The American printing industry M&A environment
June 2016 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
According to a research report published by IBISWorld in April 2016, the American commercial printing industry generated approximately $83bn in revenue with total reported profits of less than $3bn during 2015, or less than 4 percent of revenue. The industry remains highly fragmented, with our research showing a total of approximately 23,500 commercial printing companies operating within the United States as of year-end 2015, and the two largest, R.R. Donnelley & Sons Co. and Quad/Graphics Inc., accounting for a combined approximate 20 percent market share, leaving 80 percent of the available market divided among approximately 23,500 companies.
While the printing industry could well have borrowed a line from the American writer Mark Twain who quipped, “The rumors of my death have been greatly exaggerated”, it is true that print as a medium is declining (albeit at an annualised rate of less than 1 percent according to IBISWorld during the five years ending 31 December 2015), and will continue to face ever greater challenges in the years to come from the increasing use of digital media to replace traditional printed products. But despite the continuing decline of print as a communication medium, the industry continues to be a significant part of the American economy employing, according to IBISWorld, slightly under 450,000 people as of the end of 2015; and remains ripe for consolidation and active and ongoing merger and acquisition activities.
The principal driver in today’s American print M&A environment continues to be too much capacity chasing too few profitable print dollars, with consolidation being the most effective way for the industry to reduce capacity and gain the operational efficiencies and resulting improved profitability that comes not only from scale but increased product offerings that are increasingly allowing printing companies to become suppliers to their customers of more than their traditional ‘ink on paper’. As a result, in addition to the ongoing interest of strategic buyers and private equity firms, more and more smaller, but well capitalised and creative, printing companies are turning to M&A as a way of diversifying their print offerings and customer base, and are repositioning themselves for future growth and profitability by remaining relevant in an ever changing world of increased media options.
Principally for those smaller firms, the deal structure of choice is the ‘tuck-in’, where in essence the acquirer is simply seeking to acquire the target company’s book of business (i.e., its profitable customer base), and in most circumstances forcing the seller to assume the responsibility for liquidating their equipment package (and associated term debt), facility lease liability and other working capital liabilities. Typically in these ‘tuck-in’ transactions, the seller is compensated over time, ranging between three and seven years, with a royalty based on the gross revenue generated over time by the customers that the acquirer is able to retain post transaction, in addition to an initial down-payment that generally approximates 20 to 30 percent of the anticipated total compensation to be received by the seller over the agreed upon royalty period. The advantage of this transactional structure to the acquirer is simple and threefold. Firstly, they are forcing the seller to do anything and everything in its power to see that acquired customers, and associated revenues and profit margin, are retained for as long as possible by the acquirer as the seller’s eventual total received compensation is entirely dependent on the continuation (and ideally growth) of that revenue stream for the acquirer, assuring an absolute mutuality of interests. Secondly, it allows smaller and typically less well capitalised firms to engage in M&A activity that they would otherwise not be able to undertake, as the transactional financing is built-in to the transaction as a result of the ‘earn-out’ structure of the transaction being financed by the seller of the target and the relative significance of the ‘earn-out’ portion of the total price paid for the acquired book of business as a percentage of the anticipated total purchase price. Finally, and most importantly from the perspective of the acquirer, the economics of the ‘tuck-in’ may well be significantly greater than the economics of the same book of business for the seller, as typically the acquirer is using excess but unutilised (or underutilised) plant capacity. As such, the contribution margin of the acquired book of business may well be significantly higher as a percentage of revenue for the acquirer than it was for the seller, driving down the implied transactional multiple for the seller, as a result of the ability to reduce payroll expenses, absorb excess capacity and gain higher equipment utilisation, in addition of course to being able to eliminate duplicitous G&A expenses, etc.
Relative to market multiples in non ‘tuck-in’ transactions undertaken either by larger strategic or private equity purchasers, the current general ‘rule of thumb’ (to the extent that any ‘rule of thumb’ is reliable) is that transactional multiples when expressed as a multiple of agreed upon and adjusted trailing 12 month EBITDA range from a low of 2.5 to 3.0 times (in the sub $10m revenue/$1m EBITDA size) to approximately 4.0 to 5.0 times for companies with less than $5m of trailing 12 month adjusted EBITDA. That said, target companies regardless of revenue size, but generally with at least $15m to $20m of revenue and greater than 10 percent EBITDA margins, that possess unique and defendable market niches or extraordinarily valuable contractual customer relationships, embedded proprietary technology, well maintained and modern (i.e., highly efficient) equipment packages, dominant market presence, or better still a combination of these attributes, trailing 12 month multiples of EBITDA can go as high as 6.5 to 7.0 times, and have in several recently closed transactions within the US. Given the still relative abundance of low cost debt capital within the US, and the historically stable long-term value of printing equipment, these transactions when financed typically are leveraged to between 3.5 to 4.0 times trailing EBITDA, making it possible for successful larger strategic purchasers to have highly leveraged transactional structures dependent on the established enterprise value EBITDA multiple paid.
Despite the admitted continuation of the slow but steady decline of traditional print as a medium, the American printing industry remains a robust and important segment of the economy, and continues to be ripe for consolidation and merger and acquisition opportunities at ‘reasonable’ transactional valuations with significant available financing options.
Richard A. Mager is a managing director at Graphic Arts Advisors, LLC. He can be contacted on +1 (972) 255 7038 or by email: firstname.lastname@example.org.
© Financier Worldwide
Richard A. Mager
Graphic Arts Advisors, LLC