Private Equity, Favorable Economy Have Keyed Interest in Printing Industry M&As
Chances are, you haven’t been acquainted with Martin Stein. But his name may soon become synonymous with printing industry mergers and acquisitions (M&A), and others will undoubtedly follow.
Stein is the founder and managing director of Blackford Capital, a Grand Rapids, Michigan-based private investment firm that acquires, manages and grows middle-marketing manufacturing, distribution and service companies. Blackford evaluates 5,000 potential deals per year, about 90 percent of which are ruled out quickly. The remaining 500 firms are judged on their business models, strength of management team and growth potential. Stein’s team then decides whether it can help the management team take that growth to the next level.
Typically, Blackford Capital will invest in three to six businesses in a given year. And, like many other private equity concerns, Blackford did not have any printing-related businesses in its portfolio.
“It’s a high fixed-cost business with the capital equipment investments,” Stein says of his previous hesitance to invest in printing establishments. “When we’re looking at earnings, we’ll use a formula of EBITDA less capex. The printing industry, generally, is a little lower on the EBIT scale because there’s so much price competition. Given those dynamics in the past, we saw this as an industry we should stay away from.”
That is no longer the case. Blackford Capital is among the growing number of private equity firms that now view the printing industry as a viable source for investing capital.
Printing’s Attractive Qualities
Stein notes four variables that have shifted his evaluation of the printing industry: It is a large space; many firms fit its criteria ($20 million to $100 million in revenues, $2 million to $10 million in EBITDA, 1-5 percent GDP growth rate); he sees profitable printing niches with growth potential; and, as a mature industry with a declining number of players, printing is well-suited for consolidation. Printers that serve growth industries such as health care, government and financial services are among the more favorable, he says. Blackford envisions completing 10 or more add-on acquisitions to the new platform in which they are investing.
So how can printing company executives make their businesses more appealing to private equity investors? Show profitability and growth, Stein underscores. His firm invested in a company whose industry—plastic injection molding and plastic extrusion—is like printing in that it is mature. But this extruder, which serves the furniture and appliance industries, has been able to notch a 25 percent growth rate in each of the last four years.
Graphic Arts Advisors, a boutique strategic financial advisory and consulting firm serving the printing and packaging arena, relaunched earlier this year, but it’s hardly a newcomer. Mark Hahn, managing director of the Mountain Lakes, New Jersey-based company, has more than 40 years of experience in the printing industry, backed by GAA partners Rick Mager and Mitch Evans.
Hahn notes the M&A landscape has been evolving during the years following the 2008 recession, with the number of distressed “tuck-ins”—the term for companies primarily acquiring another’s book of business—gradually diminishing. Hahn wouldn’t go as far as to say the landscape had become a seller’s market; instead, he feels the playing field has leveled off.
“Between the recession, the transition of significant advertising dollars to different channels on the Internet, and the introduction of the iPad and smart phones…all of those things came together and took a lot of marginal printers out of the market,” he says. “Some were tucked in, some went out of business, but clearly many of the weaker players were taken out of the marketplace.”
According to Hahn, his company is (on the whole) seeing balance sheets and profit margins finally returning to decent levels. “Printers are coming into the market ready to buy other companies—willing to write checks at closing. That’s a change in the market for typical family-run printing companies.”
Hahn also makes a distinction between the prices and interest from prospective acquirers that package printers are receiving as opposed to traditional commercial printers. The commercial, publication and insert printers will find it tougher to net a willing buyer, especially from a private equity standpoint. Packaging printers command the most attention from the private equity community, he says.
Hahn expects action to be brisk in the foreseeable future, with a smaller core of distressed companies being joined on the block by firms whose chief executives are aging out and lack the next generation of leadership to flourish as an ongoing concern. He wouldn’t rule out more action between the big boys (e.g., RR Donnelley buying Consolidated Graphics), and envisions roll-up strategies being done on a regional basis.
New Direction Partners, the Valley Forge, Pennsylvania-based buy-and-sell side M&A firm that specializes in the printing and packaging industries, has also witnessed continued interest in tuck-ins but has observed that there are fewer willing sellers on a tuck-in basis and, as a result, these deals have become more competitive. Buyers are paying, on the whole, higher royalty rates and even guaranteeing fixed payments, notes Peter Schaefer, one of the partners.
“We’ve noticed a lot more interest in the EBITDA-based, cash-at-closing transaction,” he says. “It started with specialized companies. If you’re specialized, growing and have a track record of margins, there’s going to be interest with buyers in an EBITDA transaction.
