, debtor-in-possession financing allowed companies to reorganize under Chapter 11 bankruptcy protection. Thus, some very notable industry names have disappeared.
“Banks have companies on a very short leash so, in many cases, they cut off their line of credit and the business stops in its tracks,” he notes. “Those companies that do manage to have time to look for a buyer, most often have declining sales and mounting losses. The very few buyers with cash on hand to buy such companies are reluctant to buy something that cannot readily be fixed or improved. No one wants to spend money and not get a reasonable return on investment.
“Also, in today’s environment, struggling companies just can’t hold on very long,” Cohen adds. “Buyers know that these companies will, in all likelihood, just shut their doors rather than get sold to a competitor or restructure.”
What does the back end of this economic saga hold for M&A players? Cohen feels it’s too early to speculate, but he does expect a thinning of the ranks. Printers with the wherewithal to invest in new equipment and technology—those that aren’t over-leveraged, were well-positioned before the recession, boasted a history of reinvestment and a prudent capital structure—will be the ones left standing. But, will they be looking to cut bait?
“Once the recession is over, it isn’t necessarily true that M&A activity will immediately ramp up because we may actually see fewer acquisitions, as the survivors may want to lick their wounds and fully recover before selling.” PI