Quad Graphics Acquires World Color

Will Quad become the VistaPrint of big print? As the industry continues to migrate from a majority of content via print to a significantly shared percentage with electronic, those printers nimble enough to invest properly will continue to grab customer’s share and Wall Street attention. We will cover prints continued decline later in this commentary yet VistaPrint’s $55 share price demonstrates that while content is shifting away from print to multiple channels, well run printing companies can truly evolve into multiple disciplines and succeed with print as its foundation. If Quad can overcome the many variables in this merger, it may pass RR Donnelley as the world’s best run publicly held printing company.

With the continuous need to reduce pricing to support publishers and other users of print, consolidation of underutilized platforms is vital to the long-term viability of print in content communication channels. Printers must eliminate redundancy in SG&A, eliminate under utilized capital-intensive assets (presses), and continue to invest in productivity gains that will permit margins to overcome continued price reductions to support their customer’s new business model.

While content will continue to share electronic and print for the next 10 years, the old publishing model of advertising pages supporting editorial is over and book printing will no longer be tied to the NY Times Best Seller list. The Quad/World Color merger is good for the industry utilization rates in “big print”, the shareholders of the Quad ESOP, and World Color stakeholders. The RRD bid last summer made more sense as World and RRD share more penetration than Quad in telephone, offset retail FSI, Direct Mail and book. Plus RRD has more experience in blending printing acquisitions into its platform.

The best thing about the Harry Quadracci legacy is their continued investment in technology and new presses. Quad is the lowest cost producer and this is reflected in its EBITDA to revenue % @ 17%, well above RRD and anybody else. World is only at 9% today after all the debt holders took a major haircut. If one were to revisit QW in prior years, it was always low single digits. Why? Quad constantly invested in new presses and technology to keep margins ahead of price erosion through productivity gains. World Color tried to play catch-up from 2005-2007 with an “$1Bn” in new presses and plant rationalization that was too little and way too late.

While they are the low cost producer, other than Mr. Angelson, no one at Quad has the type of integration experience found at RR Donnelley. The Quebecor/World Color debacle in Montreal over the last decade demonstrated little long-term talent to manage this merger at either the upper or middle management level. Joel Quadracci and his team are superb operators and demonstrated a keen awareness of asset utilization by merely shutting down one press per plant in 2009 rather than a complete division. It remains to be seen if Angelson can gain the $225MM in synergy gains similar to how he did when supported by a very strong leadership team that made Banta and other acquisitions a smooth transition during his tenure at Donnelley.

In addition to the right horses to deliver synergy dollar realization, a second key issue remains for this combined company: total market deterioration. From $135Bn in 1995 to a forecasted $82Bn in 2010, why is there any hope of revenue growth except through market share gains from other marginal printers? With regards to taking share growth, other than a weakening Cenveo and possibly acquiring Vertis (FSI and DM of $1.3Bn), RRD and Brown are solid players in these markets and customers will not be in any hurry to move to Quad as it rationalizes this platform. Hence, it comes down to synergy savings at $225MM and the cost to rationalize the platform. Can this new team execute so the deal can take advantage of Quads lowest cost operations all the while shutting down redundant plant locations and moving customers from World Color higher cost plants?

Lastly, I have not seen any discussion in the deck or releases on a slippage % from the $5Bn that may move on to RRD, Brown, and a host of $100MM printers who need work. QW had an extensive loss of customers as they attempted to rationalize their high cost platform through 2003-2008. Nor was there any mentioned of revenue erosion due to existing customer movement from offset to digital presses and electronic substitution. We need simply to look at the 18% loss of advertising pages in 2009 over a very weak 2008. Further, magazine newsstand declines had been getting worse -- progressing from a 6.3% slide in the first half of 2008, compared with the same period the year prior, to an 11.1% drop in the second half of 2008, and then to a 12.4% descent in the first half of 2009. We may now have hit a newsstand bottom but there is no going back up like we saw post 1991 and 2002 recession. Time Inc just reported a 15% decline in ad pages over a disappointing 2008 and a 6% decline in subscription circulation on top of the miserable 2009 in newsstand sales. Ad pages are never returning to pre-recession levels nor will the reduced newsstand and subscription circulation return to the good ole days of 2007. Direct Mail will not return to that wonderful growth period of 103BN pieces in 2007 down to only 82Bn pieces in 2009 (USPS Annual Report).

However, it still is an $82Bn market place and Quad has been a showcase since Harry started in from scratch in the 80’s. It has the culture to succeed, the investment strategy to succeed, and hopefully develops other marketing options similar to the VistaPrint story to gain Wall Street notice along with solid earnings improvements outside of print. The industry can certainly use another showcase company like RRD, VistaPrint, and Consolidated Graphics.