“Going a step further, we noticed 6-12 months ago that the private equity buyers are interested in printing again. Back in 2009, when the banks stopped lending, the economy was troubled and the industry was being rattled, private equity largely blacklisted anything to do with printing. Even if it was a healthy, rapidly growing printing business. But that has changed. I just went to market with a traditional printer and the response was very encouraging in that we had interest from 30 private equity buyers.”
Printing a Seller’s Market?
A number of factors have caused private equity money to look at printing companies, Schaefer points out. Pent-up demand has stirred competition among the equity groups that are particularly attracted to specialized companies that are growing. Banks are once again lending on printing transactions, while the strong economy and low interest rates are also helping to fuel the feeding frenzy.
The EBITDA multiples being paid by buyers are at the highest since the heady days of the late-1990s, a.k.a. the golden age of roll-up consolidators. The high end of the spectrum is in the 6.25x to 6.60x range, which a data analytics, retail POP or packaging firm might command. The equity competition, economy and interest rates have helped here as well, and publicly-traded companies are trading at slightly higher multiples, so they, too, can afford to pay a higher price for businesses, Schaefer notes.
Schaefer says a tuck-in’s major appeal (aside from size) is the portability of its book of business. In an EBITDA transaction, the acquiree needs to bring something unique to the table from a capability standpoint. Key management pieces, an equipment list and talented employees also play a large role in the evaluation process.
Those firms that are the most easily transacted include those that provide POP, retail graphics, labels, digital printing, variable data and Web-to-print capabilities, with direct mail still garnering consideration. Another attractive segment, Schaefer says, is companies that manage and control data, which fosters loyalty among customers.
The tougher businesses to move include general commercial job shops. Union-backed operations also represent a challenge, particularly if there’s a withdraw liability or an underfunding on the pension.
“One thing that has not changed in the past few years is that organic growth is so painfully difficult,” Schaefer adds. “Growth through acquisition remains very attractive to buyers. Five years ago, the main driver was tuck-ins. Today, the tuck-in remains attractive, but now buyers are much more open to earnings-based, cash-at-closing transactions, as well.”
For a printer perspective, we turned to one of the biggest transactors in the industry—Quad/Graphics of Sussex, Wisconsin. The company made headlines with its 2014 acquisition of Brown Printing, and nearly added book manufacturing specialist Courier Corp. before its Chicago neighbor, RR Donnelley, swooped in to offer an alternative that Courier’s shareholders couldn’t resist.
Andrew DeGuire, vice president of M&A and Corporate Development at Quad/Graphics, feels that the types of deals that have taken place during the past 18 months suggests that the industry is “heading towards the peak of the deal cycle,” a stage that includes many more private equity buyers backed by significant financing.
“When interest rates rise, as is currently forecasted, acquisitions by private equity lessen because that financing becomes more expensive,” he says. “These cycles typically last 5-8 years, with the previous peak in 2008.
More recently, DeGuire notes, there have been valuation challenges, with deals completed at higher-than-typical multiples because of unique characteristics about the businesses involved. This can cause the market to misinterpret trends, he contends.
“Other prospective sellers have generalized these as a new, higher benchmark instead of understanding the special considerations,” he adds. “In some cases, this has resulted in a disconnect between seller’s expectations and buyer’s willingness to pay. In a mature industry, there is a requirement to not overpay if the deal is going to be successful long-term.”
John Fowler, vice chairman and executive vice president of global strategy and corporate development, says little has changed in Quad/Graphics’ evaluating methods. Years ago, the company expended much effort in studying the best practices of market leaders in other industries and developed its own standard for acquiring and integrating companies. Today, Quad/Graphics’ M&A goal is to be the acquirer of choice in the industry by creating growth for employees and shareholders by better serving its customers.
Quad/Graphics’ criteria includes:
- A good strategic fit for the company.
- The economics make sense. “Underlying market growth can cover paying too high a premium,” Fowler relates. “In consolidating markets, there is no growth to provide that forgiveness.”
- Confidence in a smooth integration process. “We need to make sure we can retain the target’s human capital because they are what made it successful in the first place,” he says.
- Post-acquisition, the company maintains the financial strength and flexibility it had prior to the acquisition. “We are committed to the integrity and strength of our balance sheet to ensure we are able to take advantage of opportunities as they arise,” Fowler says.
A company needs to have demonstrated consistent earnings power and must be complementary to Quad/Graphics. Managerial talent that can add depth to an already considerable talent pool will go a long way toward making a target acquisition more attractive.
“Finally, the business needs to operate in the right way,” DeGuire says. “We have a set of values that go back to our company’s founding. They are core to who we are and how we operate. Any prospective addition to Quad needs to value the same things if we are going to work effectively together to serve our clients. Customers should see the acquisition as a win and be excited about it.” PI