R.R. Donnelley Makes a Bid for Quebecor

The largest printer in North America, R.R. Donnelley, has offered to buy printer Quebecor World for $1.35 billion in cash and stock.

Quebecor World acknowledged in a May 13 release that it had received an “unsolicited, nonbinding and conditional indication of interest from R.R. Donnelley & Sons Co. to acquire all or substantially all of the assets of Quebecor World.” Quebecor World, which filed for Chapter 11 bankruptcy protection in January 2008, last month reached an agreement with its creditors—thought to be the first step toward emerging from its financial problems.

R.R. Donnelley has offered Quebecor debtors $957 million in cash and 30 million shares, valued at $394.2 million as of the closing price on May 11. Donnelley spokesperson Doug Fitzgerald had no comment. But the Chicago-based printer said in a release it is prepared to “move expediently” to a legally binding purchase agreement, pending the completion of due diligence.

“Quebecor World and R.R. Donnelley have long represented a strong strategic fit with one another and, through this proposal, we have the opportunity to join them together in a way that greatly benefits stakeholders of both companies, including Quebecor World’s debtors and their creditors,” said Donnelley president/CEO Thomas J. Quinlan III in the release.

Quinlan added: “Our offer would significantly enhance our ability to provide customers more comprehensive end-to-end printing solutions, expand our geographic reach into the important Canadian market and better balance our capacity with customer demand—all while achieving significant immediate and long-lasting synergies.”

Key aspects of R.R. Donnelley’s proposal include: The purchase consideration would consist of cash and shares of R.R. Donnelley’s common stock; the transaction is not subject to any financing condition and no shareholder approval is required; and the transaction under the proposed terms would be accretive to R.R. Donnelley shareholders after the first 12 months of combined operations.

In a May 12 letter to Quebecor World president/CEO Jacques Mallette, Quinlan indicated that R.R. Donnelley first expressed an interest in buying Quebecor World in August 2008.

Industry experts aren’t sure what the ramifications might be if this deal goes through. Daniel Walsh, vice president of catalog/publication papers at distributor Bradner Smith & Co., says the proposed Donnelley-Quebecor World deal would “ccertainly be a big deal, and would possibly reduce competition.”

But the bigger issue in the printing industry is that, like the paper industry, “there’s just too much iron out there,” Walsh says. “This possible deal reminds me of the merger last year of Abitibi and Bowater, two large players that thought their coming together would produce enough efficiencies to pull through.”

In reality, he notes, “it was like a merger between the Titanic and the Lusitania. And now AbitibiBowater has filed for protection.” There are too many paper machines to deal with the shrinking demand of print, he says, “and there are too many printing presses to deal with the shrinking demand of print.”

Indeed, says Dave Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group, there needs to be some consolidation on the print side, given the drop in demand and the fact that some printers are not running to full capacity. “If this happens, we would assume that R.R. Donnelley would shut down some inefficient equipment, which would be healthy for the overall print industry,” he explains.

“That said, we wish we did not have to lose one of the major players, as it would be one less option for our clients and could lead to higher costs.”

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