LSC Communications Shareholder Files Lawsuit to Block Proposed Acquisition by Quad/Graphics

LSC Chairman Thomas Quinlan and several LSC directors are named as individual defendants in the shareholder lawsuit.

As one might expect when it comes to a proposed, $1.4 billion all-stock mega-deal, not all shareholders will be on board — especially when the stock values of the publicly-held companies involved plummet following the Oct. 31, 2018, M&A announcement. According to a Bloomberg Law article by Brian Flood, LSC Communications common shareholder David Wefer has filed a lawsuit in the U.S. District Court of Southern New York challenging the proposed acquisition of Chicago-based LSC Communications by Quad/Graphics, of Sussex, Wis.

Defendants of the suit include LSC Communications, as well as its CEO, Thomas Quinlan, and several directors of the company.

Wefer, who is represented by Monteverde & Associates, claims that on Dec. 12, 2018, the LSC board authorized the filing of a "materially incomplete and misleading preliminary joint proxy statement/prospectus with the U.S. Securities and Exchange Commission (SEC) ... that recommends LSC shareholders vote in favor of the proposed merger. While defendants are touting the fairness of the merger consideration to the company’s shareholders in the proxy," the lawsuit filing notes, "they have failed to disclose material information that is necessary for shareholders to properly assess the fairness of the proposed merger, thereby rendering certain statements in the proxy incomplete and misleading.

"Specifically, the proxy contains materially incomplete and misleading information concerning: (i) financial projections of Quad/Graphics; (ii) the valuation analyses performed by the company’s financial advisor, Merrill Lynch, Pierce, Fenner & Smith Inc. (“BofA Merrill Lynch”), in support of its fairness opinion; and (iii) background of the proposed merger," the lawsuit contends.

Quad/Graphics presented adjusted pro forma EBITDA calculations as part of its analyst/investor presentation when announcing the proposed acquisition of LSC. (Click to enlarge)

According to Wefer, the defendants "elected to exclude the LSC-Quad/Graphics projections and the Quad/Graphics unlevered free cash flow projections from the proxy, despite the fact that they simultaneously elected to include a purported "summary" of the discounted cash flow analysis and Quad/Graphics’ projections.

"... They excised and failed to disclose the most important projections — Quad/Graphics’ unlevered free cash flows," the lawsuit filing asserted. "... Without the Quad/Graphics unlevered free cash flow projections, the projection summary provides a misleading overall valuation picture of Quad/Graphics. This is caused by significant differences between unlevered free cash flow projections — widely recognized as the most important valuation metric when it comes to valuing a company and its stock — and the EBITDA projections that were included in the proxy," the lawsuit contends.

Consequently, Wefer's suit demands that material information he claims was omitted from the proxy be disclosed to LSC shareholders prior to the forthcoming shareholder vote.

During an earlier call with analysts and investors, Quad/Graphics and LSC executives also indicated the combined company will have a lower debt leverage ratio after the deal gets finalized. (Click to enlarge)

Terms of the Quad/Graphics, LSC Transaction

Under the terms of the M&A agreement announced by Quad and LSC on Oct. 31, LSC Communications shareholders will receive 0.625 shares of Quad Class A common stock for each LSC Communications share they own, representing approximately 29% total economic ownership of the combined company (which will maintain the Quad/Graphics name) and approximately 11% of the vote of the combined company. Based on the closing share prices of both companies on Oct. 30, 2018, the merger consideration, the parties pointed out, represents a premium of 34% to LSC Communications shareholders.

Quad shareholders will continue to own Class A and Class B shares, representing approximately 71% total economic ownership of the combined company and approximately 89% total voting power of the combined company.

When making the M&A announcement, Quad said it expects the transaction to be accretive to earnings, excluding non-recurring integration costs. Net synergies are expected to be approximately $135 million, and will be achieved in less than two years, through the elimination of duplicative functions, capacity rationalization, greater operational efficiencies and greater efficiencies in supply chain management. More specifically, the $135 million would comprise $60 million in capacity rationalization savings, $50 million in administrative reductions and $25 million in supply chain management efficiencies.

Here's a breakdown of both the individual and combined print product segment mixes once the acquisition is completed by mid-2019. (Click to enlarge)

Today, Quad is a $4.2 billion conglomerate that employs 22,000 workers worldwide with 55 manufacturing and distribution facilities.

Comparatively, LSC Communications — an enterprise formed two years ago as part of a three-company spinoff of RR Donnelley — is a $3.9 billion global company with 22,000 employees and 59 manufacturing and distribution facilities. Like Quad, LSC derives a large portion of its revenues from magazine, catalog and book printing. If consummated, the coupling will also provide Quad with an entrée into the office products business. The combined businesses would make Quad/Graphics an even more formidable printing industry powerhouse, especially when it comes to magazines and books. (Following the acquisition announcement, I wrote an analysis that can be accessed by clicking here.)

Quad/Graphics was ranked No. 2 on the 35th annual Printing Impressions 400 list of the largest printing companies in the U.S. and Canada ranked by annual sales, which was published in late December 2018 (click here to access the complete list). LSC Communications was ranked No. 3. Their combination — assuming shareholder and regulatory approvals — would make Quad/Graphics the largest printer in North America, surpassing the annual sales of RR Donnelley.