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EVP, Marketing at Specialty Print Communications

Against the Grain

By Dustin LeFebvre

About Dustin

A third-generation printer, Dustin LeFebvre delivers his vision for Specialty Print Communications as EVP, Marketing through strategy, planning and new product development. With a rich background ranging from sales and marketing to operations, quality control and procurement, Dustin takes a wide-angle approach to SPC

 

Double-dipping at the Bankruptcy Bar (Commentary on National Envelope's Chapter 11)

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Well, here we go again. As reported in yesterday’s Wall Street Journal, a large printing company files for a second round of bankruptcy protection within a few years. This isn’t the first time that a firm in our business has double-dipped at the bankruptcy bar. This time, it is yet another private equity firm that has found success in our industry elusive. But the Gores Group—which in 2010 “rescued” National Envelope from bankruptcy—probably came out all right in the end. They levered up the company, halted investment and siphoned off cash flows in the form of management fees and executive salaries, as is the case with most of their type. I’m sure they’ll be alright when the dust settles.

All of this begs the question: why are people so willing to issue debt in our industry, at such low rates, with such (seemingly) flimsy justification, and with such an awful track record? The premium for distressed assets is down to around 5 percent, close to a historical low. Have people forgotten the definition of distressed? There is a LOT of dumb money, and it doesn’t seem to be getting any smarter.

And that dumb money keeps getting burned time after time, Vertis after Vertis, National after National.

I attended the Chicago Booth CREDIT Conference, short for credit restructuring, distressed investing and turnaround conference, earlier this year. Kind of apropos, right? One speaker, Victor Khosla, chief investing officer at SVP Global and former president of Cerberus, declared 14 industries were just too distressed for him to bother investing. Among them were both paper AND printing. He put a giant red “X” over them in his PowerPoint slide, which was hard not to take personally. Perhaps he learned his lesson from his friends at Cerberus.

Another speaker was Lynn Tilton, a human dynamo who sleeps three hours a day, runs Patriarch Partners, and is responsible for having saved more than 250,000 U.S. jobs—most in the manufacturing sector—with her turnaround skills. Lynn runs more than 70 companies today and believes manufacturing has a place in the United States. She also believes that our most valuable asset is human capital and her actions back that up. In contrast with Victor Khosla, she even invested in the paper industry two years ago, as she acquired the Gorham mill in New Hampshire. Through her many turnaround stories, she declared that today, some companies and some industries just can’t be saved; they’re just not worth her time.

That’s not to say that the companies and jobs lack value. Some of the roads are just too steep a climb, and time is a finite resource that must be allocated judiciously.

With so many smart people running away, why are others rushing to issue debt and jump into our industry? And why can some companies lever up with nine times more debt than their equity is worth, and still be considered a viable acquirer of National Envelope’s assets? It’s all that dumb money, again.

The carousel just keeps on turning. One issue is the dumb money that flows into our industry only to get burned, and in the process, scorching investors, managers, and workers. Another, broader issue, lays with the rest of us; those of us who’ve stood by and watched this perpetual death spiral, thinking that it might not happen the next time. Shame on us for thinking that repeating past mistakes will somehow end up positively. When there is so much excess capacity and so many companies waiting in line, why let wealth transfer to a few through Chapter 11 and Chapter 22? What happened to good old Chapter 7? Maybe those of us who keep hopefully/hopelessly watching the carousel need to consider ourselves the insane ones.

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