Largest Bondholder Chatham Makes Offer to Acquire RR Donnelley for $7.50 per Share in Cash
It appears private equity firm Chatham Asset Management is putting its money where its mouth is. The dissident investor, which manages funds that own approximately 14.9% of the outstanding common stock and which is the largest bondholder of Chicago-based RR Donnelley & Sons (RRD), has submitted a letter to RRD's board of directors seeking to buy the remaining shares of North America's largest commercial printing company for $7.50 per share in cash.
The transaction would represent a 52.1% premium over RRD's closing price of $4.93 per share on Oct. 11, a 6.2% premium over the 52-week high of $7.06 per share, and a 92% premium over the 365-day volume-weighted average price of $3.91 per share. Chatham also indicated it would finance the transaction using cash on hand and external financing, and has secured a letter from Jefferies Group LLC supporting its ability to raise all necessary funds.
To facilitate the deal, Chatham also noted it is willing to equitize and/or subordinate its entire debt position, reducing RRD's total debt by 23%. As a result, Chatham calculates that annual interest expense, on a pro forma basis, would decline by approximately $36 million or 33%.
"Despite our efforts to engage with the board on ways to position the business for long-term success, we no longer have confidence in RRD's ability to achieve full and fair value as a public company under the current board and management team," Chatham Asset Management noted in a prepared statement. "As longstanding investors in RRD, we believe our offer presents the best path forward for the company to unlock its intrinsic value, while also providing shareholders immediate and substantial cash."
Chatham made public the Oct. 12, 2021, letter it sent to RRD's board of directors:
To the Board of Directors:
Chatham Asset Management, LLC (together with its affiliates, "we" or "Chatham"), is a New Jersey-based credit investment firm focused on rigorous, fundamentally-based research, with longstanding investments in the print media and marketing communications industries. Our investments in these industries are driven by our conviction that they continue to provide essential services in the 21st century. As evidence of this conviction, we are the largest stockholder and debt holder of R.R. Donnelley & Sons (RRD), beneficially owning approximately 14.9% of RRD's outstanding common stock and 41.4% of the aggregate principal amount of RRD's outstanding bonds. As further evidence of our commitment to the print and related industries, we hold significant investments in McClatchy, Postmedia, Accelerate360, and Vericast.
We have written, both publicly and privately, to RRD's Board of Directors (the "Board") many times since February 2020, seeking to foster dialogue around ways to unlock significant value at the company for the benefit of all RRD's stakeholders, including stockholders, customers and employees. In particular, we have repeatedly called upon the Board to explore a strategic review of the company's assets, in addition to recommending other operational and governance enhancements. Despite our efforts, RRD does not appear capable of achieving full and fair value as a public company under the current board and management. Therefore, after significant consideration, we believe the company should be sold in order to maximize stockholder value.
Accordingly, we are pleased to make an offer to acquire all the common stock of RRD not already owned by Chatham at a price equal to $7.50 per share, representing a 52.1% premium over yesterday's closing price of $4.93 per share, a 6.2% premium over the 52-week high of $7.06 per share, and a 92% premium over the 365-day volume-weighted average price of $3.91 per share.
We are submitting this offer to the board in good faith and with the goal of entering into a mutually agreeable transaction that is in the best interests of all stockholders. We have retained an experienced team of advisors, including Jefferies Group LLC as our financial advisor, and Olshan Frome Wolosky LLP and Lowenstein Sandler LLP as our legal advisors. Given our familiarity with RRD after over 9 years as investors in the company, we would require limited additional due diligence in connection with the transaction. We would be able to fully fund the transaction using cash on hand and external financing, such that the transaction would not be contingent on obtaining financing. To this end, we have obtained a highly confident letter provided by Jefferies supporting our ability to finance the purchase price of $7.50 per share and any applicable change of control premiums on RRD's debt, if exercised, as well as to refinance near-term maturities and to pay requisite fees and expenses.
To facilitate the transaction, we would equitize and/or subordinate $575 million in face amount of debt that we own and provide up to $250 million in new money equity and/or subordinated capital into a new holding company, which in itself would constitute a significant deleveraging event for the company. pro forma for the transaction, as outlined above, we currently estimate that the total leverage of the company would decrease by approximately 0.9x, from 3.9x to 3.0x, for the four quarters ended June 30, 2021, and that total debt would decrease by approximately $360 million, or 23%, as of June 30, 2021. As a result, we estimate that annual interest expense would decline by approximately $36 million, or 33%, for the four quarters ended June 30, 2021.
The transaction would be subject to the following conditions: (i) receipt of board approval pursuant to Section 203 of the Delaware General Corporation Law and the Company's Rights Agreement, as amended to date; (ii) receipt of any required governmental and third party approvals (including the expiration or termination of all applicable waiting periods under Hart-Scott-Rodino, to the extent required, and any required consents under material contracts and leases); (iii) confirmatory due diligence; and (iv) the negotiation and execution of definitive agreements providing for the transaction, which agreement would provide for customary breakup fees and a "fiduciary out" provision, as well as other customary representations, warranties, covenants and conditions.
Assuming the terms of the transaction are acceptable to you, we, together with our advisors, are ready to conduct the due diligence required, negotiate and prepare definitive documentation, and finalize and enter into binding agreements, including, without limitation, financing commitments, within the next 60 days. We are prepared to devote considerable resources to completing this transaction, and we are confident that with your cooperation we will be able to execute a definitive transaction agreement without delay.
As always, we stand ready to engage meaningfully and constructively with the board and any special committee formed to evaluate our proposal to achieve a successful transaction in a quick and efficient manner, creating value for all the company's stakeholders. Of course, this letter constitutes an expression of interest only and does not create and shall not be deemed to constitute or create any legally binding or enforceable obligations on the part of either of us until a definitive transaction agreement is executed. We reserve the right to withdraw or modify any proposal in any manner.
We believe that our proposal is the best opportunity for stockholders to achieve full and certain value for their shares on an expeditious basis. We look forward to a prompt response to this non-binding proposal.
Late last month, Chatham threatened to wage a proxy contest demanding RRD to appoint a new board chairman and add new directors, to terminate the company's poison pill, and to form a strategic review and finance committee. Chatham indicated the following initiatives must be implemented to stabilize RRD's share price and drive future value creation:
- A clear strategic review process focused on the identification and sale of non-core assets;
- Increased operational efficiency through improved margins from cost reduction;
- Improved capital allocation; and
- Better alignment of executive compensation with performance.
RRD's board of directors, as one would expect, did issue a brief press release indicating it was in receipt of Chatham's unsolicited offer. It said: "Consistent with its fiduciary duties, and in consultation with its independent financial and legal advisors, the RRD Board of Directors will carefully review and consider the Chatham proposal to determine the course of action that it believes is in the best interests of the company and RRD shareholders. RRD shareholders do not need to take any action at this time."
Nevertheless, should the deal come to fruition, it really is incredible to think that North America's largest commercial printing company — founded in 1864 by Richard Robert Donnelley, renamed Lakeside Printing and Publishing Co. in 1870, destroyed by the Great Chicago Fire of 1871, and that eventually went public in 1956 to raise more capital for expansion — could become a privately-held business again owned by a large private equity firm. Stay tuned!