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RR Donnelley Eyes Bankrupt Quebecor World

June 2009
CHICAGO—The proposed acquisition of North America's second-largest printer by the biggest of them all would create a giant of unparalleled proportions. The question is, would such a deal be a violation of this nation's antitrust laws? In a sense, would it also be the best thing to happen to the printing industry in years?

The mid-May shocker saw RR Donnelley (RRD) submitting a written indication of interest to acquire the assets and properties of Montreal-based Quebecor World for $1.35 billion in cash and stock. Such a deal, should it become reality, would transform RRD into a roughly $16 billion-a-year concern. The next largest printer would be Cenveo Inc., at about $2.6 billion.

Such a deal would essentially give RR Donnelley a stranglehold in the book and publication segments, and a strong presence in the more fragmented direct mail printing sector. The main question, though, is whether the deal would pass the Hart Scott Rodino antitrust litmus test.

"About 20 years ago, Donnelley had big-time trouble with Hart Scott Rodino when it tried to buy Meredith," notes Harris DeWese, CEO of Compass Capital Partners, one of the industry's top M&A advisory firms. "It ended up costing them a lot of time and money. But, I'm sure they've researched this carefully and have strong reason to believe they'll pass Hart Scott Rodino."

Bob Cronin, managing partner of boutique consultancy The Open Approach, notes that the combined companies would only represent 10 percent of industry sales, by his estimates. The true hurdle, he feels, is proving that the resulting stronghold in magazines and books would not constitute a monopoly. In the end, he sees a marriage taking place.

"Having lived through takeover attempts in a prior career, I can say it's very difficult to wiggle out of the net, even when you're posting phenomenal results," Cronin says. "Unless there's an antitrust issue, it will probably be completed, with Donnelley finalizing the deal."

The deal calls for $957 million in cash and 30 million shares of Donnelley's common stock, worth another $394 million, based on its value as of closing value on May 12. The transaction, expected to add to RRD's earnings within 12 months of the combined operations, is not subject to any financing condition and no shareholder approval is required.

"Our offer would significantly enhance our ability to provide customers more comprehensive end-to-end printing solutions, expand our geographic reach into the important Canadian market and better balance our capacity with customer demand—all while achieving significant immediate and long-lasting synergies," said Tom Quinlan, president and CEO of RR Donnelley, in a release.

"We look forward to the chance to work with the debtors as they develop the plan that they feel is in the best interests of their stakeholders."

Quebecor World is operating under Chapter 11 reorganizational bankruptcy rules in the United States and the Companies' Creditors Arrangement Act in Canada. It had expected to emerge from bankruptcy protection in July, though creditors could pressure the company and the bankruptcy judge to accept Donnelley's offer.

"Creditors are likely to get their money much sooner if they go with the Donnelley offer," DeWese notes. "The offer is a little less than 25 percent of sales. That's not a lot of money to pay for sales. Nowadays, companies go for 50 percent of sales, and I've seen years when it's been 75 percent."

In his letter to Quebecor World, Quinlan said he believes the $1.35 billion offer is superior to the restructuring proposal set forth in the First Amended Plan of Reorganization. In that letter, Quinlan also revealed that Donnelley had made an offer to purchase the company in August 2008, but did not receive a response.

As of December 31, 2008, RRD had just $331 million in cash on hand and $3.2 billion in long-term debt, plus $1.2 billion in other long-term liabilities. It saw its first quarter net profits plunge 92 percent year-over-year.

Such a combination of printing conglomerates would have two notable impacts. It would provide Donnelley much stronger pricing power in its major footholds. But it would also trigger an integration bloodbath that would entail plant consolidations and layoffs of thousands of employees, with some placing estimates at 7,000 to 10,000 job cuts.


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